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PART I

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

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

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

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

PART I

Item 11. Business

General

Wayside Technology Group, Inc. and Subsidiaries (the “Company,” “us,” “we,” or “our”) is an information technology (“IT”) channel company. We distributeThe Company primarily operates through its “Lifeboat Distribution” segment, which distributes emerging technologies to corporate resellers, value added resellers (VARs), consultants and systems integrators worldwide. The Company also operates a smaller segment called “TechXtend”, which is a value-added reseller of software, hardware and hardware developed by others through resellers indirectly to customers worldwide. We also resell computer softwareservices for corporations, government organizations and hardware developed by others and provide technical services directly to customersacademic institutions in the United States of America (“USA”)USA and Canada. In additionAcross both segments, we operate a sales branch in Europe to serve our customers in this region of the world. We offer an extensive line of products from leading publishers of software vendors and tools for virtualization/cloud computing, security, networking, storage and infrastructure management, application lifecycle management and other technically sophisticated domains as well as computer hardware.

Wayside Technology Group, Inc.The Company was incorporated in Delaware in 1982. Our common stock, par value $0.01 per share (“Common StockStock”) is listed on The NASDAQ Global Market under the symbol “WSTG”. Our main web site address is www.waysidetechnology.com, and the other web sites maintained by our business include www.lifeboatdistribution.com and www.techxtend.com.  ReferenceThe information contained on, or otherwise accessible through, our websites is not part of, or incorporated by reference into, this report.

In our Lifeboat Distribution segment, we distribute technology products from software developers, software vendors or original equipment manufacturers (OEMs) to resellers, and system integrators worldwide. We purchase software, maintenance/service agreements, networking/storage/security equipment and complementary products from our vendors and sell them to our reseller customers. The large majority of products we sell are “drop shipped” directly to the customers, which reduces physical handling by the Company and required investment in inventory.  Generally, a vendor authorizes a limited 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.

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

In our Lifeboat segment, we are highly dependent on the end-market demand for informational purposes only. Informationthe products we sell, and on our web sites should not be considered filed withpartners’ strategic initiatives and business models. This end-market demand is influenced by many factors including the Securitiesintroduction of new products, replacement and Exchange Commission,renewal cycles for existing products, competitive products, overall economic growth and is not,general business activity. A difficult and should not be deemedchallenging economic environment may also lead to be, a part ofconsolidation or decline in the industry and increased price-based competition. We continually review the marketplace to identify new and emerging vendors and products to potentially add to our vendor partners.   

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

The Company operates through two reportable operating segments.  The “Lifeboat Distribution” segment distributes technicala distribution facility in Eatontown, New Jersey.

Products

An essential part of our ongoing operations and growth plans is the continued recruitment of software vendors for which we become authorized distributors of their products. Through our Lifeboat Distribution business, we sell a wide variety of technology products from a broad range of software vendors and hardware to corporate resellers, value added resellers (VARs), consultantsmanufacturers, such as Bluebeam Software, Flexera Software, Intel Software, Lenovo, Micro Focus, Mindjet, SmartBear Software, SolarWinds, Sophos, StorageCraft Technology, TechSmith, Unitrends, CloudGenix, Tintri and systems integrators worldwide.  The “TechXtend” segmentExtrahop.  On a continuous basis, we screen new vendors and products for inclusion in our line card based on their features, quality, price, profit margins and current market trends. We believe that effective purchasing from a diverse vendor base is a value-added resellerkey element of our business strategy. For the year ended December 31, 2019, Sophos and SolarWinds accounted for 22% and 17%, respectively of our consolidated purchases. For the year ended December 31, 2018, Sophos and SolarWinds accounted for 24% and 15%, respectively of our consolidated purchases.  The loss of a key vendor or group of vendors could disrupt our product availability and otherwise have an adverse effect on the Company.

