Wayside Technology Group Annual Report 2018

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FY2018 Annual Report · Wayside Technology Group

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Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

☒
ACT OF 1934.

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

For the fiscal year ended December 31, 2018

☐
EXCHANGE ACT OF 1934.

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

For the transition period from to

Commission file number: 000-26408
WAYSIDE TECHNOLOGY GROUP, INC.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of incorporation)

13-3136104
(IRS Employer Identification Number)

4 Industrial Way West, Suite 300 Eatontown, NJ
(Address of principal executive offices)

07724
(Zip Code)

Registrant’s telephone number, including area code: (732) 389-0932

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

Title of Each Class
Common Stock, par value $0.01 per share

Name of Each Exchange on Which Registered
The NASDAQ Global Market

Securities registered pursuant to section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act Yes ☐ No ☒

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. 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein,
and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or other information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. ☐

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

Large accelerated filer ☐

Accelerated filer ☒

Non-accelerated filer ☐

Smaller reporting company ☒
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. (cid:1)(cid:2)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

The aggregate market value of the Common Stock held by non-affiliates of the Registrant computed by reference to the closing sale price for the
Registrant’s Common Stock as of June 29, 2018, which was the last business day of the Registrant’s most recently completed second fiscal quarter,
as reported on The NASDAQ Global Market, was approximately $55,216,079 (In determining the market value of the Common Stock held by any
non-affiliates, shares of Common Stock of the Registrant beneficially owned by directors, officers and holders of more than 10% of the outstanding
shares of Common Stock of the Registrant have been excluded. This determination of affiliate status is not necessarily a conclusive determination for
other purposes).

The number of shares outstanding of the Registrant’s Common Stock as of February 18, 2019 was 4,514,994 shares.

Documents Incorporated by Reference: Portions of the Registrant’s definitive Proxy Statement for its 2019 Annual Meeting of Stockholders to be
filed on or before May 1, 2019 are incorporated by reference into Part III of this Report.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report includes “forward-looking statements” within the meaning of Section 21E of the

Exchange Act. Statements in this report regarding future events or conditions, including but not limited
to statements regarding industry prospects and the Company’s expected financial position, business and
financing plans, are forward-looking statements.

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. We strongly urge current and prospective investors to carefully consider the cautionary
statements and risks contained in this report, particularly the risks described under “Item 1A. Risk
Factors” herein. Such risks include, but are not limited to, the continued acceptance of the Company’s
distribution channel by vendors and customers, the timely availability and acceptance of new products,
contribution of key vendor relationships and support programs, as well as factors that affect the
software industry generally.

The Company operates in a rapidly changing business, and new risk factors emerge from time

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

Accordingly, forward-looking statements should not be relied upon as a prediction of actual

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

The statements concerning future sales, future gross profit margin and future selling and

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

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PART I

Item 1. Business

General

Wayside Technology Group, Inc. and Subsidiaries (the “Company,” “us,” “we,” or “our”) is

an information technology (“IT”) channel company. The Company operates through two reportable
operating segments. The “Lifeboat Distribution” segment distributes technical software and hardware
to corporate resellers, value added resellers (VARs), consultants and systems integrators worldwide.
The “TechXtend” segment is a value-added reseller of software, hardware and services for
corporations, government organizations and academic institutions in the USA and Canada. We offer an
extensive line of products from leading publishers of software and tools for virtualization/cloud
computing, security, networking, storage and infrastructure management, application lifecycle
management and other technically sophisticated domains as well as computer hardware.

The Company was incorporated in Delaware in 1982. Our common stock, par value $0.01 per

share (“Common Stock”) is listed on The NASDAQ Global Market under the symbol “WSTG”. Our
main web site address is www.waysidetechnology.com, and the other web sites maintained by our
business include www.lifeboatdistribution.com and www.techxtend.com. Reference to these “uniform
resource locators” or “URLs” is made as an inactive textual reference for informational purposes only.
Information on our web sites should not be considered filed with the Securities and Exchange
Commission, and is not, and should not be deemed to be, a part of this report.

In our Lifeboat Distribution segment, we distribute technology products from software
developers, publishers or equipment manufacturers to resellers, and system integrators worldwide. We
purchase software, maintenance/service agreements, networking/storage/security equipment and
complementary products from our vendors and sell them to our reseller customers. Generally, a vendor
authorizes a limited number of companies to act as distributors of their product and sell to resellers of
their product. Our reseller customers include value-added resellers, or VARs, corporate resellers,
government resellers, system integrators, direct marketers, and national IT superstores. We combine
our core strengths in customer service, marketing, distribution, credit and billing to allow our customers
to achieve greater efficiencies in time to market in the IT channel in a cost-effective manner.

Our Lifeboat Distribution business is characterized by low gross profit as a percentage of

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

We also provide comprehensive IT solutions directly to end users through our TechXtend

segment. Products in this segment are acquired directly from equipment manufacturers, software
developers or distributors and sold to end users. We provide customer service, billing, sales and
marketing support in this segment and provide extended payment terms to facilitate sales.

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

Products

An essential part of our ongoing operations and growth plans is the continued recruitment of
software publishers for which we become authorized distributors of their products. The Company sells
a wide variety of technology products from a broad range of publishers and manufacturers, such as
Bluebeam Software, Dell/Dell Software, erwin, Flexera Software, Hewlett Packard, Infragistics, Intel
Software, Lenovo, Micro Focus, Microsoft, Mindjet, Samsung, SmartBear Software, SolarWinds,
Sophos, StorageCraft Technology, TechSmith, Unitrends and VMware. On a continuous basis, we
screen new vendors and products for inclusion in our line card based on their

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features, quality, price, profit margins and current market trends. The Company predominantly sells
third party software, software subscriptions, and maintenance. Sales of hardware and peripherals
represented 22%, 16%, and 17% of our overall net sales in 2018, 2017 and 2016, respectively.

Marketing and Distribution

We market products through creative marketing communications, including our web sites,

local and on-line seminars, events, webinars, and social media. We also use direct e-mail and printed
material to introduce new products and upgrades, to cross-sell products to current customers, and to
educate and inform existing and potential customers. We believe that our blend of electronic and
traditional marketing and selling programs are important marketing vehicles for software publishers
and manufacturers. These programs provide a cost-effective and service-oriented means to market and
sell and fulfill software products and meet the needs of users.

The Company had two customers that each accounted for more than 10% of total consolidated

net sales for 2018. For the year ended December 31, 2018, CDW Corporation (“CDW”) and Software
House International Corporation (“SHI”), accounted for 25.6%, and 16.6%, respectively, of
consolidated net sales and as of December 31, 2018, 35.6% and 15.0%, respectively, of total net
accounts receivable. For the year ended December 31, 2017, CDW and SHI accounted for 18.0%, and
20.1%, respectively, of consolidated net sales and as of December 31, 2017, 28.2%, and 14.9%,
respectively, of total net accounts receivable. For the year ended December 31, 2016, CDW and SHI
accounted for 17.3%, and 16.3%, respectively, of consolidated net sales. Our top five customers
accounted for 55%, 50%, and 46% of consolidated net sales in 2018, 2017 and 2016, respectively. The
Company generally ships products within 48 hours of confirming a customer’s order. This results in
minimum backlog in the business.

Net sales to customers in Canada represented 7%, 7%, and 8% of our consolidated net sales in
2018, 2017, and 2016, respectively. Net sales in Europe and the rest of the world represented 6%, 7%,
and 6% of our consolidated net sales in 2018, 2017, and 2016, respectively. For geographic financial
information, please refer to Note 10 in the Notes to our Consolidated Financial Statements.

Customer Support

We believe that providing a high level of customer service is necessary to compete effectively

and is essential to continued sales and revenue growth. Our account representatives assist our
customers with all aspects of purchasing decisions, order processing, returns processing, and inquiries
on order status, product pricing and availability. The account representatives are trained to answer all
basic questions about the features and functionality of products.

Purchasing and Fulfillment

The Company’s success is dependent, in part, upon the ability of its suppliers to develop and

market products that meet the changing requirements of the marketplace. The Company believes it
maintains good relationships with its vendors. The Company and its principal vendors have cooperated
frequently in product introductions and in other marketing programs. As is customary in the industry,
the Company has no long-term supply contracts with any of its suppliers. Substantially all the
Company’s contracts with its vendors are terminable upon 30 days’ notice or less. Moreover, the way
software products are distributed and sold is changing, and new methods of distribution and sale may
emerge or expand. Software publishers have sold, and may intensify their efforts to sell, their products
directly to end-users. The Company’s business and results of operations may be adversely affected if
the terms and conditions of the Company’s authorizations with its vendors were to be significantly
modified or if certain products become unavailable to the Company.

We believe that effective purchasing from a diverse vendor base is a key element of our
business strategy. For the year ended December 31, 2018, Sophos and SolarWinds accounted for 23.9%
and 15.3%, respectively of our consolidated purchases. For the year ended December 31, 2017, Sophos
and SolarWinds accounted for 26.4% and 14.7%, respectively of our consolidated purchases. For the

year ended December 31, 2016, Sophos and SolarWinds accounted for 23.1% and 10.8%, respectively,
of our consolidated purchases. The loss of a key vendor or group of vendors could disrupt our product
availability and otherwise have an adverse effect on the Company.

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The Company purchased approximately 97%, 96% and 96% of its products directly from
manufacturers and publishers in 2018, 2017 and 2016, respectively, and the balance from multiple
distributors. Most suppliers or distributors will “drop ship” products directly to the customers, which
reduces physical handling by the Company. Inventory management techniques, such as “drop shipping”
allow the Company to offer a greater range of products without increased inventory requirements or
cost of carrying inventory.

Inventory levels may vary from period to period, due in part to increases or decreases in sales

levels, the Company’s practice of making advance purchases when it deems the terms of such
purchases to be attractive, and the addition of new suppliers and products. Moreover, the Company’s
order fulfillment and inventory control systems allow the Company to order certain products just in
time for next day shipping. The Company promotes the use of electronic data interchange (“EDI”) with
its suppliers and customers, which helps reduce overhead and the use of paper in the ordering process.
Although brand names and individual products are important to our business, we believe that
competitive sources of supply are available for substantially all the product categories we carry.

Competition

The software market is highly competitive and characterized by aggressive pricing practices

by both software distributors and resellers. This has resulted in declining gross margins as a percentage
of sales, which the Company expects to continue. The Company faces competition from a wide variety
of sources competing principally based on price, product availability, customer service and technical
support. In the Lifeboat Distribution segment, we compete against much larger broad-line distributors,
as well as specialty distributors and, in some cases, the direct sales teams of the vendors we represent,
who also sell directly to the end-customers. In the TechXtend segment, we compete against vendors
who sell directly to customers, as well as software resellers, superstores, e-commerce vendors, and
other direct marketers of software and hardware products. In both segments, some of our competitors
are significantly larger and have substantially greater resources than the Company.

There can be no assurance that the Company can compete effectively against existing
competitors or new competitors that may enter the market or that it can generate profit margins which
represent a fair return to the Company. An increase in the amount of competition faced by the
Company, or its failure to compete effectively against its competitors, could have a material adverse
effect on the Company’s business, financial condition and results of operations.

The Company competes with other distributors and resellers to become an authorized

distributor or reseller of products from software developers and publishers. It also competes with
distributors and resellers to attract prospective buyers, and to source new products from software
developers and publishers, and to market its current product line to customers. The Company believes
that its ability to offer software developers and IT professionals easy access to a wide selection of the
desired IT products at reasonable prices with prompt delivery and high customer service levels, along
with its good relationships with vendors and suppliers, allows it to compete effectively. The Company
competes to gain distribution rights for new products primarily based on its reputation for successfully
bringing new products to market and the strength of and quality of its relationships with software
publishers and the reseller community.

The market for the software products we sell is characterized by rapid changes in technology,
user requirements, and customer specifications. The way software products are distributed and sold is

changing, and new methods of distribution and sale may emerge or expand. Software developers and
publishers have sold, and may intensify their efforts to sell, their products directly to end-users. The
continuing evolution of the Internet as a platform in which to conduct e-commerce business
transactions has both lowered the barriers for competition and broadened customer access to products
and information, increasing competition and reducing prices. From time to time, certain software
developers and publishers have instituted programs for the direct sale of large order quantities of
software to certain major corporate accounts and renewals of maintenance agreements. These types of
programs may continue to be developed and used by various developers and publishers. While some
software developers and publishers currently sell new releases or upgrades directly to end users, they
have not attempted to completely bypass the distribution and reseller channels. There can be no
assurances, however, that software developers and publishers will continue using distributors and
resellers to the same extent they currently do. Future efforts by software developers and publishers to
bypass third-

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party sales channels could materially and adversely affect the Company’s business, results of
operations and financial condition.

In addition, resellers and publishers may attempt to increase the volume of software products

distributed electronically through ESD (Electronic Software Distribution) technology, through
subscription services, and through on-line shopping services. Any of these competitive programs, if
successful, could have a material adverse effect on the Company’s business, results of operations and
financial condition. For a description of additional risks relating to competition in our industry, please
refer to “Item 1.A. Risk Factors”: “We rely on our suppliers for product availability, marketing funds,
purchasing incentives and competitive products to sell”, and “The IT products and services industry is
intensely competitive and actions of competitors, including manufacturers of products we sell, can
negatively affect our business.”

Information Technology

The Company operates the IT systems on several platforms including Windows and cloud-

based platforms that control the full order processing cycle. The technology systems allow for
centralized management of key functions, including inventory, accounts receivable, purchasing, sales
and distribution and payment processing. We are dependent on the accuracy and proper utilization of
our technology systems, telephone systems, websites, e-mail and EDI systems.

Our IT systems allow us to monitor sales trends, real-time product availability, order status
throughout the full order cycle, and automates order transactions and invoicing transactions for our
customers and vendors. The main focus of our IT systems is to allow us to transact and communicate
with our customers and vendors in the most efficient manner possible. We provide various options to
transact electronically with our customers and vendors through EDI, XML and other electronic
methods.

The Company recognizes the need to continually upgrade its IT systems to effectively manage

and secure its infrastructure and customer data and to provide continued scalability and flexibility. In
that regard, the Company anticipates that it will, from time to time, require software and hardware
upgrades for its present IT systems.

Trademarks

The Company conducts its business under various trademarks and service marks including
Lifeboat Distribution, TechXtend and International Software Partners. The Company protects these
trademarks and service marks and believes that they have significant value to us and are important
factors in our marketing programs.

Employees

As of December 31, 2018, Wayside Technology Group, Inc. and its subsidiaries had 153 full-

time employees. The Company is not a party to any collective bargaining agreements with its
employees, has experienced no work stoppages and considers its relationships with its employees to be
satisfactory.

Available Information

Under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company

is required to file annual, quarterly and current reports, proxy and information statements and other
information with the Securities and Exchange Commission (“SEC”). You may read and copy any
document we file with the SEC at the SEC’s public reference room at 100 F Street, N.E., Washington,
D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information about the public reference
room. The SEC maintains a web site at http://www.sec.gov that contains reports, proxy and information
statements, and other information regarding issuers that file electronically with the SEC. The Company
files electronically with the SEC. The Company makes available, free of charge, through its internet
web site, its reports on Forms 10-K, 10-Q and 8-K, and amendments to those reports, as soon as
reasonably practicable after they are filed with the SEC. The following address for the Company’s web
site includes a hyperlink to those reports under “Financials/SEC Filings”:
http://www.waysidetechnology.com.

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In December 2017, we adopted a Code of Ethical Conduct. The full text of the Code of Ethical

Conduct, which applies to all employees, officers and directors of the Company, including our Chief
Executive Officer and Chief Financial Officer, is available at our web site,
http://www.waysidetechnology.com, under “Governance.” The Company intends to disclose any
amendment to, or waiver from, a provision of the Code of Ethical Conduct that applies to its Chief
Executive Officer or Chief Financial Officer on its web site under “Investor Information.”

