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CLIMB GLOBAL SOLUTIONS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2023
Table of Contents
2
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q (“Quarterly Report”) includes statements of our expectations, intentions, plans and beliefs that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are intended to come within the safe harbor protection provided by those sections. The statements, other than statements of historical fact, included in this Quarterly Report are forward-looking statements. Many of the forward-looking statements contained in this Quarterly Report may be identified by the use of forward-looking words such as “believes,” “expects,” “intends,” “anticipates,” “plans,” “estimates,” “projects,” “forecasts,” “should,” “could,” “would,” “will,” “confident,” “may,” “can,” “potential,” “possible,” “proposed,” “in process,” “under construction,” “in development,” “opportunity,” “target,” “outlook,” “maintain,” “continue,” “goal,” “aim,” “commit,” or similar expressions or when we discuss our future operating results, priorities, strategy, goals, vision, mission, opportunities, projections, intentions or expectations. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Because these forward-looking statements are subject to risks and uncertainties, actual results could differ materially from those indicated by such forward-looking statements. These risks and uncertainties include, but are not limited to, the continued acceptance of the Company’s distribution channel by vendors and customers, the timely availability and acceptance of new products, product mix, market conditions, competitive pricing pressures, the successful integration of acquisitions, contribution of key vendor relationships and support programs, including vendor rebates and discounts, as well as factors that affect the software industry in general and other factors generally. We strongly urge current and prospective investors to carefully consider the cautionary statements and risk factors contained in this report and our annual report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission on March 16, 2023.
The Company operates in a rapidly changing business, and new risk factors emerge from time to time. Management cannot predict every risk factor, nor can it assess the impact, if any, of all such risk factors on the Company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those projected in any forward-looking statements.
Accordingly, forward-looking statements should not be relied upon as a prediction of actual results and readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. Except as may be required by law, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
The statements concerning future sales, future gross profit margin and future selling and administrative expenses are forward looking statements involving certain risks and uncertainties such as availability of products, product mix, pricing pressures, market conditions and other factors, which could result in a fluctuation of sales below recent experience.
Unless otherwise specified, the “Company,” “we,” “us” or “our” refers to Climb Global Solutions, Inc., a Delaware corporation, and its consolidated subsidiaries.
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PART I — FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Climb Global Solutions, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Amounts in thousands, except share and per share amounts)
(Unaudited) | |||||||
September 30, | December 31, | ||||||
| 2023 |
| 2022 |
| |||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | | $ | | |||
Accounts receivable, net of allowance for doubtful accounts of $ | |
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Inventory, net | |
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Vendor prepayments and advances | — | | |||||
Prepaid expenses and other current assets | |
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Total current assets | |
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Equipment and leasehold improvements, net | |
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Goodwill | | | |||||
Other intangibles, net | | | |||||
Right-of-use assets, net | | | |||||
Accounts receivable-long-term, net | |
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Other assets | |
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Deferred income tax assets | |
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Total assets | $ | | $ | | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
Current liabilities: | |||||||
Accounts payable and accrued expenses | $ | | $ | | |||
Lease liability, current portion | | | |||||
Term loan, current portion | | | |||||
Total current liabilities | |
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Lease liability, net of current portion | | | |||||