The Company predominantly sells third party software, software subscriptions, and maintenance. Sales of hardware and servicesperipherals represented 6% and 8% of our adjusted gross billings in 2019 and 2018, 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 corporations, government organizationssoftware vendors and academic institutionsmanufacturers. 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 2019. For the year ended December 31, 2019, CDW Corporation (NASDAQ: CDW) (“CDW”) and Software House International Corporation (“SHI”), accounted for 26%, and 16%, respectively, of consolidated net sales and as of December 31, 2019,  43% and 12%, respectively, of total net accounts receivable. For the year ended December 31, 2018,  CDW and SHI accounted for 26%, and 17%, respectively, of consolidated net sales and as of December 31, 2018, 36% and 15%, respectively, of total net accounts receivable. Our top five customers accounted for 56%  and 55% of consolidated net sales in 2019 and 2018, respectively. The Company generally ships products within 48 hours of confirming a customer’s order. This results in minimum backlog in the USAbusiness.

Net sales to customers in Canada represented 6% and Canada. For each7% of our segments,consolidated net sales from unaffiliated customers, incomein 2019 and total assets, among other2018, respectively. Net sales in Europe and the rest of the world represented 5% and 6% of our consolidated net sales in 2019 and 2018, respectively. For geographic financial information, is presented inplease refer to Note 912 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. While substantially all the Company’s contracts with its vendors are terminable upon 30 days’ notice or less, the tenure of the relationships with our vendor partners tends to extend over several years. Moreover, the way software products are distributed and sold is changing, and new methods of distribution and sale may emerge or expand. Software vendors 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.

The Company purchased approximately 98% and 97% of its products directly from manufacturers and software vendors in 2019 and 2018, 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. From time to time, we may make advance payments to vendors to apply against future purchases from the vendor. 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 EDI with its suppliers and customers, which helps reduce overhead and the use of paper in the ordering process.

Competition

The software market is highly competitive. Pricing is verycompetitive and characterized by aggressive inpricing practices by both software distributiondistributors and reselling.  Theresellers. This has resulted in declining gross margins as a percentage of adjusted gross billings, which the Company expects pricing pressure to continue. The Company faces competition from a wide variety of sources.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 also 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. Many of our competitors compete principally on the basis of price, product availability, customer service and technical support.

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 fairan acceptable return to the Company. In addition, price is an important competitive factor in the personal computer software market and there can be no assurance that the Company will not be subject to increased price competition. 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 vendors. It also competes with distributors and resellers to attract prospective buyers, and in sourcingto source new products from software developers and publishers, as well as in marketingvendors, and to market its current product line to its customers. The Company believes that its ability to offer software developers and IT professionals easy access to a wide selection of the rightdesired 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 in acquiring prospective buyers and marketing its current product line to its

renewals of maintenance agreements. These types of programs may continue to be developed and used by various developers and publishers.vendors. While some software developers and publishersvendors 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 publishersvendors will continue using distributors and resellers to the same extent they currently do. Future efforts by software developers and publishersvendors to bypass third- partythird-party sales channels could materially and adversely affect the Company’s business, results of operations and financial conditions.condition.

In addition, resellers and publisherssoftware vendors 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”.Factors.”

Products

An essential part of our ongoing operations and growth plans is the continued recruitment of software publishers for which we can sell their products. The Company offers 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, StorageCraftInformation Technology TechSmith, Unitrends, Veeam Software and VMware. On a continuous basis, we screen new products for inclusion in our direct sales portfolio,  and web sites based on their features, quality, price, profit margins and warranties, as well as on current sales trends. The Company predominantly sells software, software subscriptions, and maintenance. Sales of hardware and peripherals represented 10%, 10%  and 7% of our overall net sales in 2016, 2015 and  2014, respectively.

Marketing and Distribution

We market products through creative marketing communications, including our web sites, local and on-line seminars, 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 sales for 2016. For the year ended December 31, 2016, Software House International Corporation (“SHI”), and CDW Corporation (“CDW”) accounted for 19.6%, and 17.9%, respectively, of consolidated net sales and, as of December 31, 2016, 13.3%, and 23.2%, respectively, of total net accounts receivable. The Company had two customers that each accounted for more than 10% of total sales for 2015.  For the year ended December 31, 2015, SHI, and CDW Corporation accounted for 19.0%, and 17.9%, respectively, of consolidated net sales. The Company had three customers that each accounted for

In January 2004,December 2017, we adopted a Code of EthicalEthics and Business Conduct.  We review the Code of Ethics and Business Conduct annually and consider updates as necessary. The full text of the Code of EthicalEthics and Business Conduct, which applies to all employees, officers and directors of the Company, including our Chief Executive Officer and Chief Financial Officer, is available at our web site, http://www.waysidetechnology.com, under “Governance.” The Company intendswww.waysidetechnology.com. We intend to disclose any amendment to, or waiver from, a provision of the Code of Ethical Conduct that applies to its Chief Executive Officer or Chief Financial Officer on its web site under “Investor Information.”