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

Item 1A. Risk Factors

Investors should carefully consider the risk factors set forth below as well as the other

information contained in this report. Any of the following risks could materially and adversely affect
our business, financial condition or results of operations. Additional risks and uncertainties not
currently known to us or those currently viewed by us to be immaterial may also materially and
adversely affect our business, financial condition or results of operations.

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

effect on our net sales, and/or cause us to record write-downs of obsolete inventory, if we fail to react in
a timely manner to such changes.

We rely on our suppliers for product availability, marketing funds, purchasing incentives

and competitive products to sell. We acquire products for resale both directly from manufacturers and
indirectly from distributors. The loss of a supplier could cause a disruption in the availability of
products. Additionally, there is no assurance that as manufacturers continue to or increasingly sell
directly to end users and through the distribution channel, that they will not limit or curtail the
availability of their products to distributors/resellers like us. For example, resellers and publishers may
attempt to increase the volume of software products distributed electronically through ESD (Electronic
Software Distribution) technology, through subscription services, and through on-line shopping
services, and correspondingly, decrease the volume of products sold through us. Our inability to obtain
a sufficient quantity of products, or an allocation of products from a manufacturer in a way that favors
one of our competitors, or competing distribution channels, relative to us, could cause us to be unable
to fill clients’ orders in a timely manner, or at all, which could have a material adverse effect on our
business, results of operations and financial condition. We also rely on our suppliers to provide funds
for us to market their products, including through our on-line marketing efforts, and to provide
purchasing incentives to us. If any of the suppliers that have historically provided these benefits to us
decides to reduce such benefits, our expenses would increase, adversely affecting our results of
operations.

General economic weakness may reduce our revenues and profits. Generally, economic

downturns, may cause some of our current and potential customers to delay or reduce technology
purchases, resulting in longer sales cycles, slower adoption of new technologies and increased price
competition. We may, therefore, experience a greater decline in demand for the products we sell,
resulting in increased competition and pressure to reduce the cost of operations. Any benefits from cost
reductions may take longer to realize and may not fully mitigate the impact of the reduced demand. In
addition, weak financial and credit markets heighten the risk of customer bankruptcies and create a
corresponding delay in collecting receivables from those customers and may also affect our vendors’
ability to supply products, which could disrupt our operations. The realization of any or all these risks
could have a material adverse effect on our business, results of operations and financial condition.

The IT products and services industry is intensely competitive and actions of competitors,

including manufacturers of products we sell, can negatively affect our business. Competition has
been based primarily on price, product availability, speed of delivery, credit availability and quality and
breadth of product lines and, increasingly, also

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

We offer credit to our customers and, therefore, are subject to significant credit risk. We sell
our products to a large and diverse customer base. We finance a significant portion of such sales

through trade credit, typically by providing 30-75-day payment terms. In addition, we offer extended
payment terms to certain customers for terms of 1-4 years. As a result, our business could be adversely
affected in the event of a deterioration of the financial condition of our customers, resulting in the
customers’ inability to repay us. This risk may increase if there is a general economic downturn
affecting a large number of our customers and in the event our customers do not adequately manage
their business or properly disclose their financial condition. Also, several of our larger customers
require greater than 30-day payment terms which could increase our credit risk and decrease our
operating cash flow.

We face substantial competition from other companies. We compete in all areas of our

business against local, regional, national, and international firms. Some of our current competitors have
substantially greater capital resources and sales and distribution capabilities than we do. In response to
competitive pressures from any of our current or future competitors, we may be required to lower
selling prices in order to maintain or increase market share, and such measures could adversely affect
our operating results. In addition, we face competition from vendors, which may choose to market their
products directly to end-users, rather than through channel partners such as the Company, and this
could adversely affect our future sales. Many competitors compete based principally on price and may
have lower costs or accept lower selling prices than we do and, therefore, our gross margins may not be
maintainable. Our gross margins have declined historically and may continue to decline in the future.
Our competitors may offer better or different products and services than we offer. In addition, we do
not have guaranteed purchasing volume commitments from our customers and, therefore, our sales
volume may be volatile.

The loss or any change in the business habits of key customers or vendors may have a
material adverse effect on our financial position and results of operations. Because our standing
arrangements and agreements with our customers and vendors typically contain no purchase or sale
obligations and are terminable by either party upon several months or otherwise relatively short notice,
we are subject to significant risks associated with the loss or change at any time in the business habits
and financial condition of key customers or vendors. We have experienced the loss and changes in the
business habits of key customer and vendor relationships in the past and expect to do so again in the
future.

Sales of products purchased from our largest two vendors accounted for 39.2% of our 2018
purchases and sales from our largest five vendors generated approximately 53% of 2018 purchases. As
is the case with many of our vendor and customer relationships, our contractual arrangements with
these large vendors are terminable by either party upon several months’ notice. If these contracts or our
relationships with these vendors terminate for any reason, or if any of our other significant vendor
relationships terminate for any reason, and we are not able to sell or procure a sufficient supply of those
products from alternative sources, or at all, our financial position and results of operations would be
adversely affected. Our vendors are subject to many if not all of the same (or similar) risks and
uncertainties to which we are subject, as well as other risks and uncertainties, and we compete with
others for their business. Accordingly, we are at a continual risk of loss of their business on account of
a number of factors and forces, many of which are largely beyond our control.

In 2018, our two largest customers accounted for 42.2% of our net sales and our largest five
customers accounted for 55% of our net sales. If any of our significant customer relationships
terminate for any reason, and we are not able to

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replace those customers and associated revenues, our financial position and results of operations would
be adversely affected.

Disruptions in our information technology and voice and data networks could affect our

ability to service our clients and cause us to incur additional expenses. We believe that our success to

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

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

We depend on certain key personnel. Our future success will be largely dependent on the
efforts of key management personnel for strategic and operational guidance as well as relationships
with our key vendors and customers. We also believe that our future success will be largely dependent
on our continued ability to attract and retain highly qualified management, sales, service, finance and
technical personnel. We cannot assure you that we will be able to attract and retain such personnel.
Further, we make a significant investment in the training of our sales account executives. Our inability
to retain such personnel or to train them either rapidly enough to meet our expanding needs or in an
effective manner for quickly changing market conditions could cause a decrease in the overall quality
and efficiency of our sales staff, which, in turn, could have a material adverse effect on our business,
results of operations and financial condition.

Risks related to our Common Stock. The exercise of options or any other issuance of shares

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

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

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If the Company fails to maintain an effective system of internal controls or discovers

material weaknesses in its internal controls over financial reporting, it may not be able to report its
financial results accurately or timely or detect fraud, which could have a material adverse effect on
its business. An effective internal control environment is necessary for the Company to produce
reliable financial reports and is an important part of its effort to prevent financial fraud. The Company
is required to annually evaluate the effectiveness of the design and operation of its internal controls
over financial reporting. Based on these evaluations, the Company may conclude that enhancements,
modifications, or changes to internal controls are necessary or desirable. While management evaluates
the effectiveness of the Company's internal controls on a regular basis, these controls may not always
be effective. There are inherent limitations on the effectiveness of internal controls, including collusion,
management override, and failure in human judgment. In addition, control procedures are designed to
reduce rather than eliminate financial statement risk. If the Company fails to maintain an effective
system of internal controls, or if management or the Company's independent registered public
accounting firm discovers material weaknesses in the Company's internal controls, it may be unable to
produce reliable financial reports or prevent fraud, which could have a material adverse effect on the
Company's business. In addition, the Company may be subject to sanctions or investigation by
regulatory authorities, such as the SEC or the NASDAQ. Any such actions could result in an adverse
reaction in the financial markets due to a loss of confidence in the reliability of the Company's financial
statements, which could cause the market price of its Common Stock to decline or limit the Company's
access to capital.

In the past, we identified a material weakness in our internal control over financial

reporting, and any material weakness could, if not remediated, result in material misstatements in
our financial statements. Maintaining effective internal control over financial reporting is necessary
for us to produce reliable financial statements. In evaluating the effectiveness of our internal control
over financial reporting as of December 31, 2017, management identified a material weakness in our
internal control over financial reporting. This material weakness was successfully remediated in 2018
through implementation of enhanced controls and procedures. We continue to work to improve our
internal control process and diligently review our financial reporting controls and procedures. However,
if our remediation measures prove to be insufficient to address this material weakness, or if additional
material weaknesses or significant deficiencies in our internal control over financial reporting are
discovered or occur in the future, our Consolidated Financial Statements may contain material
misstatements, and we could be required to restate our financial results, our stock price may be
adversely affected and we may be unable to maintain compliance with applicable stock exchange
listing requirements.

The Company may be subject to intellectual property rights claims, which are costly to
defend, could require payment of damages or licensing fees and could limit the company's ability to
use certain technologies in the future. Certain of the Company's products and services include
intellectual property owned primarily by the Company's
third-party suppliers. Substantial litigation and threats of litigation regarding intellectual property rights
exist in the software and some service industries. From time to time, third parties (including certain
companies in the business of acquiring patents not for the purpose of developing technology but with
the intention of aggressively seeking licensing revenue from purported infringers) may assert patent,
copyright and/or other intellectual property rights to technologies that are important to the company's
business. In some cases, depending on the nature of the claim, the company may be able to seek
indemnification from its suppliers for itself and its customers against such claims, but there is no
assurance that it will be successful in obtaining such indemnification or that the company is fully
protected against such claims. Any infringement claim brought against the company, regardless of the
duration, outcome, or size of damage award, could result in substantial cost to the Company, divert
management's attention and resources, be time consuming to defend, result in substantial damage
awards, or cause product shipment delays.

Additionally, if an infringement claim is successful the Company may be required to pay

damages or seek royalty or license arrangements, which may not be available on commercially
reasonable terms. The payment of any such damages or royalties may significantly increase the
Company's operating expenses and harm the Company's operating results and financial condition. Also,

royalty or license arrangements may not be available at all. The Company may have to stop selling
certain products or using technologies, which could affect the Company's ability to compete effectively.

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We may explore additional growth through acquisitions. As part of our growth strategy, we
may pursue the acquisition of companies that either complement or expand our existing business. As a
result, we regularly evaluate potential acquisition opportunities, which may be material in size and
scope. In addition to those risks to which our business and the acquired businesses are generally
subject, the acquisition of these businesses gives rise to transactional and transitional risks, and the risk
that the anticipated benefits will not be realized.

Changes in income tax and other regulatory legislation. We operate in compliance with
applicable laws and regulations and make plans for our structure and operations based upon existing
laws and anticipated future changes in the law. When new legislation is enacted with minimal advance
notice, or when new interpretations or applications of existing laws are made, we may need to
implement changes in our policies or structure. We are susceptible to unanticipated changes in
legislation, especially relating to income and other taxes, import/export laws, hazardous materials and
other laws related to trade, accounting and business activities. Such changes in legislation may have an
adverse effect on our business.

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

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

Changes in accounting rules, or the misapplication of current accounting rules, may

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

We are required to determine if we are the principal or agent in all transactions with our

customers. The voluminous number of products and services we sell, and the manner in which they are
bundled, are technologically complex. Mischaracterization of these products and services could result
in misapplication of revenue recognition polices. We use estimates where necessary, such as allowance
for doubtful accounts and product returns, which require judgment and are based on best available

information. If we are unable to accurately estimate the cost of these services or the timeline for
completion of contracts, the profitability of our contracts may be materially and adversely affected.

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

We may not be able to continue to pay dividends on our Common Stock in the future, which

could impair the value of our Common Stock. We have paid a quarterly dividend on our Common
Stock since the first quarter of 2003.

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Any future declaration of dividends remains subject to further determination from time to time by our
Board of Directors. Our ability to pay dividends in the future will depend on our financial results,
liquidity and financial condition. There is no assurance that we will be able to pay dividends in the
future, or if we are able to, that our Board of Directors will continue to declare dividends in the future,
at current rates or at all. If we discontinue or reduce the amount or frequency of dividends, the value of
our Common Stock may be impaired.

Item 1B. Unresolved Staff Comments

Not applicable.

Item 2. Properties

The Company leases approximately 20,000 square feet of space in Eatontown, New Jersey for

its corporate headquarters under a lease expiring in March 2027. Total annual rent expense for these
premises is approximately $420,000. The Company also leases 7,800 square feet of warehouse space in
Eatontown, New Jersey under a lease expiring in October 2020. Total annual rent expense for such
warehouse space is approximately $49,000. We believe that each of the properties is in good operating
condition and that such properties are adequate for the operation of the Company’s business as
currently conducted. We also rent smaller satellite offices on a short-term basis.

Item 3. Legal Proceedings

There are no material legal proceedings to which the Company or any of its subsidiaries is a

party or of which any of their property is the subject.

Item 4. Mine Safety Disclosures

Not applicable.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities

Shares of our Common Stock, par value $0.01, trade on The NASDAQ Global Market under

the symbol “WSTG”. Following is the range of low and high closing sales prices for our Common
Stock as reported on The NASDAQ Global Market.

2018:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter

2017:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter

High

Low

$16.75
$14.45
$14.25
$13.23

$12.80
$12.80
$11.20
$ 9.76

$18.85
$20.95
$19.35
$17.10

$16.60
$18.25
$13.35
$13.40

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Securities Authorized for Issuance Under Equity Compensation Plans

The following table sets forth information, as of December 31, 2018, regarding securities

authorized for issuance upon the exercise of stock options and vesting of restricted stock under all the
Company’s equity compensation plans.

(a)

Number of Securities to be Issued Upon

Exercise of Outstanding Options and

Vesting of Stock Awards

(b)
Weighted
Average
Exercise
Price
of
Outstanding
Options

for Future Issuance Under Equity

Compensation Plans (Excluding Securities

Reflected in Column (a))

96,744
96,744

$
$

15.67
15.67

530,022
530,022

Plan Category
Equity
Compensation
Plans Approved
by Stockholders
(1)

Total

(1) Includes the 2012 Plan. For plan details, please refer to Note 7 in the Notes to our Consolidated

Financial Statements.

In each of 2018 and 2017, we declared dividends totaling $0.68 per share on our Common

Stock. There can be no assurance that we will continue to pay comparable cash dividends in the future.

During 2017, the Company granted a total of 87,076 shares of Restricted Stock to officers and

employees. These shares of Restricted Stock vest over time in up to twenty equal quarterly
installments. In 2017, 22,694 shares of Restricted Stock were forfeited as a result of directors and
employees terminating employment with the Company.

During 2018, the Company granted a total of 123,000 shares of Restricted Stock to officers,

directors and employees. These shares of Restricted Stock vest immediately or over time in up to

twenty equal quarterly installments. In 2018, 7,176 shares of Restricted Stock were forfeited as a result
of directors and employees terminating employment with the Company.

The share issuances in all the above transactions were not registered under the Securities Act
of 1933, as amended (the “Securities Act”). The issuances were exempt from registration pursuant to
Section 4(2) of the Securities Act and/or Regulation D thereunder, as they were transactions by the
issuer that did not involve public offerings of securities and/or involved issuances to accredited
investors.

As of February 19, 2019, there were approximately 106 record holders of our Common Stock.

This figure does not include an estimate of the number of beneficial holders whose shares are held of
record by brokerage firms and clearing agencies.

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During the fourth quarter of 2018, we repurchased shares of our Common Stock as follows:

Total
Number
of Shares
Purchased
as
Part of
Average
Average
Publicly
Price Paid Announced Price Paid
Per Share
Plans or
Per Share
(3)
Programs
(2)

Total
Number
of Shares
Purchased

Maximum
Number of

Shares That
May Yet Be

Purchased

Under the
Plans or
Programs
(4)

— $

—
1,729 (1)$ 12.44
—
$ 12.44

— $

1,729

— $
— $
— $
— $

— 547,488
— 547,488
— 547,488
— 547,488

Period

October 1, 2018 - October 31, 2018
November 1, 2018 - November 30, 2018
December 1, 2018 - December 31, 2018

Total

(1) Includes 1,729 shares surrendered to the Company by employees to satisfy individual tax

withholding obligations upon vesting of previously issued shares of Restricted Stock. These shares
are not included in the Common Stock repurchase program referred to in footnote (4) below.