Deferred income tax liabilities | | | |||||
Term loan, net of current portion | | | |||||
Non-current liabilities | | | |||||
Total liabilities | | | |||||
Commitments and contingencies | |||||||
Stockholders’ equity: | |||||||
Common stock, $ | |
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Additional paid-in capital | |
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Treasury stock, at cost, | ( |
| ( | ||||
Retained earnings | |
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Accumulated other comprehensive loss | ( |
| ( | ||||
Total stockholders’ equity | |
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Total liabilities and stockholders' equity | $ | | $ | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Climb Global Solutions, Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings
(Unaudited)
(Amounts in thousands, except per share data)
Nine months ended | Three months ended | ||||||||||||
September 30, | September 30, | ||||||||||||
| 2023 |
| 2022 |
| 2023 |
| 2022 |
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Net sales | $ | | $ | | $ | | $ | | |||||
Cost of sales |
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Gross profit |
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Selling, general, and administrative expenses |
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Acquisition related costs | | | | | |||||||||
Depreciation and amortization expense | | | | | |||||||||
Income from operations |
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Other income: | |||||||||||||
Interest, net |
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Foreign currency transaction loss | ( | ( | ( | ( | |||||||||
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Income before provision for income taxes |
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Provision for income taxes |
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Net income | $ | | $ | | $ | | $ | | |||||
Income per common share-Basic | $ | | $ | | $ | | $ | | |||||
Income per common share-Diluted | $ | | $ | | $ | | $ | | |||||
Weighted average common shares outstanding — Basic |
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Weighted average common shares outstanding — Diluted |
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Dividends paid per common share | $ | | $ | | $ | | $ | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Climb Global Solutions, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
(Amounts in thousands)
Nine months ended | Three months ended | ||||||||||||
September 30, | September 30, | ||||||||||||
| 2023 |
| 2022 |
| 2023 |
| 2022 |
| |||||
Net income | $ | $ | $ | | $ | | |||||||
Other comprehensive income (loss): | |||||||||||||
Foreign currency translation adjustments |
| |
| ( |
| ( |
| ( | |||||
Other comprehensive income (loss) |
| |
| ( |
| ( |
| ( | |||||
Comprehensive income (loss) | $ | | $ | | $ | | $ | ( |
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
Climb Global Solutions, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
(Amounts in thousands, except share amounts)
Accumulated | ||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||
Common Stock | Paid-In | Treasury | Retained | Comprehensive | ||||||||||||||||||
| Shares |
| Amount |
| Capital |
| Shares |
| Amount |
| Earnings |
| (Loss) Income |
| Total | |||||||
Balance at January 1, 2023 |
| | $ | | $ | |
| | $ | ( | $ | | $ | ( | $ | | ||||||
Net income | — | — | — | — | — | | — | | ||||||||||||||
Translation adjustment | — | — | — | — | — | — | | | ||||||||||||||
Dividends paid | — | — | — | — | — | ( | — | ( | ||||||||||||||
Share-based compensation expense | — | — | | — | — | — | — | | ||||||||||||||
Restricted stock grants (net of forfeitures) | — | — | ( | ( |
| | — | — | — | |||||||||||||
Treasury shares repurchased | — | — | — | | ( | — | — | ( | ||||||||||||||
Balance at March 31, 2023 |
| | $ | | $ | |
| | $ | ( | $ | | $ | ( | $ | | ||||||
Net income | — | — | — | — | — | | — | | ||||||||||||||
Translation adjustment | — | — | — | — | — | — | | | ||||||||||||||
Dividends paid | — | — | — | — | — | ( | — | ( | ||||||||||||||
Share-based compensation expense | — | — | | — | — | — | — | | ||||||||||||||
Restricted stock grants (net of forfeitures) | — | — | ( | ( |
| | — | — | — | |||||||||||||
Treasury shares repurchased | — | — | — | | ( | — | — | ( | ||||||||||||||
Balance at June 30, 2023 |
| | | | | ( | | ( | | |||||||||||||
Net income | — | — | — | — | — | | — | | ||||||||||||||
Translation adjustment | — | — | — | — | — | — | ( | ( | ||||||||||||||
Dividends paid | — | — | — | — | — | ( | — | ( | ||||||||||||||
Share-based compensation expense | — | — | | — | — | — | — | | ||||||||||||||
Restricted stock grants (net of forfeitures) | — | — | ( | ( |
| | — | — | — | |||||||||||||
Treasury shares repurchased | — | — | — | | ( | — | — | ( | ||||||||||||||
Balance at September 30, 2023 |