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

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

We operate on narrow margins.The way software products are distributed and sold is changing, and new methods of distribution and sale may emerge or expand. We operate in a very competitive business environment. Like other companies inSoftware vendors have sold, and may intensify their efforts to sell, their products directly to end-users. There can be no assurances that software developers and vendors will continue using distributors and resellers to the technology distribution industry,same extent they currently do. Future efforts by software developers and vendors to bypass third-party sales channels could materially and adversely affect the Company’s business, is continually under pricing pressureresults of operations and characterized by narrow gross and operating margins. These narrow margins magnify the impact on the Company’s operating results attributed to variations in sales and operating costs and place a premium on our ability to leverage our infrastructure. Future gross and operating margins may be adversely affected by changes in product mix, vendor pricing actions and competitive and economic pressures.financial condition. In addition, failureresellers and software vendors may attempt to attract new sourcesincrease the volume of business from expansionsoftware products distributed electronically through ESD (Electronic Software Distribution) technology, through subscription services, and through on-line shopping services. Any of products or services or entry into new markets may adversely affect future gross and operating margins.

If we lose several of our larger customers our earnings may be affected. Meeting our customers’ needs quickly and fairly is critical to our business success. Our contracts for the provision of products are generally non-exclusive agreements that are terminable by either party upon 30 days’ notice. In addition, our agreements with these larger customers do not provide for minimum purchase commitments. The loss of several of our large customers, the failure of such customers to pay their accounts receivable on a timely basis, or a material reduction in the amount of purchases made by such customerscompetitive programs, if successful, could have a material adverse effect on ourthe Company’s business, financial position, results of operations and cash flows. Additionally, anything that negatively impactsfinancial condition. 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 offer credit to our customers and, therefore, are subject to significant credit risk. We sell our products to a large and diverse customer relations also can negatively impactbase. 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 1-3 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.

Our business is substantially dependent on a limited number of customers and vendors, and the loss or any change in the business habits of such 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% of our 2019 purchases and sales from our largest five vendors generated approximately 54% of 2019 purchases. As is the case with many of our vendor and customer relationships, our contractual arrangements with these large vendors are terminable by either party upon several months’ notice. If these contracts or our relationships with these vendors terminate for any reason, or if any of our other significant vendor relationships terminate for any reason, and we are not able to sell or procure a sufficient supply of those products from alternative sources, or at all, our financial position and results of operations would be adversely affected. Our vendors are subject to many if not all of the same (or similar) risks and 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 2019, our two largest customers accounted for 42% of our net sales and our largest five customers accounted for  56% of our net sales. If any of our significant customer relationships terminate for any reason, and we are not able to 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 a number ofseveral regulatory regimes. In the course of normal and customary business practice, we may share some of this information with vendors who assist us with certain aspects of our business. Moreover, the success of our operations depends upon the secure transmission of confidential and personal data over public networks, including the use of cashless payments. AnyAlthough we did not have any material cybersecurity breaches in 2019 and 2018, any failure on the part of us or our vendors to maintain the security of data we are required to protect, including via the penetration of our network security and the misappropriation of confidential and personal information, could result in business disruption, damage to our reputation, financial obligations to third parties, fines, penalties, regulatory proceedings and private litigation with

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.

If the companyCompany 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 companyCompany to produce reliable financial reports and is an important part of its effort to prevent financial fraud. The companyCompany is required to annually evaluate the effectiveness of the design and operation of its internal controls over financial reporting. Based on these evaluations, the companyCompany may conclude that enhancements, modifications, or changes to internal controls are necessary or desirable. While management evaluates the effectiveness of the company'sCompany'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 companyCompany fails to maintain an effective system of internal controls, or if management or the company'sCompany's independent registered public accounting firm discovers material weaknesses in the company'sCompany'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'sCompany's business. In addition, the companyCompany 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'sCompany's financial statements, which could cause the market price of its common stockCommon Stock to decline or limit the company'sCompany's access to capital.

The companyCompany 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'sCompany's products and services include intellectual property owned primarily by the company's third partyCompany's 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Item 1B. Unresolved Staff Comments

Not applicable.