(2) Average price paid per share reflects the closing price of the Company’s Common Stock on the
business date the shares were surrendered by the employee stockholder to satisfy individual tax
withholding obligations upon vesting of Restricted Stock or the price of the Common Stock paid
on the open market purchase, as applicable.

(3) Average price paid per share reflects the price of the Company’s Common Stock purchased on the

open market.

(4) 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
Common Stock repurchase program does not have an expiration date.

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STOCK PRICE PERFORMANCE GRAPH

Set forth below is a line graph comparing the yearly percentage change in the cumulative total

shareholder return on the Company’s Common Stock with the cumulative total return of the S&P
Midcap 400 Index and the S&P 500 Computer and Electronics Retail Index for the period commencing
December 31, 2013 and ending December 31, 2018, assuming $100 was invested on December 31,
2013 and the reinvestment of dividends.

Picture 2

Company / Index
Wayside Technology Group, Inc.
S&P MidCap 400 Index
S&P 500 Computer & Electronics Retail

Base
Period
Dec-
13
100
100

INDEXED RETURNS
Year ended

Dec-14
132.71
109.77

Dec-15
146.87
107.38

Dec-16
155.72
129.65

Dec-17
144.68
150.71

Dec-18
91.43
134.01

Index

100

90.85

75.04

111.72

183.77

145.91

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Item 6. Selected Financial Data

The following tables set forth, for the periods indicated, selected consolidated financial and

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

The selected financial data for the years ended December 31, 2018, 2017 and 2016 reflects

our adoption of ASC 606 – Revenue from Contracts with Customers (“ASC 606”). We have not
adjusted the selected financial data for any other period presented. See Note 3 to the Consolidated
Financial Statements in Part II, Item 8 of this Form 10K.

Year Ended December 31,
(Amounts in thousands, except per share amounts)

Consolidated Statement of
Operations Data:
Net sales - (1)
Cost of sales
Gross profit
Selling, general and administrative
expenses
Separation expenses
Income from operations
Other income, net
Income before provision for income
taxes
Provision for income taxes
Net income
Net income per common share

Basic
Diluted

Weighted average common
shares outstanding:

Basic
Diluted

Net income excluding separation
expenses, net of tax (Non-GAAP) -
(2)
Diluted earnings per share excluding
separation expenses, net of tax (Non-
GAAP) - (3)

Reflects Impact of ASC 606 Adoption
2016
2017
2018

2015

2014

$ 181,444
154,524
26,920

$ 160,567
133,491
27,076

$ 164,609
137,278
27,331

$ 382,090
355,517
26,573

$ 340,758
315,948
24,810

20,319
2,446
4,155
962

5,117
1,579
3,538

0.78
0.78

4,358
4,358

19,263
—
7,813
740

8,553
3,491
5,062

1.13
1.13

4,299
4,299

18,715
—
8,616
317

8,933
3,032
5,901

1.25
1.25

4,503
4,503

18,063
—
8,510
348

8,858
3,028
5,830

1.22
1.22

4,634
4,634

16,513
—
8,297
461

8,758
2,998
5,760

1.20
1.20

4,661
4,661

$
$

5,546

5,062

5,901

5,830

5,760

1.23

1.13

1.25

1.22

1.20

$
$

(1) See Note 3 to the Consolidated Financial Statements in Part II, Item 8 of this Form 10K, for

information related to the impact on revenue from the adoption of ASC 606, effective January
1, 2018.

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(2) Excludes $2.0 million in expenses related to a separation and release agreement the Company
entered into with its former Chairman and Chief Executive Officer upon his resignation on
May 11, 2018, consisting of $1.7 million in accelerated vesting of restricted stock and $0.8
million in cash payments, net of $0.4 million in tax benefits. See table in Part II, Item 7 of this
Form 10K for reconciliation of net income to net income excluding separation expense, net of
tax (Non-GAAP).

(3) Excludes $0.45 per share in expenses related to a separation and release agreement the

Company entered into with its former Chairman and Chief Executive Officer upon on his
resignation on May 11, 2018, consisting of $0.55 per share of separation expenses, net of
$0.10 per share in tax benefits.

The selected financial data as of December 31, 2018 and 2017 reflects our adoption of ASC

606 – Revenue from Contracts with Customers (“ASC 606”). We have not adjusted the selected
financial data as of any other date presented. See Note 3 to the Consolidated Financial Statements in
Part II, Item 8 of this Form 10K.

December 31,
(Amounts in thousands, except per share amounts)

Balance Sheet Data:
Cash and cash equivalents
Working capital
Total assets
Total stockholders’ equity

2018

2017

2016

2015

2014

$ 14,883
36,214
107,971
40,573

5,530
29,859
104,690
38,712

$ 13,524
24,477
113,698
37,611

$ 23,823
30,568
94,082
38,659

$ 23,124
31,161
94,981
39,567

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following management’s discussion and analysis of the Company’s financial condition
and results of operations should be read in conjunction with the Company’s Consolidated Financial
Statements and the Notes thereto. This discussion and analysis contains, in addition to historical
information, forward-looking statements that involve risks and uncertainties. Our actual results may
differ materially from those anticipated in these forward-looking statements as a result of certain risks
and uncertainties, including those set forth under the heading “Risk Factors” and elsewhere in this
report.

Overview

Our Company is an IT channel company, primarily selling software and other third-party IT

products and services through two reportable operating segments. Through our “Lifeboat 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
“TechXtend Segment” we act as a value-added reseller, selling computer software and hardware
developed by others and provide technical services directly to end user customers in the USA and
Canada. We offer an extensive line of products from leading publishers of software 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 and the Netherlands, through which its

sales are made.

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Factors Influencing Our Financial Results

We derive most of our net sales though the sale of third-party software licenses, maintenance

and service agreements. In our Lifeboat 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 competitive, and demand characteristics of the products which we are authorized to distribute.
In our TechXtend segment sales are generally driven by sales force effectiveness and success in
providing superior customer service, competitive pricing, and flexible payment solutions to our
customers. Our sales are also impacted by external factors such as levels of IT spending and customer
demand for products we distribute.

We sell in a competitive environment where gross product margins have historically declined

due to competition and changes in product mix towards products where no delivery of a physical
product is required. 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.

Selling general and administrative expenses are comprised mainly of employee salaries,

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

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

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 shares repurchased were $3.1 and $1.0 million for the year ended December 31,
2018, respectively, and $3.1 million and $3.0 million for the year ended December 31, 2017,
respectively. The payment of future dividends is at the discretion of our Board of Directors and
dependent on results of operations, projected capital requirements and other factors the Board of
Directors may find relevant.

Stock Volatility. The technology sector of the United States stock markets is subject to

substantial volatility. Numerous conditions which impact the technology sector 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.

We adopted ASC 606 Revenue from Contracts with Customers effective January 1, 2018.

Using the full retrospective method, we recasted our historical financial information to reflect the
adoption as of the earliest reporting period presented. Under ASC 606, net sales for certain
maintenance, service and security products we sell are recorded net of the related cost of sales. We refer
to these items as being recorded on a “net basis” in the discussion below. Software and hardware
products for which sales and cost of sales are reported on separate line items are referred to as being
recorded on a “gross basis”.

Financial Overview

Net sales increased 13%, or $20.8 million, to $181.4 million for the year ended December 31,

2018, compared to $160.6 million for the same period in 2017. Gross profit decreased 1%, or $0.2
million, to $26.9 million for the year

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ended December 31, 2018, compared to $27.1 million in the prior year. Selling, general and
administrative (“SG&A”) expenses increased 5%, or $1.0 million, to $20.3 million for the year ended
December 31, 2018, compared to $19.3 million in the prior year. Separation expenses were $2.4 million
for the year ended December 31, 2018; there were no such expenses in the prior year. Net income
decreased 30%, or $1.6 million, to $3.5 million for the year ended December 31, 2018, compared to
$5.1 million in the prior year. Weighted Average diluted shares outstanding increased by 1% from the
prior year. Income per share diluted decreased 31% to $0.78 for the year ended December 31, 2018,
compared to $1.13 for the same period in 2017.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of the Company’s financial condition and results of

operations are based upon the Company’s Consolidated Financial Statements that have been prepared
in accordance with US GAAP. The preparation of these financial statements requires the Company to
make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. Revenues from the sales of
hardware products, software products, licenses, maintenance and subscription agreements are
recognized on a gross basis upon delivery or fulfillment, with the selling price to the customer recorded
as sales and the acquisition cost of the product recorded as cost of sales.

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

The Company bases its estimates on historical experience and on various other assumptions

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

The Company believes the following critical accounting policies used in the preparation of its

Consolidated Financial Statements affect its more significant judgments and estimates.

Revenue

The Company adopted ASC 606 using the full retrospective method effective January 1, 2018.
See Note 3 to the accompanying financial statements for further information. The Company utilizes
judgement regarding performance obligations inherent in the products for services it sells including,
whether ongoing maintenance obligations performed by third party vendors are distinct from the related
software licenses, and allocation of sales prices among distinct performance obligations. These

estimates require significant judgment to determine whether the software’s functionality is dependent
on ongoing maintenance or if substantially all functionality is available in the original software
download. We also use judgment in the allocation of sales proceeds among performance obligations,
utilizing observable data such as stand-alone selling prices, or market pricing for similar products and
services.

Allowance for Accounts Receivable

The Company maintains allowances for doubtful accounts for estimated losses resulting from

the inability of its customers to make required payments. Management determines the estimate of the
allowance for uncollectible accounts receivable by considering a number of factors, including historical
experience, aging of the accounts receivable, and specific information obtained by the Company on the
financial condition and the current creditworthiness of its customers. If the financial condition of the
Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required. At the time of sale, we record an estimate for sales returns
based on historical experience. If actual sales returns are greater than estimated by management,
additional expense may be incurred.

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Accounts Receivable – Long Term

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

Inventory Allowances

The Company writes down its inventory for estimated obsolescence or unmarketable inventory

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

Income Taxes

The Company has considered future taxable income and ongoing prudent and feasible tax

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

Share-Based Payments

Under the fair value recognition provision, stock-based compensation cost is measured at the

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

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09,

Revenue from Contracts with Customers, superseding the previous revenue recognition requirements,
along with most existing industry-specific guidance. In March, April, May and December 2016, the
FASB issued additional updates to the new accounting standard which provide supplemental adoption
guidance and clarifications. The guidance requires an entity to review contracts in five steps: 1) identify
the contract, 2) identify performance obligations, 3) determine the transaction price, 4) allocate the
transaction price, and 5) recognize revenue in order to depict the transfer of promised goods or services
to customers in an amount that reflects the consideration to which the entity expects to be entitled in
exchange for those goods or services. The new standard also requires enhanced disclosures regarding
the nature, amount, timing and uncertainty of revenue arising from contracts with customers. The
Company adopted the new standard on January 1, 2018, using the full retrospective method which
required us to recast our historical financial information to reflect the adoption as of the earliest
reporting period presented. The most significant impact of adopting the standard relates to the
determination of whether the Company is acting as a principal or an agent in the sale of third-party
security software and software that is highly interdependent with support, as well as maintenance,
support or other services. For additional information on the impact to reported results, please see Note 3
of the Consolidated Financial Statements in Part II of this Annual Report on Form 10-K.

In February 2016, the FASB issued ASU 2016-02, Leases ("ASU 2016-02"). ASU 2016-02

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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. This ASU is effective for fiscal years, and interim periods within those
years, beginning after December 15, 2018. The Company expects to elect to adopt the new accounting
standard using the modified retrospective transition option. The Company is in the process of finalizing
its evaluation of current leases and quantifying the impact to its balance sheet. The Company expects to
recognize right of use assets and leases liabilities between $2.5 million and $3.5 million as of January
1, 2019. The Company does not expect the adoption of this standard to have a material impact on the
Company’s Consolidated Statements of Earnings.

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 August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (“ASU 2016-15”)

which reduces diversity in practice in how certain transactions are classified in the statement of cash
flows. The new standard became effective for the Company beginning with the first quarter of 2018.
The adoption of this guidance did not have a material impact on the Company’s Consolidated Financial
Statements.

In May 2017, the FASB issued ASU No. 2017-09, “Scope of Modification Accounting”, to
reduce diversity in practice and provide clarity regarding existing guidance in ASC 718, “Stock
Compensation”. The amendments in this updated guidance clarify that an entity should apply
modification accounting in response to a change in the terms and conditions of an entity’s share-based
payment awards unless three newly specified criteria are met. This guidance is effective for fiscal years
beginning after December 15, 2017, including interim periods within that reporting period. The new
guidance was effective for the Company on a prospective basis beginning on January 1, 2018 and did
not impact the Company’s Consolidated Financial Statements as it is not the Company’s practice to
change either the terms or conditions of stock-based payment awards once they are granted.

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. This new guidance is effective for the Company
beginning on January 1, 2019 and must be applied either in the period of adoption or retrospectively to
periods in which the effects of the TCJA are recognized. The adoption of this guidance is not expected
to have a material impact on the Company’s Consolidated Financial Statements.

In March 2018, the FASB issued ASU 2018-05, “Amendments to SEC Paragraphs Pursuant to
SEC Staff Accounting Bulletin No. 118 (SEC Update), Income Taxes (Topic 740)” (“ASU 2018-
05”). ASU 2018-05 provides guidance regarding the recording of tax impacts where uncertainty exists,
in the period of adoption of the TCJA, which allowed companies to reflect provisional amounts for
those specific income tax effects of the TCJA for which the accounting under ASC Topic 740 is
incomplete but for which a reasonable estimate could be determined. The Company completed its
Federal and State income tax filings for 2017 with no material change to amounts previously reported.

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,” 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 guidance also
allows nonpublic entities to account for nonemployee awards using certain practical expedients that are
already available for employee awards, but the same accounting policies must be used for awards to
both employees and nonemployees. ASU 2018-07 is effective for fiscal years beginning after

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December 15, 2018, and interim periods within those fiscal years. The Company is currently evaluating
the impact of adopting this guidance.

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. Most of the amendments in ASU
2018-09 will be effective in annual periods beginning after December 15, 2018. This new guidance is
effective for the Company beginning on January 1, 2019 and is not expected to have a material impact
on the Company’s Consolidated Financial Statements and related disclosures.

Results of Operations

The following table sets forth for the years indicated the percentage of net sales represented by

selected items reflected in the Company’s Consolidated Statements of Earnings. The year-to-year
comparison of financial results is not necessarily indicative of future results:

Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Separation expenses
Income from operations
Other income
Income before income taxes
Income tax provision
Net income

Year ended December 31,
2018
2016
2017
100 % 100 % 100 %
85.2
14.8
11.2
1.3
2.3
0.5
2.8
0.9
1.9 % 3.2 % 3.6 %

83.4
16.6
11.4
—
5.2
0.2
5.4
1.8

83.1
16.9
12.0
—
4.9
0.5
5.3
2.2

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, gross margin, adjusted gross billings, gross profit as a percentage of gross
billings, net income as a percentage of net sales, net income as a percentage of gross billings, and net
income excluding separation expenses, net of taxes. 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.

Reconciliation of net sales to adjusted gross billings
(Non-GAAP):

Net sales
Costs of sales related to Software – security or highly
interdependent with support and maintenance, support or
other services
Adjusted gross billings

Year ended December 31,

2018

2017

2016

$ 181,444

$ 160,567

$ 164,609

328,506
$ 509,950

288,812
$ 449,379

253,522
$ 418,131

We define adjusted gross billings as net sales in accordance with US GAAP, adjusted for the

cost of sales related to Software – security or highly interdependent with support and maintenance,
support or other services. 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

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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 it 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.