| | | | | ( | | ( | $ | | ||||||||||||
Accumulated | ||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||
Common Stock | Paid-In | Treasury | Retained | Comprehensive | ||||||||||||||||||
| Shares |
| Amount |
| Capital |
| Shares |
| Amount |
| Earnings |
| (Loss) Income |
| Total | |||||||
Balance at January 1, 2022 |
| | | |
| | ( | | ( | $ | | |||||||||||
Net income | — | — | — | — | — | | — | | ||||||||||||||
Translation adjustment | — | — | — | — | — | — | ( | ( | ||||||||||||||
Dividends paid | — | — | — | — | — | ( | — | ( | ||||||||||||||
Share-based compensation expense | — | — | | — | — | — | — | | ||||||||||||||
Restricted stock grants (net of forfeitures) | — | — | ( | ( |
| | — | — | — | |||||||||||||
Treasury shares repurchased | — | — | — | | ( | — | — | ( | ||||||||||||||
Balance at March 31, 2022 |
| | | | | ( | | ( | $ | | ||||||||||||
Net income | — | — | — | — | — | | — | | ||||||||||||||
Translation adjustment | — | — | — | — | — | — | ( | ( | ||||||||||||||
Dividends paid | — | — | — | — | — | ( | — | ( | ||||||||||||||
Share-based compensation expense | — | — | | — | — | — | — | | ||||||||||||||
Restricted stock grants (net of forfeitures) | — | — | ( | ( |
| | — | — | — | |||||||||||||
Treasury shares repurchased | — | — | — | | ( | — | — | ( | ||||||||||||||
Balance at June 30, 2022 |
| | | | | ( | | ( | | |||||||||||||
Net income | — | — | — | — | — | | — | | ||||||||||||||
Translation adjustment | — | — | — | — | — | — | ( | ( | ||||||||||||||
Dividends paid | — | — | — | — | — | ( | — | ( | ||||||||||||||
Share-based compensation expense | — | — | | — | — | — | — | | ||||||||||||||
Restricted stock grants (net of forfeitures) | — | — | ( | ( |
| | — | — | — | |||||||||||||
Treasury shares repurchased | — | — | — | | ( | — | — | ( | ||||||||||||||
Balance at September 30, 2022 |
| | | | | ( | | ( | $ | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
Climb Global Solutions, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Amounts in thousands)
Nine months ended | |||||||
September 30, | |||||||
| 2023 |
| 2022 |
| |||
Cash flows from operating activities | |||||||
Net income | $ | | $ | | |||
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities: |
| ||||||
Depreciation and amortization expense |
| |
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Provision for doubtful accounts |
| |
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Deferred income tax benefit |
| ( |
| ( | |||
Share-based compensation expense | | | |||||
Amortization of discount on accounts receivable | ( | ( | |||||
Amortization of right-of-use assets | | | |||||
Changes in operating assets and liabilities: |
|
| |||||
Accounts receivable |
| |
| ( | |||
Inventory |
| |
| ( | |||
Prepaid expenses and other current assets |
| ( |
| | |||
Vendor prepayments | | ( | |||||
Accounts payable and accrued expenses |
| ( |
| | |||
Lease liability, net | ( | ( | |||||
Other assets and liabilities |
| |
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Net cash and cash equivalents provided by operating activities |
| |
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Cash flows from investing activities | |||||||
Purchase of equipment and leasehold improvements |
| ( |
| ( | |||
Payment for acquisitions, net of cash acquired | — | ( | |||||
Net cash and cash equivalents used in investing activities |
| ( |
| ( | |||
Cash flows from financing activities | |||||||
Purchase of treasury stock |
| ( |
| ( | |||
Borrowings under revolving credit facility | | — | |||||
Repayments of borrowings under revolving credit facility | ( | — | |||||
Borrowings under term loan | — | | |||||
Repayments of borrowings under term loan | ( | ( | |||||
Dividends paid |
| ( |
| ( | |||
Payments of deferred financing costs | ( | — | |||||
Net cash and cash equivalents used in financing activities |
| ( |
| ( | |||
Effect of foreign exchange rate on cash and cash equivalents |
| |
| ( | |||
Net increase (decrease) in cash and cash equivalents |
| |
| ( | |||
Cash and cash equivalents at beginning of period |
| |
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Cash and cash equivalents at end of period | $ | | $ | | |||
Supplementary disclosure of cash flow information: | |||||||
Income taxes paid | $ | | $ | | |||
Interest paid | $ | | $ | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
8
Climb Global Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 2023
(Unaudited)
(Amounts in tables in thousands, except share and per share amounts)
1. Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements of Climb Global Solutions, Inc. and its subsidiaries (collectively, the “Company”), have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, as permitted by the rules and regulation of the Securities and Exchange Commission, the financial statements do not include all of the information and footnotes required by U.S. GAAP for complete audited financial statements.