Item 2. Properties

The Company leases approximately 20,000 square feet of space in Eatontown, New Jersey for its corporate headquarters under a lease expiring in March 2027. Total annual rent expense for these premises is approximately $420,000. The Company also leases 7,800 square feet of warehouse space in Eatontown, New Jersey under a lease expiring in October 2017. Total annual rent expense is approximately $40,000.   The Company also leases 2,800 square feet of office space in Mesa, Arizona under a lease expiring in August 2018. Total annual rent expense is approximately $55,000.  Additionally, the Company leases approximately 3,700 square feet of office and warehouse space in Mississauga, Canada, under a lease which expires in November 30, 2019.2020. Total annual rent expense for these premisessuch warehouse space is approximately $30,000.  The Company also leases office space in Amsterdam, Netherlands under a lease which expires June 30, 2017, at an annual rent of approximately $34,000.$49,000. We believe that each of the properties is in good operating condition and that such properties are adequate for the operation of the Company’s business as currently conducted. We also rent smaller satellite offices on a short-term basis.

Item 3. Legal Proceedings

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

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

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

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

Item 4. Mine Safety Disclosures

Not applicable.

Purchases of Equity Securities

During the fourth quarter of 2016,2019, we repurchased shares of our Common Stock as follows:

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, 2011 and ending December 31, 2016, assuming $100 was invested on December 31, 2011 and the reinvestment of dividends.

The selected financial data as of December 31, 2019, 2018 and 2017 reflects our adoption of ASC 606. Effective January 1, 2018, we adopted ASC 606 using the full retrospective method, which requires us to recast our historical financial information to reflect the adoption as of the earliest reporting period presented, which was as of December 31, 2017. We have not adjusted the selected financial data as of December 31, 2016 and 2015.

December 31,

(Amounts in thousands, except per share amounts)

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

The Company 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 institutionsWe have subsidiaries in the USAUnited States, Canada and Canada.the Netherlands, through which sales are made.

Factors Influencing Our Financial Results

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

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

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

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

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

Financial Overview

Net sales increased 9%15%, or $36$27.4 million, to $418.1$208.8 million for the year ended December 31, 2016,2019, compared to $382.1$181.4 million for the same period in 2015.2018. Gross profit increased 3%11%, or $0.8$3.1 million, to $27.3$30.0 million for the year ended December 31, 2016,2019, compared to $26.6$26.9 million for the same period in the prior year.2018. Selling, general and administrative (“SG&A”) expenses increased 4%5%, or $0.7$1.1 million, to $18.7$21.4 million for the year ended December 31, 2016,2019, compared to $18.1$20.3 million for the same period in the prior year.  Net income increased 1%, or2018. Separation expenses were $0.1 million, to $5.9 million for the year ended December 31, 2016,2019 compared to $5.8$2.4 million for the same period in the prior year. Weighted Average diluted shares outstanding decreased by 3% from the prior year,   primarily due2018. Net income increased 92%, or $3.2 million, to the Company’s share buyback program. Income per share diluted increased 5% to $1.31$6.8 million for the year ended December 31, 2016,2019 compared to $1.25$3.5 million for the same period in 2015.2018. Weighted Average diluted shares outstanding increased by 1% from the prior year. Income per diluted share increased 94% to $1.51 for the year ended December 31, 2019 compared to $0.78 for the same period in 2018.

Critical Accounting Policies and Estimates

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

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

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

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

Revenue

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

Allowance for Accounts Receivable

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

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 based on prevailing rates.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, which is the vesting period. We make certain assumptions in order to value and expense our various share-based payment awards. In connection with valuing stock options, we use the Black-Scholes model, which requires us to estimate certain subjective assumptions. The key assumptions we make are: the expected volatility of our stock; the expected term of the award; and the expected forfeiture rate. In connection with our restricted stock programs we make assumptions principally related torecord the forfeiture rate.forfeitures when they occur. We review our valuation assumptions periodically and, as a result, we may change our valuation assumptions used to value stock basedstock-based awards granted in future periods. Such changes may lead to a significant change in the expense we recognize in connection with share-based payments.