Reconciliation of net income to net income excluding
separation expenses, net of tax (Non-GAAP):

Year ended December 31,
2017

2016

2018

Net income
Separation expenses
Income tax benefits related to separation expenses
Net income excluding separation expenses, net of taxes

3,538
2,446
(438)
5,546

5,062
-
-
5,062

5,901
-
-
5,901

We use net income excluding separation expenses as a supplemental measure of our performance to
gain insight into comparison of our businesses profitability when compared to the prior year. Our use of
net income excluding separation expenses, net of tax has limitations, and you should not consider it 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 separation expenses net of tax,
or similarly titled measures differently, which may reduce their usefulness as comparative measures.

Year ended December 31,
2017

2016

2018

Net sales
Adjusted gross billings (Non-GAAP)
Gross profit
Net income
Net income excluding Separation expense (Non-GAAP)
Gross margin % - Net sales
Gross margin % - Adjusted gross billings (Non-GAAP)
Net income - % of Net sales
Net income - % of Adjusted gross billings (Non-GAAP)
Net income excluding Separation expense % - Net sales
(Non-GAAP)

$ 181,444
$ 509,950
26,920
$
3,538
$
5,546
$
14.8%
5.3%
1.9%
0.7%

$ 160,567
$ 449,379
27,076
$
5,062
$
5,062
$
16.9%
6.0%
3.2%
1.1%

$ 164,609
$ 418,131
27,331
$
5,901
$
5,901
$
16.6%
6.5%
3.6%
1.4%

3.1%

3.2%

3.6%

Year Ended December 31, 2018 Compared to Year Ended December 31, 2017

Net Sales

Net sales increased 13%, or $20.8 million, to $181.4 million for the year ended December 31,
2018, from $160.6 million for the same period in 2017. Net sales in our Lifeboat Distribution segment
increased $21.9 million, or 15%, to $163.5 million when compared to the prior year. This increase was
offset, in part, by decreased net sales in our TechXtend segment (discussed below). Adjusted gross
billings for the year ended December 31, 2018 increased 13%, or $60.6 million, to $510.0 million
compared to $449.4 million for the same period in 2017.

The increase in our Lifeboat Distribution segment was primarily due to growth in sales

penetration for several of our more significant product lines, the addition of several new product lines,
as well as product mix shift resulting in an increased percent of our sales being reported on a gross
basis. The increases were partially offset by turnover in some vendor and customer accounts, including
the termination of one of our vendor distribution agreements that accounted for less than 10% of net
sales. While the tenure of our vendor relationships is generally for multiple years, the contractual terms
of the distribution agreements themselves are short term in nature and vendors consolidate or change
their relationships for various reasons. We operate in a competitive market in which vendor distribution
and sales agreements

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are subject to turnover due to competitive bidding processes and other factors. Approximately 9.1% of
our net sales during the year ended December 31, 2018 was attributable to security, maintenance and
third-party service products which are recorded on a net basis compared to 10.4% in the same period of
the prior year. Adjusted gross billings for the Lifeboat Distribution segment for the year ended
increased 13%, or $52.3 million, to $469.7 million for the year ended December 31, 2018 compared to
$417.4 million for the prior year.

TechXtend segment net sales decreased $1.0 million, or 5%, to $17.9 million for the year

ended December 31, 2018, compared to $18.9 million for the prior year. Sales in our TechXtend
segment may vary significantly from year to year based on the timing of IT spending decisions by our
larger customers and internal capital allocation decisions regarding the amount of capital we allocate to
the extended payment program. Adjusted gross billings for the TechXtend segment for the year ended
increased 26%, or $8.3 million, to $40.3 million for the year ended December 31, 2018 compared to
$32.0 million for the prior year.

During the year ended December 31, 2018, we relied on two key customers for a total of

42.2% of our total net sales. One major customer accounted for 25.6% and the other for 16.6%, of our
total net sales during the year ended December 31, 2018. These same customers accounted for 35.5%
and 14.9%, of total net accounts receivable as of December 31, 2018.

Gross Profit

Gross profit for the year ended December 31, 2018 decreased 1%, or $0.2 million, to $26.9

million compared to $27.1 million for the prior year. Lifeboat Distribution segment gross profit
increased 1%, or $0.2 million, to $23.4 million for the year ended December 31, 2018 compared to
$23.2 million for the prior year due to higher net sales which were partially offset by the impact of
lower gross margin as a percentage of net sales. TechXtend segment gross profit decreased 11%, or
$0.4 million, to $3.5 million for the year ended December 31, 2018 compared to $3.9 million for the
prior year due to the decreased level of net sales discussed above.

Gross profit margin (gross profit as a percentage of net sales) for the year ended December 31,

2018 was 14.8% compared to 16.9% in 2017. Lifeboat Distribution segment gross profit margin was
14.3% for the year ended December 31, 2018, compared to 16.4% in 2017. TechXtend segment gross
profit margin for the year ended December 31, 2018 was 19.5%, compared to 20.6% in 2017. The
decreases in gross profit margin were primarily caused by lower gross profit margins as a percent of net
sales for hardware, software and other product sales which are reported on a gross basis and a change
in the percentage mix of our products which are recorded net of the related cost of sales. During the
year ended December 31, 2018 approximately 9.1% of our net sales was attributable to security,
maintenance and third-party service products which are recorded on a net basis, or an effective 100%
gross profit margin, compared to 10.4% in 2017. This shift in product mix had the effect of reducing
gross profit as a percent of net sales by 90 basis points. The remainder of the decline was caused by
lower gross profit margin on software and hardware products recorded on a gross basis, as growth in
these products was primarily from high volume lines which are sold at lower gross profit margin than
our average gross profit. We operate in a competitive environment where the trend has been and may
continue to be for gross profit margins as a percentage of adjusted gross billings to decline.

Vendor rebates and discounts for the year ended December 31, 2018 were $2.4 million
compared to $2.2 million in the same period last year. Vendor rebates are dependent on reaching
certain targets set by our vendors. The Company monitors vendor rebate levels, competitive pricing,
and gross profit margins carefully. We anticipate that price competition in our market will continue in
both of our business segments.

Selling, General and Administrative Expenses

SG&A expenses for the year ended December 31, 2018 increased 5%, or $1.0 million, to

$20.3 million, compared to $19.3 million for the prior year. The increase in general and administrative
expenses is primarily due to higher business development and field sales personnel expenses, as well as
professional and public company related costs. SG&A expenses as a percentage of net sales were
11.2% for the year ended December 31, 2018 compared to 12.0% in 2017.

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The Company expects that its SG&A expenses, as a percentage of net sales, may vary

depending on changes in sales volume, as well as the levels of continuing investments in key growth
initiatives. We plan to continue to expand our investment in information technology and marketing,
while monitoring SG&A expenses closely.

Separation Expense

Separation expense for the year ended December 31, 2018 was $2.4 million related to the

resignation of our former Chairman, President and Chief Executive Officer on May 11, 2018,
consisting of a $1.7 million charge for accelerated vesting of restricted stock and $0.8 million in cash
payments to be made over twelve months. There was no separation expense during 2017.

Income Taxes

For the year ended December 31, 2018, the Company recorded a provision for income taxes of

$1.6 million, or 30.9% of income before taxes, compared to $3.5 million or 40.8% of income before
taxes for 2017. The Company’s effective tax rate for the year ended December 31, 2018 was impacted
by limitations on the deductibility of executive compensation resulting from Section 162(m) of the
Internal Revenue Code, and adjustments to the accrual for state income taxes in states which have
enacted economic nexus statutes. The Company recorded a $0.4 million tax benefit related to
separation expenses during the year ended December 31, 2018, resulting in a 16.5% effective tax
benefit rate on that expense. We also adjusted our provision for state income taxes in states with
economic nexus statutes by $0.2 million. The effective tax rate for ordinary income was 24.2% for the
year ended December 31, 2018. The 2017 tax expense includes charges of $0.2 million resulting from
the revaluation of deferred tax assets and transition tax for foreign unrepatriated earnings under the
TCJA, and approximately $0.4 million related to a provision for state taxes for states with economic
nexus statutes and other adjustments.

The TCJA was enacted on December 22, 2017 and introduced significant changes to the U.S.

income tax law. Effective in 2018, the TCJA reduced U.S. statutory tax rates from 34% to 21%.
Accordingly, we remeasured our deferred taxes as of December 31, 2017 to reflect the reduced rate that
will apply in future periods when these deferred taxes are settled or realized.

Due to the timing of the enactment and the complexity involved in applying the provisions of
TCJA, we made reasonable estimates of the effects and recorded provisional amounts in our financial
statements as of December 31, 2017. We completed our Federal and State income tax filings for 2017
with no material changes to amounts previously reported.

Year Ended December 31, 2017 Compared to Year Ended December 31, 2016

Net Sales

Net sales, as reflected for the adoption of ASC 606 where using the full retrospective method

we recasted our historical financial information to reflect the adoption as of the earliest reporting period
presented, for the year ended December 31, 2017 decreased 2%, or $4.0 million, to $160.6 million,
compared to $164.6 million for the same period in 2016. Adjusted gross billings for the year ended
December 31, 2017 increased 7%, or $31.3 million, to $449.4 million, compared to $418.1 million for
the same period in 2016.

Lifeboat Distribution segment net sales for the year ended December 31, 2017 increased 3%,
or $4.6 million, to $141.7 million, compared to $137.1 million for the same period a year earlier. The
increase in our Lifeboat Distribution segment was primarily due to growth in sales penetration for
several of our more significant product lines, as well as the addition of several new product lines. The
increases were partially offset by turnover in some vendor and customer accounts due to competitive
bid situations. We operate in a competitive market in which some sales agreements are subject to
periodic competitive bidding processes, resulting in fluctuations from year to year based on the

outcome. Adjusted gross billings for the Lifeboat Distribution segment increased 13%, or $47.9
million, to $417.4 million for the year ended December 31, 2017, compared to $369.5 million for the
same period in 2016.

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TechXtend segment net sales decreased 31%, or $8.6 million, to $18.9 million for the year
ended December 31, 2017, compared to $27.5 million for the prior year. The decrease in TechXtend
was due primarily to lower large enterprise sales, including those sold under extended payment terms.
Large enterprise sales tend to fluctuate from period to period based on the timing of customer
purchasing decisions for IT projects. The Company’s focus on extended payment sales is impacted by
such timing, and internal capital allocation decisions. During 2017, a significant amount of our working
capital was invested in vendor prepayments and extended payment sales from the fourth quarter of
2016, reducing our emphasis on this business during 2017. Adjusted gross billings for the TechXtend
segment decreased 34%, or $16.6 million, to $32.0 million for the year ended December 31, 2017,
compared to $48.6 million for the same period in 2016.

Gross Profit

Gross profit for the year ended December 31, 2017 decreased 1%, or $0.2 million, to $27.1
million, compared to $27.3 million for the same period in 2016. Lifeboat Distribution segment gross
profit increased 4%, or $0.9 million, to $23.2 million for the year ended December 31, 2017, compared
to $22.3 million for the same period in the prior year. TechXtend segment gross profit decreased 22%,
or $1.1 million, to $3.9 million for the year ended December 31, 2017, compared to $5.0 million for the
same period in the prior year. Gross profit decreased primarily due to lower extended payment terms
sales in our TechXtend segment described above and vendor competitive pressures on gross profit
margins as discussed below, which were mitigated in part by the impact of increased sales in our
Lifeboat Distribution segment.

Gross profit margin (gross profit as a percentage of net sales) for the year ended December 31,

2017 was 16.9% compared to 16.6% in 2016. Lifeboat Distribution segment gross profit margin was
16.4% for the year ended December 31, 2017 compared to 16.3% in 2016. TechXtend segment gross
profit margin for the year ended December 31, 2017 was 20.6% compared to 18.1% in 2016. The
increase in gross profit margin was due to a decrease in larger enterprise and public sector sales. Sales
of large enterprise licenses and related equipment typically carry a lower gross profit margin as a
percent of gross billings, and lower incremental selling and administrative costs as a percentage of
revenue, than smaller account sales.

Vendor rebates and discounts for the year ended December 31, 2017 was $2.2 million
compared to $2.0 million in 2016. Vendor rebates are dependent on reaching certain targets set by our
vendors. The Company monitors vendor rebate levels, competitive pricing, and gross profit margins
carefully. We anticipate that price competition in our market will continue in both of our business
segments.

Selling, General and Administrative Expenses

SG&A expenses for the year ended December 31, 2017 increased $0.6 million or 3% to $19.3

million, compared to $18.7 million for the same period in 2016. The increase in general and
administrative expenses is primarily due to higher employee related and other expenses to support our
growth and compliance as a public company. SG&A expenses were 12.0% of net sales for the year
ended December 31, 2017, and 11.4% for the same period in 2016.

The Company expects that its SG&A expenses, as a percentage of net sales, may vary

depending on changes in sales volume, as well as the levels of continuing investments in key growth

initiatives. We plan to continue to expand our investment in information technology and marketing,
while monitoring our sales and general and administrative expenses closely.

Income Taxes

For the year ended December 31, 2017, the Company recorded a provision for income taxes of

$3.5 million, or 40.8% of income before taxes, compared to $3.0 million or 33.9% of income before
taxes for 2016. The 2017 tax expense includes charges of $0.2 million resulting from the revaluation of
deferred tax assets and transition tax for foreign unrepatriated earnings under the TCJA, and
approximately $0.4 million related to a provision for state taxes for states with economic nexus statutes
and other adjustments.

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The TCJA was enacted on December 22, 2017 and introduced significant changes to the U.S.

income tax law. Effective in 2018, the TCJA reduces U.S. statutory tax rates from 34% to 21%.
Accordingly, we remeasured our deferred taxes as of December 31, 2017 to reflect the reduced rate that
will apply in future periods when these deferred taxes are settled or realized.

Due to the timing of the enactment and the complexity involved in applying the provisions of

the TCJA, we made reasonable estimates of the effects and recorded provisional amounts in our
financial statements as of December 31, 2017. We completed our Federal and State income tax filings
for 2017 with no material changes to amounts previously reported.

Liquidity and Capital Resources

Our cash and cash equivalents increased by $9.4 million to $14.9 million at December 31,

2018 from $5.5 million at December 31, 2017. The increase in cash was primarily the result of cash
provided by operating activities of $13.9 million offset, in part, by use of cash for stock repurchases
and dividends of $4.1 million.

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

The increase in cash provided by changes in operating assets and liabilities in 2018 was

primarily due to a decrease in net working capital (accounts receivable, inventory, and vendor
prepayments less accounts payable) required to support our business. The decreased working capital is
primarily driven by $3.7 million utilization in 2018 of a prior year vendor prepayment as part of a
distribution agreement. Our accounts receivable – long term decreased by approximately $4.3 million
during 2018 due to collection of receivables with extended payment term sales.

Net cash used by operating activities for the year ended December 31, 2017 was $2.0 million,
comprised of net income adjusted for non-cash items of $6.5 million, offset by cash used in changes in
operating assets and liabilities of $8.5 million. Net cash used in operating activities for the year ended
December 31, 2016 was $0.5 million, comprised of net income adjusted for non-cash items of $7.6
million, offset by cash used by changes in operating assets and liabilities of $8.1 million.

The increase in cash used in changes in operating assets and liabilities in 2017 was primarily
due to an increase in net working capital (accounts receivable, inventory, and vendor prepayments less
accounts payable) required to support our business. The increased working capital requirement is
primarily driven by increased sales levels and extended payment terms sales during the fourth quarter
of 2016, and a vendor prepayment of approximately $8.0 million as part of a distribution
agreement. Our accounts receivable – long term increased by approximately $4.3 million during the

fourth quarter of 2016 due to a higher level of extended payment term sales. The products related to
these sales were paid for in the first quarter of 2017, while related sales proceeds will be collected over
future periods.

In 2018, net cash used in investing activities was $0.3 million, compared to $0.4 million and

$1.0 million in 2017 and 2016, respectively. The decrease from 2016 to 2017 was primarily due to
capital expenditures for equipment and leasehold improvements related to our new office in 2016. In
October 2016, the Company moved into a new office, occupying approximately 20,000 square foot
facility under a ten-year lease with renewal options.

Net cash used in financing activities for the year ended December 31, 2018 of $4.1 million

was comprised of $3.1 million of dividend payments on our Common Stock, and $1.0 million for the
purchases of treasury shares of our Common Stock.

Net cash used in financing activities for the year ended December 31, 2017 of $6.0 million

was comprised of $3.1 million of dividend payments on our Common Stock, and $3.0 million for the
purchases of treasury shares of our Common Stock.

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On December 3, 2014, the Board of Directors of the Company approved an increase of

500,000 shares of Common Stock to the number of shares of Common Stock available for repurchase
under its repurchase plans. On February 2, 2017, the Board of Directors approved an 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 is authorized to purchase 547,488 shares of Common Stock
as of December 31, 2018. The Common Stock repurchase program does not have an expiration date.

As of December 31, 2018, we held 788,006 shares of our Common Stock in treasury at an

average cost of $17.06 per share. As of December 31, 2017, we held 829,671 shares of our Common
Stock in treasury at an average cost of $17.12 per share. We intend to hold the repurchased shares in
treasury for general corporate purposes, including issuances under various stock plans.

On November 15, 2017, the Company entered into a $20,000,000 revolving credit facility (the

At December 31, 2018 and 2017, the Company had no borrowings outstanding under the

Credit Facility. The Company incurred $0.1 million of interest expense, related to the Credit Facility
for the years ended December 31, 2018 and 2017.

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

Contractual Obligations as of December 31, 2018
(Amounts in thousands)

Payment due by Period

Total

Less than 1 year

1-3 years

4-5 years

After 5 years

Operating Leases Obligations (1)
Total Contractual Obligations

$3,776
$3,776

$
$

484
484

$1,257
$1,257

$
$

935
935

$
$

1,100
1,100

(1) Operating leases relate primarily to the leases of the space used for our operations in Eatontown,

New Jersey; Mesa, Arizona; Mississauga, Canada; and Amsterdam, Netherlands. The
commitments for operating leases include the minimum rent payments.

As of December 31, 2018, the Company is not committed by lines of credit or standby letters

of credit, and has no standby repurchase obligations or other commercial commitments (see Note 6 -
Credit Facility in the Notes to our Consolidated Financial Statements).

Foreign Exchange

The Company’s foreign business is subject to changes in demand or pricing resulting from

fluctuations in currency exchange rates or other factors. We are subject to fluctuations primarily in the
Canadian and Euro Dollar-to-U.S. Dollar exchange rate.

Off-Balance Sheet Arrangements

As of December 31, 2018, we did not have any off-balance sheet arrangements, as defined in

Item 303 (a)(4)(ii) of SEC Regulation S-K.

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Item 7A. Quantitative and Qualitative Disclosures about Market Risk

In addition to its activities in the USA, 7% and 6% of the Company’s 2018 sales were
generated in Canada and Europe and the rest of the world, respectively. We are subject to general risks
attendant to the conduct of business in Canada and other countries, including economic uncertainties
and foreign government regulations. In addition, the Company’s foreign businesses are subject to
changes in demand or pricing resulting from fluctuations in currency exchange rates or other factors.

The Company’s cash and cash equivalents, at times, may exceed federally insured limits. The

Company maintains its cash accounts primarily in financial institutions with global operations. The
Company has not experienced any losses in such accounts. The Company believes it is not exposed to
any significant credit risk on cash and cash equivalents.

Item 8. Financial Statements and Supplementary Data

See Index to Consolidated Financial Statements at Item 15(a).

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures. 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 such term is defined in Rules 13a-
15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report. This
evaluation was carried out under the supervision and with the participation of various members of our
management, including our Company’s President and Chief Executive Officer (principal executive
officer), Vice President and Chief Financial Officer (principal financial officer), and Vice President and

Chief Accounting Officer (principal accounting officer). Based upon that evaluation, the Company’s
Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer concluded that the
Company’s disclosure controls and procedures were effective, as of the end of the period covered by
this report, to ensure that information required to be disclosed by the Company in the reports it files or
submits under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the 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.

Management Report on Internal Control Over Financial Reporting. Our management is
responsible for establishing and maintaining adequate internal control over financial reporting as
defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Internal control over financial reporting
is a process designed by, or under the supervision of, our Chief Executive Officer, Chief Financial
Officer, and Chief Accounting Officer, and effected by the Board of Directors, management and other
personnel, to provide reasonable assurance regarding the reliability of our financial reporting and the
preparation of financial statements for external purposes in accordance with US GAAP. Internal control
over financial reporting includes maintaining records in reasonable detail that accurately and fairly
reflect our transactions and disposition of assets; providing reasonable assurance that transactions are
recorded as necessary for preparation of our financial statements in accordance with US GAAP;
providing reasonable assurance that receipts and expenditures of the Company, are made in accordance
of with authorizations of management and directors of the Company; and providing reasonable
assurance that unauthorized acquisition, use or disposition of Company assets that could have a
material effect on our financial statements would be prevented or detected on a timely basis. Because of
its inherent limitations, internal control over financial reporting is not intended to provide absolute
assurance that a misstatement of our financial statements would be prevented or detected. In addition,
projections of any evaluation of effectiveness to future periods are subject to the risk that, owing to
changes in conditions, controls may become inadequate, or that the degree of compliance with policies
or procedures may deteriorate.

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Management, with the participation of our Chief Executive Officer, Chief Financial Officer

and Chief Accounting Officer, conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework). Based on
this evaluation, management concluded that the Company’s internal control over financial reporting
was effective as of December 31, 2018.

In January 2018, we implemented certain internal controls over financial reporting in

conjunction with our adoption of ASC Topic 606, Revenue from Contracts with Customers. Also,
during 2018, in conjunction with our outside consultants, we modified certain account review
procedures and trained personnel to remediate deficiencies in our internal controls that we identified in
2017 that when viewed in aggregate constituted a material weakness in our internal controls. These
deficiencies related to documentation and review procedures in our financial close process. There were
no changes in our internal control over financial reporting during the quarter ended December 31, 2018
that have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.

Our independent registered public accounting firm, BDO USA, LLP, has audited our internal

control over financial reporting as of December 31, 2018. Their attestation report on the audit of our
internal control over financial reporting is included below.

Item 9B. Other Information

None.

Item 10. Directors, Executive Officers and Corporate Governance

PART III

The information required hereunder, with the exception of the information relating to the

Company’s Code of Ethical Conduct that is presented in Part I under the heading “Available
Information,” is incorporated by reference herein from our Definitive Proxy Statement for the 2019
Annual Meeting of Stockholders, to be filed pursuant to Regulation 14A not later than May 1, 2019
(the “Definitive Proxy Statement”) under the sections captioned “Election of Directors,” “Corporate
Governance” and “Section 16 (a) Beneficial Ownership Reporting Compliance.”

Item 11. Executive Compensation

The information required hereunder is incorporated by reference herein from the Definitive

Proxy Statement under the sections captioned “Executives and Executive Compensation” and
“Corporate Governance.”

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters

The information required hereunder is incorporated by reference herein from the Definitive
Proxy Statement under the sections captioned “Equity Compensation Plan Information — Securities
Authorized for Issuance under Equity Compensation Plans” and “Security Ownership of Certain
Beneficial Owners and Management.”

Item 13. Certain Relationships and Related Party Transactions, and Director Independence

The information required hereunder is incorporated by reference herein from the Definitive

Proxy Statement under the sections captioned “Executives and Executive Compensation,” “Corporate
Governance” and “Transactions with Related Persons.”

Item 14. Principal Accounting Fees and Services

The information required hereunder is incorporated by reference herein from the Definitive

Proxy Statement under the section captioned “Ratification of Appointment of Independent Registered
Public Accounting Firm.”

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PART IV

Item 15. Exhibits, Financial Statement Schedules

(a)

The following documents are filed as part of this Report:

Consolidated Financial Statements (See Index to Consolidated Financial
Statements on page F-1 of this report);

Financial Statement Schedule:

Schedule II Valuation and Qualifying Accounts

All other schedules are omitted since the required information is not present or is not present
in amounts sufficient to require submission of the schedule, or because the information
required is included in the Consolidated Financial Statements or notes thereto.

Exhibits Required by Regulation S-K, Item 601:

Exhibit No.

Description of Exhibit

3.1

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

3.1(a)

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

3.2

4.1

10.1

10.2

10.3

10.4

Form of Amended and Restated By-Laws of the Company. (1)

Specimen of Common Stock Certificate. (1)

Second Amended and Restated Revolving Credit Loan Agreement, dated November 15,
2017, by and among Wayside Technology Group, Inc., Lifeboat Distribution, Inc.,
Techxtend, Inc., Programmer’s Paradise, Inc., and ISP International Software
Partners, Inc., as Co-Borrowers, and Citibank, N.A., as Lender. (7)

Second Amended and Restated Credit Loan Note, dated November 15, 2017, by and
among Wayside Technology Group, Inc., Lifeboat Distribution, Inc., Techxtend, Inc.,
Programmer’s Paradise, Inc., and ISP International Software Partners, Inc., as Co-
Borrowers, and Citibank, N.A., as Lender. (7)

Second Amended and Restated Security Agreement, dated November 15, 2017, by and
among Wayside Technology Group, Inc., Lifeboat Distribution, Inc., Techxtend, Inc.,
Programmer’s Paradise, Inc., and ISP International Software Partners, Inc., as Debtors, and
Citibank, N.A., as Lender. (7)

Second Amended and Restated Pledge and Security Agreement, dated November 15, 2017,
by and between Wayside Technology Group, Inc., as Grantor, and Citibank, N.A., as
Secured Party. (7)

10.5 Code of Ethics and Business Conduct. (8)

10.6

10.7

Employment agreement dated January 3, 2018 between the Company and Dale Foster. (9)

Employment agreement dated January 2, 2018 between the Company and Charles Bass.
(9)

10.10

Form of Officer and Director Indemnification Agreement. (10)

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Exhibit No.

Description of Exhibit

10.11

2012 Stock-Based Compensation Plan. (6)

10.13

Employment Agreement, dated January 12, 2006, between the Company and Simon F.
Nynens. (4)

10.14

Offer Letter, dated January 6, 2003, from the Company to Vito Legrottaglie. (5)

10.28

Form of Non-Qualified Stock Option Agreement. (3)

21.1

23.1

23.2

31.1

31.2

31.3

32.1

32.2

32.3

99.1

101

(1)

(2)

(3)

Subsidiaries of the Registrant. (11)

Consent of BDO USA, LLP. (11)

Consent of EisnerAmper LLP. (11)

Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act
of 1934, of Steve DeWindt, the Chief Executive Officer of the Company. (11)

Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act
of 1934, of Michael Vesey, the Vice President and Chief Financial Officer of the Company.
(11)

Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act
of 1934, of Kevin T. Scull, the Vice President and Chief Accounting Officer of the
Company. (11)

Certification pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, of Steve DeWindt, the Chief Executive Officer of the Company. (11)

Certification pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, of Michael Vesey, the Vice President and Chief Financial Officer of the Company.
(11)

Certification pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, of Kevin T. Scull, the Vice President and Chief Accounting Officer of the Company.
(11)

Insider Trading Policy. (11)

The following financial information from Wayside Technology Group, Inc.’s Annual
Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on March
18, 2019, formatted in XBRL (Extensible Business Reporting Language) includes:
(1) Consolidated Balance Sheets, (2) Consolidated Statements of Earnings,
(3) Consolidated Statements of Comprehensive Income, (4) Consolidated Statements of
Stockholders’ Equity, (5) Consolidated Statements of Cash Flows, and (6) the Notes to the
Consolidated Financial Statements.

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

Incorporated by reference to the exhibits of the same number to the Registrant’s Quarterly
Report on Form 10-Q for the quarter ended September 30, 2006 filed on November 3, 2006.

Incorporated by reference to exhibits of the same number filed with the Registrant’s Annual
Report on Form 10-K for the year ended December 31, 2007 filed on March 13, 2008.

Table of Contents

(4)

(5)

(6)

(7)

(8)

(9)

Incorporated by reference to Exhibit 10.43 to the Registrant’s Quarterly Report on Form 10-Q
for the quarter ended March 31, 2006 filed on May 12, 2006.

Incorporated by reference to exhibits of the same number filed with the Registrant’s Quarterly
Report on Form 10-Q for the quarter ended March 31, 2007 filed on May 15, 2007.

Incorporated by reference to Exhibit A of the Registrant’s Definitive Annual Meeting Proxy
Statement filed on April 24, 2012.

Incorporated by reference to the Registrant’s Form 8-K filed on November 20, 2017.

Incorporated by reference to the Registrant’s Form 8-K filed on December 8, 2017.

Incorporated by reference to exhibits of the same number filed with the Registrant’s Annual
Report on Form 10-K for the year ended December 31, 2017 filed on March 15, 2018.

(10)

Incorporated by reference to exhibits of the same number filed with the Registrant’s Quarterly
Report on Form 10-Q for the Period Ended March 31, 2017 filed May 5, 2017.

(11)

Furnished herewith.

(b)

The exhibits required by Item 601 of Regulation S-K are reflected above in Section (a) 3. of
this Item.

(c)

The financial statement schedule is included as reflected in Section (a) 2. of this Item.

Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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, in Eatontown, New Jersey, on March 18, 2019.

WAYSIDE TECHNOLOGY GROUP, INC.

By: /s/ Steve DeWindt

Steve DeWindt, President and
Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant in the capacities and on the dates
indicated:

Signature

Title

Date

/s/ Steve DeWindt
Steve DeWindt

President, Chief Executive Officer and
Director
(Principal Executive Officer)

March 18, 2019

/s/ Michael Vesey
Michael Vesey

Vice President and
Chief Financial Officer

March 18, 2019

(Principal Financial Officer)

Vice President and
Chief Accounting Officer
(Principal Accounting Officer)

March 18, 2019

Chairman of the Board of Directors

March 18, 2019

Director

/s/ Kevin Scull
Kevin T. Scull

/s/ Jeffrey Geygan
Jeffrey R. Geygan

/s/ Mike Faith
Mike Faith

/s/ Diana Kurty
Diana Kurty

Table of Contents

Items 8 and 15(a)

Wayside Technology Group, Inc. and Subsidiaries

Index to Consolidated Financial Statements and Schedule

Reports of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2018 and 2017

Consolidated Statements of Earnings for the years ended December 31, 2018, 2017 and
2016

Consolidated Statements of Comprehensive Income for the years ended December 31, 2018,
2017 and 2016

Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2018,
2017 and 2016

Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and
2016

Notes to Consolidated Financial Statements

Schedule II — Valuation and Qualifying Accounts

Page

F-2

F-5

F-6

F-7

F-8

F-9

F-10

F-31

F-1

Table of Contents

Report of Independent Registered Public Accounting Firm

Shareholders and Board of Directors
Wayside Technology Group, Inc.
Eatontown, New Jersey

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheet of Wayside Technology Group, Inc. and
subsidiaries (the “Company”) as of December 31, 2018, the related consolidated statements of earnings
and comprehensive income, stockholders’ equity, and cash flows for the period then ended December
31, 2018, and the related notes and schedule (collectively referred to as the “consolidated financial
statements”). In our opinion, the consolidated financial statements present fairly, in all material
respects, the financial position of the Company and subsidiaries at December 31, 2018, and the results
of their operations and their cash flows for the period ended December 31, 2018, in conformity with
accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of
December 31, 2018, based on criteria established in Internal Control – Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”)
and our report dated March 18, 2019, expressed an unqualified opinion thereon.

Change in Accounting Principle

On January 1, 2018, the Company adopted Accounting Standards Update 2014-09, Revenue from
Contracts with Customers (Topic 606). The effects of the adoption are described in Note 3 to the
consolidated financial statements.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on the Company’s consolidated financial statements based on our
audit. We are a public accounting firm registered with the PCAOB and are required to be independent
with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement, whether due to error or fraud.