Recently Issued Accounting Pronouncements

 In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance for revenue recognition for contracts, superseding the previous revenue recognition requirements, along with most existing industry-specific guidance. 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. The new standard will result in enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue arising from contracts with customers. In August 2015, the FASB issued Accounting Standards Update ASU 2015-14 (“ASU 2015-14”) which deferred the effective date of the new standard by one year. Along with the deferral of the effective date, ASU No. 2015-14 allows early application as of the original effective date. Entities are allowed to transition to the new standard by either recasting prior periods or recognizing the cumulative effect as of the beginning of the period of adoption. The standard and related amendments will be effective for the Company for its annual reporting period beginning January 1, 2018, including interim periods within that reporting period. The Company is in the process of developing its conclusions on several aspects of the standard including principal versus agent considerations, identification of performance obligations,  the determination of when control of goods and services transfers to the Company’s customer,  which transition approach will be applied and the estimated impact it will have on our consolidated financial statements.

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

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

In August 2016,February 2018, the FASB issued ASU 2016-15,2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Cash FlowsCertain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2016-15”2018-02”), whichpermits the reclassification of stranded tax effects resulting from the Tax Cuts and Jobs Act (the “TCJA” or “U.S. tax reform”) ASU 2016-15 which reduces diversity in practice in how certain transactions are classified in the statement of cash flows.from accumulated other comprehensive income (loss) to retained earnings. The new standard will becomebecame effective for the Company beginning with the first quarter of 2019. The adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements.

In June 2018, the FASB issued ASU 2018-07, “Compensation — Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting” (“ASU 2018-07”), which aligns the measurement and classification guidance for share-based payments to nonemployees with that for employees, with certain exceptions. It expands the scope of ASC 718 to include share-based payments granted to nonemployees in exchange for goods or services used or consumed in the entity’s own operations and supersedes the guidance in ASC 505-50. The ASU retains the existing cost attribution guidance, which requires entities to recognize compensation cost for nonemployee awards in the same period and in the same manner (i.e., capitalize or expense) they would if they paid cash for the goods or services, but it moves the guidance to ASC 718. The new standard became effective for the Company beginning with the first quarter of 2018, with early adoption permitted.2019. The adoption of this guidance willdid not have a material impact on the Company’s consolidated financial statements.

Consolidated Financial Statements. 

In October 2016,July 2018, the FASB issued ASU 2016-16,2018-09 – Codification Improvements, which facilitates amendments to a variety of topics to clarify, correct errors in, or make minor improvements to the accounting standards codification. The effective date of the standard is dependent on the facts and circumstances of each amendment. Some amendments do not require transition guidance and will be effective upon the issuance of this standard. A majority of the amendments in this standard became effective for the Company beginning with the first quarter of 2019. The adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements.

In December 2019, the FASB issued ASU 2019-12,  “Income Taxes (Topic 740): Intra-Entity TransfersSimplifying the Accounting for Income Taxes” as part of Assets Other Than Inventory.” This amendment is intendedits initiative to improvereduce complexity in the accounting standards. The standard eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The standard also clarifies and simplifies other aspects of the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. In accordance with this guidance, an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs.taxes. The ASUstandard is effective for the Companyfiscal years, and interim periods within those fiscal years, beginning in fiscal 2019.after December 15, 2020. Early adoption is permitted in fiscal 2018 with modified retrospective application.permitted. The Company is continuing to evaluatecurrently evaluating the impact of the adoption ofthat this guidance onwill have upon its consolidated financial statements.position and results of operations, if any.

Results of Operations

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

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

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

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

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

Key Financial Metrics

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

Year Ended December 31, 20162019 Compared to Year Ended December 31, 20152018

Net Sales

Net sales for the year ended December 31, 20162019 increased 9%15%, or $36.0$27.3 million, to $418.1$208.8 million compared to  $382.1$181.4 million for the same period in 2015. Net sales increased in both our Lifeboat Distribution segment and our TechXtend segment.2018.  

Lifeboat Distribution segment net salesAdjusted gross billings, a non-GAAP financial measure, for the year ended December 31, 20162019 increased $29.818%, or $91.0 million, or 9% to $369.5$601.0 million compared to $339.7$510.0 million for the same period ain 2018.