Our audit included performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the
amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the
overall presentation of the consolidated financial statements. We believe that our audit provides a
reasonable basis for our opinion.

/s/ BDO USA, LLP

We have served as the Company’s auditor since 2018.

Woodbridge, New Jersey

March 18, 2019

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F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Wayside Technology Group, Inc. and Subsidiaries

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of Wayside Technology Group, Inc. and
Subsidiaries (the "Company") as of December 31, 2017, and the related consolidated statements of
earnings, comprehensive income, stockholders' equity, and cash flows for each of the years ended
December 31, 2017 and 2016, including the related notes and the financial statement schedule
identified in Item 15(a)(2) (collectively referred to as the "consolidated financial statements"). In our
opinion, the consolidated financial statements present fairly, in all material respects, the consolidated
financial position of the Company as of December 31, 2017, and the consolidated results of their
operations and their cash flows for each of the years ended December 31, 2017 and 2016, in conformity
with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is
to express an opinion on the Company’s financial statements based on our audits. We are a public
accounting firm registered with the Public Company Accounting Oversight Board (United States)
("PCAOB") and are required to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement, whether due to error or fraud. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over financial reporting. As part of our
audits we are required to obtain an understanding of internal control over financial reporting but not for
the purpose of expressing an opinion on the effectiveness of the Company's internal control over
financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ EisnerAmper LLP

We served as the Company's auditor from 2010 through 2018.

Iselin, New Jersey
March 15, 2018, except for the effects of the retrospective adoption of accounting for revenue
recognition as discussed in Note 3 to the consolidated financial statements, as to which the date is
March 18, 2019.

F-3

Table of Contents

Report of Independent Registered Public Accounting Firm

Shareholders and Board of Directors
Wayside Technology Group, Inc.
Eatontown, New Jersey

Opinion on Internal Control over Financial Reporting

We have audited Wayside Technology Group, Inc. and subsidiaries (the “Company”) internal control
over financial reporting as of December 31, 2018, based on criteria established in Internal Control –
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the “COSO criteria”). In our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States) (“PCAOB”), the consolidated balance sheet of the Company and subsidiaries as
of December 31, 2018, the related consolidated statements of earnings and comprehensive income,
stockholders’ equity, and cash flows for the period ended December 31, 2018, and the related notes and
schedule and our report dated March 18, 2019, expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying “Item 9A, Management’s Report on Internal Control over Financial
Reporting”. Our responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and
are required to be independent with respect to the Company in accordance with U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.

We conducted our audit of internal control over financial reporting in accordance with the standards of
the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, and testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk. Our audit also included performing such other procedures
as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and

dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the Company are being made only
in accordance with authorizations of management and directors of the Company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.

/s/ BDO USA, LLP

Woodbridge, New Jersey
March 18, 2019

Table of Contents

F-4

Wayside Technology Group, Inc. and Subsidiaries
Consolidated Balance Sheets
(Amounts in thousands, except share and per share amounts)

ASSETS
Current assets:

Cash and cash equivalents
Accounts receivable, net of allowances of $785 and $862, respectively
Inventory, net
Vendor prepayments
Prepaid expenses and other current assets

Total current assets

Equipment and leasehold improvements, net
Accounts receivable-long-term, net
Other assets
Deferred income taxes

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable and accrued expenses

Total current liabilities

Deferred rent and tenant allowances

Total liabilities

December 31,

2018

2017

$ 14,883
81,351
1,473
3,172
1,988
102,867

1,588
3,156
215
145
$107,971

$ 5,530
78,177
2,794
6,837
1,718
95,056

1,828
7,437
231
138
$104,690

$ 66,653
66,653

$ 65,197
65,197

745

781

67,398

65,978

Commitments and contingencies

Stockholders’ equity:

Common stock, $.01 par value; 10,000,000 shares authorized; 5,284,500
shares issued: 4,496,494 and 4,454,829 shares outstanding, respectively
Additional paid-in capital
Treasury stock, at cost, 788,006 and 829,671 shares, respectively
Retained earnings
Accumulated other comprehensive loss

Total stockholders’ equity

53
32,392
(13,447)
22,994
(1,419)
40,573
$107,971

53
31,257
(14,207)
22,522
(913)
38,712
$104,690

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

F-5

Table of Contents

Net sales

Cost of sales

Gross profit

Wayside Technology Group, Inc. and Subsidiaries
Consolidated Statements of Earnings
(Amounts in thousands, except per share amounts)

Year ended December 31,

2018

2017

2016

$181,444

$160,567

$164,609

154,524

133,491

137,278

26,920

27,076

27,331

Selling, general, and administrative expenses

20,319

19,263

18,715

Separation expenses

Income from operations

Other income (expense):

Interest, net

Foreign currency transaction gains (loss)

2,446

—

4,155

7,813

8,616

907

699

318

(1)

Income before provision for income taxes

5,117

8,553

8,933

Provision for income taxes

1,579

3,491

3,032

Net income

Income per common share-Basic

Income per common share-Diluted

3,538

0.78

5,062

1.13

5,901

1.25

4,358

4,299

4,503

Weighted average common shares outstanding — Basic

Weighted average common shares outstanding — Diluted

4,358

4,299

4,503

Dividends paid per common share

0.68

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

F-6

Table of Contents

Wayside Technology Group, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Amounts in thousands)

Net income

Other comprehensive (loss) income:

Foreign currency translation adjustments

Other comprehensive (loss) income

Comprehensive income

Year ended December 31,
2016
2017
2018

$3,538

$5,062

$5,901

(506)
(506)

698
698

(160)
(160)

$3,032

$5,760

$5,741

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

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Table of Contents

Wayside Technology Group, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
(Amounts in thousands, except share amounts)

Additional

Accumulated
Other

Common Stock
Shares

Amount

Paid-In
Capital

Treasury

Amount Earnings

Retained Comprehensive
(Loss) Income

Total

Balance at January 1,
2016

Net income
Translation adjustment
Dividends paid
Share-based
compensation expense
Tax benefit from share-
based compensation
Restricted stock grants
(net of forfeitures)
Treasury shares
repurchased

Balance at December 31,
2016

Net income
Translation adjustment
Dividends paid
Share-based
compensation expense
Restricted stock grants
(net of forfeitures)
Treasury shares
repurchased

Balance at December 31,
2017

Net income
Translation adjustment
Dividends paid
Share-based
compensation expense
Restricted stock grants
(net of forfeitures)
Treasury shares
repurchased

Balance at December 31,
2018

5,284,500
—
—
—

—

5,284,500
—
—
—

—

5,284,500
—
—
—

—

53
—
—
—

—

53
—
—
—

—

53
—
—
—

—

$ 32,540
—
—
—

583,688
—
—
—

$(10,296) $ 17,813
5,901
—
(3,199)

—
—
—

(1,451) $38,659
5,901
(160)
— (3,199)

—
(160)

1,673

141

—

(3,671)

(164,085)

3,671

— 309,463

(5,404)

—

30,683
—
—
—

729,066
—
—
—

(12,029)
—
—
—

20,515
5,062
—
(3,055)

1,350

—

(776)

(64,382)

—

776

— 164,987

(2,954)

—

31,257
—
—
—

829,671
—
—
—

(14,207)
—
—
—

22,522
3,538
—
(3,066)

2,769

—

(1,634)

(115,824)

1,799

— 74,159

(1,039)

—

1,673

141

—

— (5,404)

37,611
(1,611)
5,062
—
698
698
— (3,055)

—

1,350

—

— (2,954)

(913)
—
(506)

38,712
3,538
(506)
— (3,066)

—

2,769

165

— (1,039)

5,284,500

$ 32,392

788,006

$(13,447) $ 22,994

(1,419) $40,573

The accompanying notes are an integral part of the consolidated financial statements

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Table of Contents

Wayside Technology Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Amounts in thousands)

Year ended December 31,
2017

2016

2018

Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:

Depreciation and amortization expense
Benefit from doubtful accounts receivable
Deferred income tax (benefit) expense
Share-based compensation expense
Loss on disposal of fixed assets
Amortization of discount on accounts receivable

Changes in operating assets and liabilities:

$ 3,538

$ 5,062

$ 5,901

482
(75)
(7)
2,769
17
(869)

477
(95)
278
1,512
—
(747)

296
(73)
105
1,673
12
(308)

Accounts receivable
Inventory
Prepaid expenses and other current assets
Vendor prepayments
Accounts payable and accrued expenses
Other assets and liabilities

Net cash provided by (used in) operating activities

Cash flows used in investing activities
Purchase of equipment and leasehold improvements
Net cash used in investing activities

Cash flows used in financing activities
Purchase of treasury stock
Borrowings under revolving credit facility
Repayments of borrowings under revolving credit facility
Tax benefit from share-based compensation
Dividends paid
Net cash used in financing activities

1,538
1,312
(280)
3,665
1,841
(30)
13,901

11,540
(461)
31
(6,837)
(12,656)
(125)
(2,021)

(28,348)
(361)
(625)
—
21,246
(34)
(516)

(266)
(266)

(359)
(359)

(1,040)
(1,040)

(1,039)
10,000
(10,000)
—
(3,066)
(4,105)

(2,954)
2,000
(2,000)
—
(3,055)
(6,009)

(5,404)
—
—
141
(3,199)
(8,462)

Effect of foreign exchange rate on cash

(177)

395

(281)

Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period

9,353
5,530
$ 14,883

(7,994)
13,524
$ 5,530

(10,299)
23,823
$ 13,524

Supplementary disclosure of cash flow information:
Income taxes paid

$ 2,338

$ 2,437

$ 2,559

Leasehold improvements funded by tenant allowance

840

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

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Table of Contents

Wayside Technology Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in tables in thousands, except share and per share amounts)

Note 1. Description of Business

Wayside Technology Group, Inc. and Subsidiaries (the “Company”), was incorporated in

Delaware in 1982. The Company distributes technology products developed by others to resellers who
in turn sell to end customers worldwide. The Company also resells computer software and hardware
developed by others and provides technical services directly to customers in the United States of
America (“USA”) and Canada. The Company also operates a sales branch in Europe to serve our
customers in this region of the world. The Company offers an extensive line of products from leading
publishers of software and tools for virtualization/cloud computing, security, networking, storage &
infrastructure management, application lifecycle management and other technically sophisticated
domains as well as computer hardware.

The Company is organized into two reportable operating segments. The “Lifeboat

Distribution” segment distributes technical software to corporate resellers, value added resellers

(VARs), consultants and systems integrators worldwide. The “TechXtend” segment is a value-added
reseller of software, hardware and services, selling to end user corporations, government organizations
and academic institutions in the USA and Canada.

Note 2. Summary of Significant Accounting Policies

Principles of Consolidation and Operations

The consolidated financial statements include the accounts of Wayside Technology
Group, Inc. and its wholly owned subsidiaries. All intercompany transactions and balances have been
eliminated.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles

generally accepted in the United States of America (“US GAAP”) requires management to make
extensive use of certain estimates and assumptions which affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods. The significant areas of
estimation include but are not limited to accounting for allowance for doubtful accounts, sales returns,
allocation of revenue in multiple deliverable arrangements, principal vs. agent considerations, discount
rates applicable to long term receivables, inventory obsolescence, income taxes, depreciation,
contingencies and stock-based compensation. Actual results could differ from those estimates.

Net Income Per Common Share

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

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Table of Contents

A reconciliation of the numerators and denominators of the basic and diluted per share

computations follows:

Numerator:
Net income

Year ended December 31,
2016
2017

2018

$ 3,538

$ 5,062

$ 5,901

Less distributed and undistributed income allocated to participating
securities

118

222

251

Net income attributable to common shareholders

3,420

4,840

5,650

Denominator:

Weighted average common shares (Basic)

4,358

4,299

4,503

Weighted average common shares including assumed conversions
(Diluted)

Basic net income per share
Diluted net income per share

Cash Equivalents

4,358

4,299

4,503

$ 0.78
$ 0.78

$ 1.13
$ 1.13

$ 1.25
$ 1.25

The Company considers all liquid short-term investments with maturities of 90 days or less

when purchased to be cash equivalents.

Accounts Receivable

Accounts receivable principally represents amounts collectible from our customers. The

Company performs ongoing credit evaluations of its customers but generally does not require collateral
to support any outstanding obligation. From time to time, we sell accounts receivable to a financial
institution on a non-recourse basis for cash, less a discount. The Company has no significant retained
interests or servicing liabilities related to the accounts receivable sold. Proceeds from the sale of
receivables approximated their discounted book value and were included in operating cash flows on the
Consolidated Statements of Cash Flows.

Allowance for Accounts Receivable

We provide allowances for doubtful accounts related to accounts receivable for estimated

losses resulting from the inability of our customers to make required payments. We take into
consideration the overall quality and aging of the receivable portfolio along with specifically identified
customer risks. If actual customer payment performance were to deteriorate to an extent not expected,
additional allowances may be required. At the time of sale, we record an estimate for sales returns
based on historical experience. If actual sales returns are greater than estimated by management,
additional expense may be incurred.

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. Cumulative translation adjustments have been
classified within accumulated other comprehensive income, which is a separate component of
stockholders’ equity in accordance FASB ASC Topic No. 220, “Comprehensive Income”. Foreign
currency transaction gains and losses are recorded as income or expenses as amounts are settled.

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Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations in credit risk

consist of cash and cash equivalents.

The Company’s cash and cash equivalents, at times, may exceed federally insured limits. The

Company’s cash and cash equivalents are deposited primarily in banking institutions with global
operations. The Company has not experienced any losses in such accounts. The Company believes it is
not exposed to any significant credit risk on cash and cash equivalents.

Financial Instruments

The carrying amounts of financial instruments, including cash and cash equivalents, accounts
receivable and accounts payable approximated fair value as of December 31, 2018 and 2017, because
of the relative short maturity of these instruments. The Company’s accounts receivable-long-term is
discounted to their present value at prevailing market rates at the time of sale which, approximates fair
value as of December 31, 2018 and 2017.

Inventory

Inventory, consisting primarily of finished products held for resale, is stated at the lower of

cost or market.

Vendor Prepayments

Vendor prepayments represents advance payments made to vendors to be applied against

future purchases. Any amounts not expected to be utilized to apply against purchases within one year
are reclassified to other long-term assets.

Equipment and Leasehold Improvements

Equipment and leasehold improvements are stated at cost. Equipment depreciation is
calculated using the straight-line method over three to five years. Leasehold improvements are
amortized using the straight-line method over the estimated useful lives of the assets or the related lease
terms, whichever is shorter.

Accounts Receivable-Long-Term

Accounts receivable-long-term result from product sales with extended payment terms that are

discounted to their present values at the prevailing market rates at the time of sale. In subsequent
periods, the accounts receivable is increased to the amounts due and payable by the customers through
the accretion of interest income on the unpaid accounts receivable due in future years. The amounts
under these long-term accounts receivable due within one year are reclassified to the current portion of
accounts receivable.

Comprehensive Income

Comprehensive income consists of net income for the period and the impact of unrealized

foreign currency translation adjustments. The foreign currency translation adjustments are not currently
adjusted for income taxes as they relate to permanent investments in international subsidiaries.

Revenue Recognition

Effective January 1, 2018, the Company adopted the requirements of Accounting Standards

Update, or ASU, No. 2014-09 Revenue from Contracts with Customers, or Accounting Standard
Codification (“ASC”) 606 using the full retrospective method, as discussed in detail in Note 3. All
amounts and disclosures set forth in this Annual Report on Form 10-K have been updated to comply
with ASC 606 as discussed in Note 3.

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Table of Contents

Stock-Based Compensation

The Company has stockholder-approved stock incentive plans for employees and directors.

Stock- based compensation is recognized based on the grant date fair value and is recognized as
expense on a straight-line basis over the requisite service period.