Net sales in our Lifeboat Distribution segment for the year earlier.ended December 31, 2019 increased 18%, or $30.0 million, to $193.6 million compared to $163.6 million for the same period in 2018. The increase in our Lifeboat Distribution segment was primarily due to increasedgrowth in sales penetration for several of existing products into new and existing distribution partner accounts,our more significant product lines, as well as the addition ofincremental sales from several new product lines.  The increases were partially offset by turnover

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

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

TechXtend segment net sales increased $6.2 million or 15% to $48.6 million for the year ended December 31, 2016, compared to $42.4 million for the prior year. The increase was primarily due to higher sales to major accounts on extended payment terms, partially offset by the impact of a reduced number of sales people and lower revenues from marketing services. We extend payment terms on some enterprise account sales, typically for periods of one to three years, to provide flexibility for our customers. We reduced our number of sales people late in 2015 to streamline and focus our operations on opportunities with the highest financial return.

Gross Profit

Gross Profit for the year ended December 31, 2016 increased 3% or $0.8 million, to $27.3 million, compared to $26.6 million for the same period in 2015. Lifeboat Distribution segment gross profit increased 4% to $22.3 million for the year ended December 31, 2016 compared to $21.5 million for the same period in the prior year. TechXtend segment gross profit remained flat at $5.0 million  for each of 2016 and 2015. Gross profit amounts reflect increased sales volumes and competitive pressures on gross profit margins discussed below.

Gross profit margin (gross profit as a percentage of net sales) for the year ended December 31, 2016 was 6.5% compared to 7.0% in 2015. Lifeboat Distribution segment gross profit margin was 6.0% for the year ended December 31, 2016 compared to 6.3% in 2015. The decrease in gross profit margin for the Lifeboat Distribution segment was primarily caused by competitive pricing pressure and product mix. We operate in a competitive environment where the

trend has been for

Adjusted gross profit margins to declinebillings, a non-GAAP financial measure, for the past several years. We attribute some of the decline to an increasing portion of our revenues coming from the sale of licenses, maintenance and service agreements that are not associated with a physical product. While our gross profit margin has declined on these products, we have been able to maintain our profitability through efficiencies gained in electronic ordering and distribution through the use of EDI and other automation. TechXtend segment gross profit margin for the year ended December 31, 2016 was 10.2%2019 decreased 36%, or $14.7 million, to $25.6 million compared to 11.9%$40.3 million for the same period in 2015. The decrease2018. 

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

Gross Profit

Gross profit for the year ended December 31, 2019 increased 11%, or $3.1 million, to $30.0 million compared to $26.9 million for the same period in 2018. Lifeboat Distribution segment gross profit margin wasfor the year ended December 31, 2019 increased 14%, or $3.4 million, to $26.8 million compared to $23.4 million for the same period in 2018 due to competitive market pricing, particularly on larger enterprise sales. Saleshigher net sales discussed above, which were partially offset by the impact of large enterprise licenses typically carry a lower gross profit margin and lower incremental selling and administrative costs as a percentage of revenue, than smaller accountnet sales. TechXtend segment gross profit for the year ended December 31, 2019 decreased 8%, or $0.3 million, to $3.2 million compared to $3.5 million for the same period in 2018 due to the decreased level of net sales discussed above.

Vendor rebates and discounts for each of the yearsyear ended December 31, 2016 and 2015 was $2.0 million.2019 were $3.3 million compared to $2.4 million for the same period in 2018. 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, 20162019 increased $0.75%, or $1.1 million, or 4% to $18.7$21.4 million, compared to $18.1$20.3 million for the same period in 2015.2018.  The increase in SG&A expenses is primarily due to increased stock based compensation and employee related expensescosts including salary, commission and bonus expense to support our growth, costs related to the relocation to ourincreased sales on existing and new offices in October, 2016, and professionalvendor lines, partially offset by decreased stock compensation expense. SG&A expenses related to public company compliance. Selling, General & Administrative expenses were 4.5%as a percentage of net sales were 10.3% for the year ended December 31, 2016, and 4.7%2019 compared to 12.0% for the same period in 2015.2018.

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 administrativeSG&A expenses closely.

Separation Expense

Separation expense for the year ended December 31, 2019 was $0.1 million related to the resignation of our former President, Chief Executive Officer and member of the Board. 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, 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.

Income Taxes

For the year ended December 31, 2016,2019, the Company recorded a provision for income taxes of $3.0$2.3 million, which consistsor 25.0% of a provision of $2.5 million for U.S. federal income before taxes, as well as a $0.1 million provision for state taxes, and a provision for foreign taxes of $0.4 million.

As of December 31, 2016, the Company had a U.S. deferred tax asset of approximately $0.4 million.

For the year ended December 31, 2015, the Company recorded a provision for income taxes of $3.0 million which consists of a provision of $2.7 million for U.S. federal income taxes, as well as a $0.1 million provision for state taxes, and a provision for foreign taxes of $0.2 million.

As of December 31, 2015, the Company had a U.S. deferred tax asset of approximately $0.5 million.

Year Ended December 31, 2015 Compared to Year Ended December 31, 2014

Net Sales

Net sales for 2015 increased 12%, or $41.2 million to $382.1 million in 2015 compared to $340.8$1.6 million, in 2014. Total salesor 30.9% of income before taxes for our Lifeboat Distribution segment in 2015 were $339.7 million compared to $290.4 million in 2014, representing a 17% increase. Total sales for the TechXtend segment in 2015 amounted to $42.4 million, compared to $50.3 million in 2014, representing a 16% decrease.

The 17% increase in net sales from our Lifeboat Distribution segment was  mainly a result of the addition of several key product lines and our ongoing strategy of strengthening of our account penetration. The 16% decrease in net sales in the TechXtend segment was primarily due to a decrease in both extended payment terms sales transactions and large transactions as compared to the same period in 2014.

Net cash used inprovided by operating activities for the year ended December 31, 20162019 was $0.5$3.2 million, comprised of net income adjusted for non-cash items of $7.9 million, offset byless cash used byin changes in operating assets and liabilities of $8.4$4.7 million.

The net cash used in changes in operating assets and liabilities in 2019 were the result of increases in accounts receivables due to increased sales to a large customer with longer than average payment terms, partially offset by increases in accounts payable required to support the business and utilization of a prior year vendor prepayment as part of a distribution agreement.

Net cash provided by operating activities for the year ended December 31, 20152018 was $8.2$13.9 million, comprised of net income adjusted for non-cash items of $7.3$5.9 million, andplus cash provided by changes in operating assets and liabilities of $0.9$8.0 million.

The increase innet cash used inprovided by changes in operating assets and liabilities in 20162018 was primarily due to increaseda decrease in net working capital (accounts receivable, inventory, and vendor prepayments less accounts receivable, inventories andpayable) 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 partially offsetdecreased by increased accounts payable. The increase in accounts receivable and accounts payable was primarilyapproximately $4.3 million during 2018 due to higher fourth quarter 2016 sales activity when compared to the prior year, increased accounts receivable payment terms for a large reseller customer, and increased salescollection of receivables with extended payment terms. Accounts receivable at December 31, 2016 included approximately $9.5 million of accounts receivable related to two extended payment term sales from 2016  that were collected during the first two months of 2017.sales.

In 2016, netNet cash used in investing activities for the year ended December 31, 2019 was $1.0$0.1 million compared to $0.2$0.3 million for the same period in the prior year. The increase was2018. Net cash used in investing activities primarily due to increasedrepresented capital expenditures for equipment and leasehold improvements related to our new office. In October 2016, the Company moved into a new office, occupying approximately 20,000 square foot facility under a ten year lease with renewal options.improvements.

Net cash used in financing activities for the year ended December 31, 2016 of $8.52019 was $3.2 million, which was comprised of $3.2$3.1 million of dividend payments on our Common Stock and $5.4$0.1 million for the purchases of treasury shares of our Common Stock, offset by the tax benefit from share based compensation of $0.1 million.Stock.

Net cash used in financing activities for the year ended December 31, 20152018 of $7.1$4.1 million was comprised of $3.2$3.1 million of dividend payments on our Common Stock, and $4.6$1.0 million for the purchases of treasury shares of our Common Stock, offset by stock option proceeds of $0.6 million and the tax benefit from share based compensation of $0.2 million.Stock.