Separation Expenses

Separation expenses consist of expenses related to accelerated vesting of restricted stock and
other cash payments to be made to the Company’s former Chairman of the Board, President and Chief
Executive Officer pursuant to a separation agreement dated May 11, 2018.

Interest, net

Interest, net consists primarily of income from the amortization of the discount on accounts

receivable long term, net of interest expense on the Company’s credit facility.

Income Taxes

The Company utilizes the asset and liability method of accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on differences between financial
reporting and tax basis of assets and liabilities and are measured using enacted tax rates and laws that
will be in effect when the differences are expected to reverse. This method also requires a valuation
allowance against the net deferred tax asset if, based on the weighted available evidence, it is more
likely than not that some or all the deferred tax assets will not be realized. The Company’s policy is to
recognize interest and penalties related to uncertain tax positions in income tax expense when assessed.
The Company accounts for uncertainties in accordance with FASB ASC 740 “Income Taxes”. This
standard clarified the accounting for uncertainties in income taxes. The standard prescribes criteria for
recognition and measurement of tax positions. It also provides guidance on derecognition,
classification, interest and penalties, and disclosures related to income taxes associated with uncertain
tax positions. The Company classifies all deferred tax asset or liabilities as non-current on the balance
sheet in accordance with ASU 2015-17 which the Company has adopted.

Reclassifications

Certain reclassifications have been made to the prior period financial statements to conform
to the current-year presentation, including the reclassification of certain vendor rebates from prepaids
expenses and other current assets to accounts payable and accrued expenses and the reclassification of
deferred rent and tenant allowances from current liabilities to long-term liabilities. See Note 3 for
certain balance sheet reclassifications relating to the Company’s adoption of ASC 606.

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09,

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software that is highly interdependent with support, as well as maintenance, support or other services.
See Note 3 (Revenue Recognition).

In February 2016, the 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 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. This ASU is effective for
fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company
expects to elect to adopt the new accounting standard using the modified retrospective transition option.
The Company is in the process of finalizing its evaluation of current leases and quantifying the impact
to its balance sheet. The Company expects to recognize right of use assets and leases liabilities between
$2.5 million and $3.5 million as of January 1, 2019. The Company does not expect the adoption of this
standard to have a material impact on the Company’s Consolidated Statements of Earnings.

In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (“ASU 2016-15”)

In May 2017, the FASB issued ASU No. 2017-09, “Scope of Modification Accounting”, to

reduce diversity in practice and provide clarity regarding existing guidance in ASC 718, “Stock
Compensation”. The amendments in this updated guidance clarify that an entity should apply
modification accounting in response to a change in the terms and conditions of an entity’s share-based
payment awards unless three newly specified criteria are met. This guidance is effective for fiscal years
beginning after December 15, 2017, including interim periods within that reporting period. The new
guidance was effective for the Company on a prospective basis beginning on January 1, 2018 and did
not impact the Company’s Consolidated Financial Statements as it is not the Company’s practice to
change either the terms or conditions of stock-based payment awards once they are granted.

In March 2018, the FASB issued ASU 2018-05, “Amendments to SEC Paragraphs Pursuant to
SEC Staff Accounting Bulletin No. 118 (SEC Update), Income Taxes (Topic 740)” (“ASU-2018-05”).
ASU 2018-05 provides guidance regarding the recording of tax impacts where uncertainty exists, in the

period of adoption of the TCJA, which allowed companies to reflect provisional amounts for those
specific income tax effects of the TCJA for which the

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Table of Contents

accounting under ASC Topic 740 is incomplete but for which a reasonable estimate could be
determined. The Company completed its Federal and State income tax filings for 2017 with no material
change to amounts previously reported.

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 guidance also allows nonpublic entities to account for nonemployee awards using certain
practical expedients that are already available for employee awards, but the same accounting policies
must be used for awards to both employees and nonemployees. ASU 2018-07 is effective for fiscal
years beginning after December 15, 2018, and interim periods within those fiscal years. The Company
is currently evaluating the impact of adopting this guidance.

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. Most of the amendments in ASU
2018-09 will be effective in annual periods beginning after December 15, 2018. This new guidance is
effective for the Company beginning on January 1, 2019 and is not expected to have a material impact
on the Company’s Consolidated Financial Statements and related disclosures.

3. Revenue Recognition

Effective January 1, 2018, we adopted ASC 606 using the full retrospective method, which

requires us to recast our historical financial information to reflect the adoption as of the earliest
reporting period presented. There was no adjustment to equity as a result of the adoption. The most
significant impact of adopting the standard relates to the determination of whether the Company is
acting as a principal or an agent in the sale of third-party security software and software that is highly
interdependent with support, as well as maintenance, support and other services. Historically, under the
transfer of risk and rewards model of revenue recognition, the Company has accounted for primarily all
its sales on a gross basis. The new guidance requires the Company to identify performance obligations
and assess transfer of control. While assessing its performance obligations for sales of security software
and software subscriptions that are highly interdependent with support, the Company determined that
the vendor has ongoing performance obligations with the end customer that are not separately
identifiable from the software itself. The Company also determined that the vendor has ongoing
performance obligation for sales of certain third-party maintenance, support and service contracts. In
these instances, the Company has determined that it does not have control and is acting as an agent in
the sale. When acting as an agent in a transaction, the Company accounts for sales on a net basis, with
the vendor cost associated with the sale recognized as a reduction of revenue.

The Company also changed its presentation of its accrual for returns and recognized this as a
refund liability within the accounts payable and accrued expense line of the balance sheet. The amount
previously had been recorded as a reduction of accounts receivable. Additionally, the asset for the right
to recover from customers settling the refund liability is presented separately from the refund liability.
This amount had previously been recorded as a reduction of accounts payable and accrued expenses. As
a result, in our consolidated balance sheets, we reclassified our sales return allowance from accounts
receivable, net of allowances to accounts payable and accrued expenses and reclassified the relating
asset for the right to recover from customers settling the refund liability from accounts payable and
accrued expenses to prepaid expenses and other current assets.

F-15

Table of Contents

ASC 606 Adoption Impact to Previously Reported Results

The tables below present historical information adjusted as if the standard had been adopted

on January 1, 2016 for all periods presented. The effect of these changes for each quarter of 2017 is
presented in Note 11.

Year ended December 31, 2017

Year ended December 31, 2016

Impact

Reported

of Adoption

Adjusted

Reported

of Adoption

Adjusted

Net sales
Cost of sales
Gross profit

$ 449,379 $ (288,812) $ 160,567 $ 418,131 $ (253,522) $ 164,609
137,278
— $ 27,331

— $ 27,076 $ 27,331 $

422,303
$ 27,076 $

(288,812)

(253,522)

390,800

133,491

The following table presents the effect from the adoption of ASC 606 on the consolidated

balance sheet.

Assets:

Accounts receivable, net of allowances
Prepaid expenses and other current assets

Liabilities:

Accounts payable and accrued expenses

$
$

As of December 31, 2017

Impact

Reported

of Adoption

Adjusted

76,937
553

$
$

1,240
1,165

$
$

78,177
1,718

62,792

2,405

65,197

There is no impact to stockholders’ equity from the adoption of ASC 606.

The core principle of ASC 606 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 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

F-16

Table of Contents

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:

Net sales:

Year ended December 31,

Hardware, software and other products
Software - security & highly interdependent with support
Maintenance, support & other services
Net sales

$ 164,870
6,527
10,047
$ 181,444

$ 143,920
5,939
10,708
$ 160,567

$ 148,949
4,916
10,744
$ 164,609

2018

2017

2016

See Note 10 for disaggregation of revenue by segment and geography.

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.

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

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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
December 31, 2018 and 2017 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.

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

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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.

4. Balance Sheet Detail

Equipment and leasehold improvements, net consist of the following as of December 31:

Equipment
Leasehold improvements

Less accumulated depreciation and amortization

2018
$ 2,146
1,332
3,478
(1,890)
$ 1,588

2017
$ 1,988
1,335
3,323
(1,495)
$ 1,828

Depreciation expense relating to equipment and leasehold improvements, net was $473

thousand, $470 thousand and $292 thousand during the years ended December 31, 2018, 2017 and
2016, respectively.

Accounts receivable – long term, net consist of the following as of December 31:

Total amount due from customer
Less unamortized discount
Less current portion included in accounts receivable

2018

2017

$11,169 $ 20,886
(912)
(12,537)
7,437

(391)
(7,622)
$ 3,156 $

Accounts payable and accrued expenses consist of the following as of December 31:

Trade accounts payable
Accrued expenses

2018
$62,751
3,902
$66,653

2017
$60,075
5,122
$65,197

Accumulated other comprehensive loss consists of the following as of December 31:

Foreign currency translation adjustments

2018

2017

$(1,419) $ (913)
$(1,419) $ (913)

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5. Income Taxes

Deferred tax attributes resulting from differences between the tax basis of assets and liabilities

and the reported amounts in the consolidated balance sheet at December 31, 2018 and 2017 are as
follows:

Deferred tax assets:
Accruals and reserves
Deferred rent credit

Total deferred tax assets

Deferred tax liabilities:
Depreciation and amortization
Total deferred tax liabilities

Net deferred tax asset

The provision for income taxes is as follows:

2018

2017

$ 331 $ 331
161
492

151
482

(337)
(337)

(354)
(354)
$ 145 $ 138

Year ended December 31,
2017

2016

2018

Current:

Federal
State
Foreign

Deferred:
Federal
State

$ 967
327
292
1,586

(11)
4
(7)
$1,579

$2,253
552
408
3,213

273
5
278
$3,491

$2,515
55
357
2,927

102
3
105
$3,032

Effective Tax Rate

30.9 %

40.8 %

33.9 %

The Company’s effective tax rate for the year ended December 31, 2018 was impacted by

limitations on the deductibility of executive compensation resulting from Section 162(m) of the Internal
Revenue Code and adjustments to the accrual for state income taxes in states which have enacted
economic nexus statutes. The Company recorded a $0.4 million tax benefit related to separation
expenses during the year ended December 31, 2018, which were accounted for as a discrete item,
resulting in a 19.4% effective tax benefit rate on that item. The Company also recorded an adjustment
to its accrual for potential liabilities for state income taxes in states which have enacted economic nexus
statutes of $0.2

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million during the year ended December 31, 2018. The effective tax rate for ordinary income was
25.1% for the year ended December 31, 2018.

The reasons for the difference between total tax expense and the amount computed by

applying the U.S. statutory federal income tax rate to income before income taxes are as follows:

Statutory rate applied to pretax income
Section 162(m) and other permanent items
Potential state tax obligations, net of federal tax
benefit
State income taxes, net of federal income tax benefit
Impact of new tax law

Year ended December 31,
2016
2018
2017
$3,037
$2,908
$1,075
—
—
203

158
99
—

375
36
189

—
36
—

Foreign income taxes over (under) U.S. statutory
rate
Other items
Income tax expense

(70)

(64)

(6)
$1,579

53
$3,491

23
$3,032

The Company receives a tax deduction from the income realized by employees on the exercise

of certain non-qualified stock options and restricted stock awards for which the tax effect of the
difference between the book and tax deduction is recognized as a component of current income tax.
Included in the table above is the net effect of the current year global intangible low-taxed income
(“GILTI”) inclusion of $0.1 million, which is fully offset by a foreign tax credit.

The Company has analyzed filing positions in all 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 has
identified its federal consolidated tax return, its state tax return in New Jersey and its Canadian tax
return as major tax jurisdictions. As of December 31, 2018, the Company’s 2016 and 2017 Federal tax
returns remain open for examination, as the Company recently concluded an Internal Revenue Service
examination through the 2015 tax year. This examination resulted in no change to the previously filed
Federal corporate tax returns. The Company’s New Jersey and Canadian tax returns are open for
examination for the years 2014 through 2017. As of December 31, 2018, the Company recorded an
accrual of $0.6 million, net of federal tax benefit, for potential liabilities for state income taxes in states
which have enacted economic nexus statutes and the Company has not filed income tax returns. 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 experience and
interpretations of tax law applied to the facts of each matter.

For financial reporting purposes, income before income taxes includes the following

components:

United States

Foreign

Year ended December 31,

2018

2017

2016

$3,960

$6,929

$7,514

1,157

1,624

1,419

$5,117

$8,553

$8,933

The TCJA was enacted on December 22, 2017 and introduced significant changes to the U.S.

Due to the timing of the enactment and the complexity involved in applying the provisions of

the TCJA, we made reasonable estimates of the effects and recorded provisional amounts in our
financial statements as of

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December 31, 2017. The Company completed our Federal and State income tax filings for 2017 with
no material changes to amounts previously reported.

The following table summarizes the activity related to the Company’s unrecognized tax

benefits as of December 31, 2018 and 2017:

Balance as of January 1
Additions related to prior period tax positions
Reductions related to settlements with tax authorities
Balance as of December 31

2018
$ 443
200
(102)
$ 541

2017
-
$
443
-
$ 443

All of the unrecognized income tax benefits at December 31, 2018 and 2017 would have

affected the Company’s effective income tax rate if recognized. The Company believes that it is
reasonably possible that a significant decrease in the total amount of unrecognized income tax benefits
related to state exposures may be necessary within the next twelve months.

During the year ended December 31, 2018, the Company incurred interest and penalties of less

than $0.1 million related to these uncertain tax benefits. During the years ended December 31, 2017
and 2016, there were no amounts incurred for interest and penalties related to these uncertain tax
benefits.

6. Credit Facility

On November 15, 2017, the Company entered into a $20,000,000 revolving credit facility (the

“Credit Facility”) with Citibank, N.A. (“Citibank”) pursuant to a Second Amended and Restated
Revolving Credit Loan Agreement (the “Loan Agreement”), Second Amended and Restated Revolving
Credit Loan Note (the “Note”), Second Amended and Restated Security Agreement (the “Security
Agreement”) and Second Amended and Restated Pledge and Security Agreement (the “Pledge
Agreement”). The Credit Facility, which will be used for working capital and general corporate
purposes, matures on August 31, 2020, at which time the Company must pay all outstanding principal
of all outstanding loans plus all accrued and unpaid interest, and any, fees, costs and expenses. In
addition, the Company will pay regular monthly payments of all accrued and unpaid interest. The
interest rate for any borrowings under the Credit Facility is subject to change from time to time based
on the changes in the LIBOR Rate, as defined in the Loan Agreement (the “Index”). The Index was
2.39% at December 31, 2018. Interest on the unpaid principal balance of the Note will be calculated
using a rate of 1.50 percentage points over the Index. If the Index becomes unavailable during the term
of the Credit Facility, interest will be based upon the Prime Rate (as defined in the Loan Agreement)
after notifying the Company. The Credit Facility is secured by the assets of the Company.

Among other affirmative covenants set forth in the Loan Agreement, the Company must

maintain (i) a minimum Debt Service Coverage Ratio (as defined in the Loan Agreement) of not less
than 2.0 to 1.0, (ii) a maximum Leverage Ratio (as defined in the Loan Agreement) of at least 2.5 to
1.0, and (iii) a minimum Collateral Coverage Ratio (as defined in the Loan Agreement) of not less than
1.5 to 1.0. Additionally, the Loan Agreement contains negative covenants prohibiting, among other
things, the creation of certain liens, the alteration of the nature or character of the Company’s business,
and transactions with the Company’s shareholders, directors, officers, subsidiaries and/or affiliates
other than with respect to (i) the repurchase of the issued and outstanding capital stock of the Company
from the stockholders of the Company or (ii) the declaration and payment of dividends to the
stockholders of the Company.

At December 31, 2018 and 2017, the Company had no borrowings outstanding under the

Credit Facility. The Company incurred $0.1 million and $0.1 million of interest expense, related to the
Credit Facility during the years ended December 31, 2018 and 2017, respectively, and no interest
expense for the year ended December 31, 2016.