On December 3, 2014, the Board of Directors of the Company approved an increase of 500,000 shares of Common Stock to the number of shares of Common Stock available for repurchase under its repurchase plans. On February 2, 2017, the Board of Directors approved an increase of 500,000 shares of Common Stock to the number of shares of Common Stock available for repurchase under its repurchase plans. A total of 2,828.963The Company is authorized to purchase 547,488 shares of the Company’s Common Stock has been bought back as of December 31, 2016, leaving  182,050 shares of Common Stock available that the Company is authorized to buy back in the future as of such date. On  February 2, 2017, the Board of Directors approved an additional increase of 500,000 shares of Common Stock to the number of shares of Common Stock available for repurchase under its repurchase plans. The Company expects to purchase shares of its Common Stock from time to time in the market or otherwise subject to market conditions.2019.  The Common Stock repurchase program does not have an expiration date.

 On July 27, 2016, the Board of Directors of the Company approved, and on September 1, 2016, the Company entered into, a written purchase plan intended to comply with the requirements of Rule 10b5-1 under the Securities

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.

 WeSubsequent Events

By letter dated January 22, 2020, a shareholder of the Company demanded that the Board of Directors investigate and bring an action against the Company’s former Chairman, President and Chief Executive Officer, Simon Nynens, for his breaches of certain restrictive covenants contained in the separation agreement he entered into a $10,000,000 revolving credit facility (the “Credit Facility”) with Citibank, N.A. pursuant to a Business Loan Agreement, Promissory Note, Commercial Security Agreements and Commercial Pledge Agreement. The Credit Facility, which is intended to be used for business and working capital purposes, including financing of larger extended payment terms sales transactions which may become a more significant portionthe Company on or about May 11, 2018. Following receipt of the shareholder demand, the Company filed a lawsuit against Mr. Nynens, Shepherd Kaplan Krochuk, LLC (“SKK”), and North & Webster SSG, LLC (“N&W,” and together with SKK, the “N&W Group”) on February 14, 2020, in the Superior Court of New Jersey Monmouth County. The Company’s net sales.complaint asserts claims against Mr. Nynens for his breaches of his separation agreement with the Company and claims for tortious interference against the N&W Group for inducing Mr. Nynens to commit those breaches.  In connection with its claims, the Company seeks monetary damages, injunctive relief, and a declaratory judgment against Mr. Nynens and the N&W Group.  The litigation is in its early stages.

Previously, the Company had received unsolicited acquisition proposals from the N&W Group to acquire all of the outstanding shares of common stock of the Company. The Company received the most recent unsolicited acquisition proposal from the N&W Group on December 10, 2019, and that proposal expired on its own terms on December 16, 2019. Prior to that, Mr. Nynens entered into an agreement with the N&W Group on November 27, 2019, granting SKK an irrevocable proxy to vote his shares of our common stock in favor of any acquisition proposal by SKK, against any third-party acquisition, and as directed by SKK with respect to the election of directors nominated by persons other than the Company. On December 18, 2015, the Company signed an extension to this agreement which extended the maturity date to January 31,20, 2019, with all other terms remaining the same. (see Note 5 Credit Facility in the NotesMr. Nynens nominated four individuals for election to our Consolidated Financial Statements).  AsBoard of December 31, 2016 there were no borrowings outstanding onDirectors at the Credit Facility.2020 annual meeting of stockholders.

We had cashThe Company and cash equivalentsits Board of $13.5 million asDirectors have hired financial advisors and legal counsel to advise on resolution of December 31, 2016,the matters. The ultimate outcome of which $3.9 million was held outsidethese matters and related costs cannot be determined at this time, and accordingly no provision has been recorded for estimated expenses to resolve the United States. Our current intention is to reinvest the majority of our foreign earnings in foreign operations. Our current plans do not anticipate a need to repatriate cash to fund our domestic operations. In the event cash from foreign operations is needed to fund operations in the U.S., we would be subject to additional income taxes in the U.S. reduced by any foreign taxes paid on these earnings.matter.

Contractual Obligations as of December 31, 2016

(Amounts in thousands)

Payment due by Period2019

As of December 31, 2016,Smaller reporting companies are not required to provide the Company is not committedinformation required by lines of credit or standby letters of credit, and has no standby repurchase obligations or other commercial commitments (see Note 5 Credit Facility in the Notes to our Consolidated Financial Statements).this item.

Foreign Exchange

The Company’s Canadianforeign 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, 2016,2019, we did not have any off-balance sheet arrangements, as defined in Item 303 (a)(4)(ii) of SEC Regulation S-K.

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, Chairman of the Board 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.