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7. Stockholders’ Equity and Stock-Based Compensation

At the annual stockholder’s meeting held on June 6, 2012, the Company’s stockholders

approved the 2012 Stock-Based Compensation Plan (the “2012 Plan”). The 2012 Plan authorizes 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 Common Stock initially
available for award under the 2012 Plan was 600,000, which was increased to 1,000,000 shares by
shareholder approval at the Company’s 2018 Annual Meeting in June 2018. As of December 31, 2018,
the number of shares of Common Stock available for future award grants to employees, officers and
directors under the 2012 Plan is 530,022.

During 2017, the Company granted a total of 87,076 shares of Restricted Stock to officers and

employees. These shares of Restricted Stock vest between twelve and twenty equal quarterly
installments. In 2017, a total of 22,694 shares of Restricted Stock were forfeited as a result of directors
and employees terminating employment with the Company.

During 2018, the Company granted a total of 123,000 shares of Restricted Stock to officers,

directors and employees. These shares of Restricted Stock vest between immediate vesting and twenty
equal quarterly installments. In 2018, a total of 7,176 shares of Restricted Stock were forfeited as a
result of directors and employees terminating employment with the Company.

During 2018, the Board of Directors approved certain Restricted Stock awards to officers of
the Company, whereby the underlying number of shares to be issued are dependent on the Company
meeting certain performance targets during the year. Subsequent to December 31, 2018, the Company
issued 20,405 shares of Restricted Stock at a grant date fair value of $12.80 to satisfy these awards,
which vests over sixteen quarterly installments.

There was no options activity during the year ended December 31, 2018 and 2017 and there

were no options outstanding or exercisable at December 31, 2018 and 2017, respectively, under the
Company’s 2012 Plan.

Under the various plans, options that are cancelled can be reissued. At December 31, 2018, no

cancelled options were reserved for future reissuance.

A summary of nonvested shares of Restricted Stock awards outstanding under the Company’s
2012 Plan as of December 31, 2018, and 2017 and changes during the years ended December 31, 2018
and 2017 is as follows:

Nonvested shares at January 1, 2017

Granted in 2017
Vested in 2017
Forfeited in 2017

Nonvested shares at December 31, 2017

Granted in 2018
Vested in 2018
Forfeited in 2018

Nonvested shares at December 31, 2018

Shares
186,081
87,076
(88,645)
(22,694)
161,818
123,000
(180,898)
(7,176)
96,744

Weighted
Average Grant
Date
Fair Value
16.48
18.25
16.56
10.87
17.26
14.97
16.62
15.44
15.67

As of December 31, 2018, there was approximately $1.4 million of total unrecognized

compensation cost related to nonvested share-based compensation arrangements. The unrecognized
compensation cost is expected to be recognized over a weighted-average period of 3.0 years.

For the years ended December 31, 2018, 2017 and 2016, the Company recognized share-based

compensation cost of approximately $2.8 million, $1.5 million and $1.7 million, respectively. During
the year ended

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Table of Contents

December 31, 2018, $1.7 million of stock compensation expense related to the accelerated vesting of
shares upon resignation of the Company former Chief Executive Officer, was included in separation
expense. All other share-based compensation is included in selling, general and administrative
expenses. The Company does not capitalize any share-based compensation cost.

8. Defined Contribution Plan

The Company maintains a defined contribution plan covering substantially all domestic

employees. Participating employees may make contributions to the plan, through payroll deductions.
Matching contributions are made by the Company equal to 50% of the employee’s contribution to the
extent such employee contribution did not exceed 6% of their compensation. During the years ended
December 31, 2018, 2017 and 2016, the Company expensed approximately $264 thousand, $237
thousand and $211 thousand, respectively, related to this plan.

9. Commitments and Contingencies

Leases

Operating leases primarily relate to the lease of the space used for our operations in
Eatontown, New Jersey; Mesa, Arizona; Mississauga, Canada; and Amsterdam, Netherlands. Future
minimum rental commitments under non-cancellable operating leases are as follows:

2019
2020
2021
2022
2023
Thereafter

$ 484
438
405
414
463
1,572
$3,776

Rent expense for the years ended December 31, 2018, 2017 and 2016 was approximately $496

thousand, $509 thousand and $455 thousand, respectively.

Employment Agreements

The Company has entered into employment agreements with its President and Chief Executive

Officer, Executive Vice President, Vice President and Chief Information Officer, Vice President New
Business Development, Vice President and Chief Financial Officer, and Vice President and Chief
Accounting Officer

In the event that the Company’s, President and Chief Executive Officer, employment is

terminated for any reason other than for cause, he is entitled to receive severance payments equal to
twelve months at the then applicable annual base salary. Additionally, if during the term of his
employment and on or within twelve months following a change of control his employment terminates,
he is entitled to receive severance payments equal to twenty-four months at the then applicable annual
base salary and actual incentive bonus earned in the year prior paid over a twelve-month period.

The Company’s Executive Vice President, Vice President and Chief Information Officer, Vice
President New Business Development, Vice President and Chief Financial Officer, and Vice President
and Chief Accounting Officer are entitled to a severance payment and severance payments, respectively
for six months at the then applicable annual base salary if the Company terminates their respective
employment for any reason other than for cause.

The Executive Vice President and Vice President New Business Development are also entitled

to receive continuation of certain employee benefits and their outstanding equity awards become
immediately vested if the Company terminates their respective employment for any reason other than
for cause.

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Table of Contents

Additionally, in the event that a change of control of the Company occurs (as described in the
employment agreement), the Chief Financial Officer’s outstanding equity awards become immediately
vested and he is entitled to receive a lump-sum payment equal to 1.0 times his then annual salary and
actual incentive bonus earned in the year prior to such change in control.

On May 11, 2018, the Company entered into a Separation and Release Agreement (the
“Separation Agreement”) with its former Chairman of the Board, President and Chief Executive Officer
upon his resignation from the Company. The Separation Agreement supersedes and replaces the
Employment Agreement, dated January 12, 2006, between the former Chairman of the Board, President
and Chief Executive Officer and the Company.

The former Chairman of the Board, President and Chief Executive Officer is entitled to

receive (a) a cash payment of $0.7 million, payable in 12 consecutive, equal monthly installments on
the fifteenth day of each month, commencing June 15, 2018; provided that the monthly payments were
delayed until the earlier to occur of the former Chairman of the Board, President and Chief Executive
Officer death or November 19, 2018 (the “Delay Period”), and upon the expiration of the Delay Period,
all payments that were delayed were paid in a lump sum, (b) a one-time, lump sum cash payment of
$0.03 million (the former Chairman of the Board, President and Chief Executive Officer then current
monthly salary) payable within 30 days after the Separation Date so long as the former Chairman of the
Board, President and Chief Executive Officer performed certain transition services to the extent
reasonably requested by the Company, which was paid; and (c) payment of accrued vacation equal to
$0.04 million, all stock options and stock awards issued to the former Chairman of the Board, President
and Chief Executive Officer, consisting solely of 109,084 shares of restricted Common Stock issued
under the 2012 Plan, were fully vested and became immediately exercisable and remain exercisable
through their original terms.

Other

As of December 31, 2018, the Company has no standby letters of credit, has no standby
repurchase obligations or other commercial commitments. The Company has a line of credit see Note 6
(Credit Facility). Other than employment arrangements and other management compensation
arrangements, the Company is not engaged in any transactions with related parties.

10. Industry, Segment and Geographic Financial 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 in the USA and Canada. We also operate a sales branch
in Europe to serve our customers in this region of the world.

Geographic revenue and identifiable assets related to operations as of and for the years ended
December 31, 2018, 2017 and 2016 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. No one country other
than the USA represents more than 10% of net sales for 2018, 2017 or 2016.

2018

2017

2016

Net sales to Unaffiliated Customers:

USA
Canada
Rest of the world
Total

$159,275
12,036
10,133
$181,444

$137,185
11,835
11,547
$160,567

$141,571
12,694
10,344
$164,609

F-25

Table of Contents

Identifiable Assets by Geographic Areas at

December 31,
USA and Rest of the world
Canada
Total

2018

2017

2016

$ 100,681
7,290
$ 107,971

$ 97,481
7,209
$ 104,690

$ 108,568
7,684
$ 116,252

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 Company’s Chief Operating
Decision Maker (CODM) to assess performance and allocate resources determines the basis for
reportable operating segments. The Company’s CODM is the Chief Executive Officer.

The Company is organized into two reportable operating segments. The “Lifeboat

Distribution” segment distributes technical software to corporate resellers, value added resellers
(VARs), consultants and systems integrators worldwide. The “TechXtend” segment is a value-added
reseller of software, hardware and services for corporations, government organizations and academic
institutions in the USA and Canada.

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

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

Revenue:
Lifeboat Distribution
TechXtend

Gross Profit:
Lifeboat Distribution
TechXtend

Direct Costs:
Lifeboat Distribution
TechXtend

2018

Year ended December 31,
2017

2016

163,564
17,880
181,444

23,441
3,479
26,920

8,920
1,707

141,708
18,859
160,567

23,183
3,893
27,076

7,952
1,879

137,113
27,496
164,609

22,349
4,982
27,331

7,478
2,098

Segment Income Before Taxes: (1)
Lifeboat Distribution
TechXtend

Segment Income Before Taxes

General and administrative
Separation expenses
Interest, net
Foreign currency transaction gains (loss)
Income before taxes

10,627

14,521
1,772
16,293

9,692
2,446
907
55
5,117

9,831

15,231
2,014
17,245

9,432
—
699
41
8,553

9,576

14,871
2,884
17,755

9,139
—
318
(1)
8,933

(1) Excludes general corporate expenses including separation, interest, and foreign currency translation
expenses.

F-26

Table of Contents

The following table presents historical information by segment adjusted as if the standard had

been adopted on January 1, 2016 for all periods presented.

Year ended December 31, 2017

Year ended December 31, 2016

Impact

Reported

of Adoption

Adjusted

Reported

of Adoption

Adjusted

Lifeboat Distribution
Segment:
Net sales
Cost of sales
Gross profit

TechXtend Segment:
Net sales
Cost of sales
Gross profit

Table of Contents

$ 417,427 $ (275,719) $ 141,708 $ 369,519 $ (232,406) $ 137,113
114,764
— $ 22,349

— $ 23,183 $ 22,349 $

394,244
$ 23,183 $

(275,719)

(232,406)

347,170

118,525

$ 31,952 $ (13,093) $ 18,859 $ 48,612 $ (21,116) $ 27,496
22,514
4,982

14,966
3,893 $

28,059
3,893 $

43,630
4,982 $

(13,093)

(21,116)

— $

F-27

December 31,

Selected Assets by Segment:

Lifeboat Distribution
TechXtend
Segment Select Assets
Corporate Assets
Total Assets

2018

2017

$ 77,610 $ 73,794
21,451
95,245
9,445
$107,971 $104,690

11,542
89,152
18,819

Disaggregation of revenue:

Lifeboat Distribution

Year ended December 31,
2017

2016

2018

Hardware, software and other products
Software - security & highly interdependent with support
Maintenance, support & other services
Net Sales

$ 148,570
6,087
8,907
$ 163,564

$ 126,738
5,465
9,505
$ 141,708

$ 124,377
4,338
8,398
$ 137,113

TechXtend

Hardware, software and other products
Software - security & highly interdependent with support
Maintenance, support & other services
Net Sales

16,300
440
1,140
17,880

17,182
474
1,203
18,859

24,572
578
2,346
27,496

The Company had two customers that each accounted for more than 10% of total consolidated

For the year ended December 31, 2017, CDW and SHI accounted for 18.0%, and 20.1%,

respectively, of consolidated net sales and as of December 31, 2017, 28.2%, and 14.9%, respectively,
of total net accounts receivable. For the year ended December 31, 2017, Sophos and SolarWinds
accounted for 26.4% and 14.7%, respectively of our consolidated purchases.

For the year ended December 31, 2016, CDW and SHI accounted for 17.3%, and 16.3%,

respectively, of consolidated net sales. For the year ended December 31, 2016, Sophos and SolarWinds
accounted for 23.1% and 10.8%, respectively of our consolidated purchases.

Our top five customers accounted for 55%, 50%, and 46% of consolidated net sales in 2018,

2017 and 2016, respectively.

F-28

Table of Contents

11. Quarterly Results of Operations (Unaudited)

The following table presents summarized quarterly results for 2018:

Net sales
Gross profit
Net income (loss)

First

Second Third Fourth
$40,552 $43,914 $47,923 $49,055
7,225
1,739

6,498
(1,117)

6,303
1,318

6,894
1,598

Basic net income (loss) per common share
Diluted net income (loss) per common share

$ 0.36 $ (0.25) $
$ 0.36 $ (0.25) $

0.29 $
0.29 $

0.39
0.39

The following table presents summarized quarterly results for 2017 (adjusted):

Net sales
Gross profit
Net income

First

Second Third Fourth
$38,091 $39,021 $39,018 $44,437
7,502
1,128

6,572
1,273

6,758
1,319

6,244
1,341

Basic net income per common share
Diluted net income per common share

$ 0.29 $
0.29 $
$

0.28 $
0.28 $

0.30 $
0.30 $

0.25
0.25

The following tables presents the effect of the adoption of ASC 606 on net sales (see Note 3)

for each quarter of 2017:

First
Second
Third
Fourth
Total net sales

Impact

Reported

of Adoption

Adjusted

112,795
102,982
106,646
126,956
449,379

(74,704) $
(63,961)
(67,628)
(82,519)
$ (288,812) $

38,091
39,021
39,018
44,437
160,567

During the fourth quarter of 2018, the Company determined certain balances related to

customer return liabilities should be reclassified between current assets and liabilities in accordance
with ASC 606. The adjustments had no impact on net equity and was determined to not have a material
impact on previously presented financial statements. However, the Company will present its previously
issued financial statements on a restated basis in future comparative presentations in order to be
consistent with the current period presentation. The following tables present certain balance sheet
reclassification adjustments relating to the adoption of ASC 606 on previously presented quarters of
2018:

As of September 30, 2018

Impact

Reported

of Adoption

Adjusted

83,762
525

$
$

1,600
1,504

$
$

85,362
2,029

62,675

3,104

65,779

$
$

F-29

Assets:

Accounts receivable, net of allowances
Prepaid expenses and other current assets

Liabilities:

Accounts payable and accrued expenses

Table of Contents

Assets:

Accounts receivable, net of allowances
Prepaid expenses and other current assets

Liabilities:

Accounts payable and accrued expenses

Assets:

Accounts receivable, net of allowances
Prepaid expenses and other current assets

Liabilities:

Accounts payable and accrued expenses

12. Separation Charges

As of June 30, 2018

Impact

Reported

of Adoption

Adjusted

71,780
572

$
$

1,123
1,055

$
$

72,903
1,627

57,765

2,178

59,943

As of March 31, 2018

Impact

Reported

of Adoption

Adjusted

82,019
611

$
$

1,324
1,245

$
$

83,343
1,856

67,931

2,569

70,500

$
$

The Company recorded expenses of $2.4 million during the year ended December 31, 2018

related to the Separation Agreement consisting of $1.7 million for accelerated vesting of restricted
stock grants and $0.8 million in other cash payments to be made over during the next twelve months.
The compensation is subject to certain limitations on deductibility for income tax purposes under
Section 162(m) of the Internal Revenue Code (see Note 5).

F-30

Table of Contents

Wayside Technology Group, Inc. and Subsidiaries
Schedule II--Valuation and Qualifying Accounts
(Amounts in thousands)

Description
Year ended December 31, 2016

Allowances for accounts receivable
Reserve for inventory obsolescence

Year ended December 31, 2017

Allowances for accounts receivable
Reserve for inventory obsolescence

Year ended December 31, 2018

Allowances for accounts receivable
Reserve for inventory obsolescence

Beginning
Balance

Charged to
Cost and
Expense

Ending
Deductions Balance

$ 1,060
16
$

$
$

970
15

862
12

$
$

(73) $
$

(95) $
— $

(75) $
— $

17
4

13
3

2
4

$ 970
$ 15

$ 862
$ 12

$ 785
8
$

F-31