The preparation of these condensed consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to product returns, bad debts, inventories, intangible assets, income taxes, stock-based compensation, evaluation of performance obligations and allocation of revenue to distinct items, contingencies and litigation. The Company bases its estimates on its historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. In the opinion of the Company’s management, all adjustments that are of a normal recurring nature, considered necessary for fair presentation of the results for the periods presented, have been included in the accompanying condensed consolidated financial statements. The Company’s actual results may differ from these estimates under different assumptions or conditions. The unaudited condensed consolidated statements of earnings for the interim periods are not necessarily indicative of results for the full year. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K filed with the Securities Exchange Commission for the year ended December 31, 2022.
The consolidated financial statements include the accounts of Climb Global Solutions, Inc. and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated.
2. Recently Issued Accounting Standards:
In June 2016, the FASB issued Accounting Standards Update No. 2016-13, “Financial Instruments - Credit Losses (Topic 326)” ("ASU 2016-13"). ASU 2016-13 revises the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. Originally, ASU 2016-13 was effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. In November 2019, FASB issued ASU 2019-10, “Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842).” This ASU defers the effective date of ASU 2016-13 for public companies that are considered smaller reporting companies as defined by the SEC to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Effective January 1, 2023, the Company adopted the new credit loss standard and it did not have an impact on the Company’s financial statements.
In July 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-03, “Presentation of Financial Statements (Topic 205), Income Statement — Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), Compensation — Stock Compensation (Topic 718).” This ASU amends various paragraphs in the accounting codification pursuant to the issuance of Commission Staff Accounting Bulletin (“SAB”) number 120. The ASU provides clarifying guidance related to employee and non-employee share-based payment accounting, including guidance related to spring-loaded awards. ASU 2023-03 was effective upon issuance. The adoption of this ASU did not have an impact on the Company’s consolidated financial statements.
9
3. Foreign Currency Translation:
Assets and liabilities of the Company’s foreign subsidiaries have been translated using the end of the reporting period exchange rates, and related revenues and expenses have been translated at average rates of exchange in effect during the period. Transactions denominated in currencies other than the applicable functional currency are converted to the functional currency at the exchange rate on the transaction date. Foreign currency transaction gains and losses are recorded as income or expenses as amounts are settled. The net sales from our foreign operations for the three months ended September 30, 2023 and 2022 were $
4. Comprehensive Income:
Cumulative translation adjustments have been classified within accumulated other comprehensive loss, which is a separate component of stockholders’ equity in accordance with FASB ASC Topic 220, “Comprehensive Income.”
5. Revenue Recognition:
The Company’s revenues primarily result from the sale of various technology products and services, including third-party products, third-party software and third-party maintenance, software support and services. The Company recognizes revenue as control of the third-party products and third-party software is transferred to customers, which generally happens at the point of shipment or fulfilment and at the point that our customers and vendors accept the terms and conditions of the arrangement for third-party maintenance, software support and services.
The Company has contracts with certain customers where the Company’s performance obligation is to arrange for the products or services to be provided by another party. In these arrangements, as the Company assumes an agency relationship in the transaction, revenue is recognized in the amount of the net fee associated with serving as an agent. These arrangements primarily relate to third party maintenance, cloud services and certain security software whose intended functionality is dependent on third party maintenance.
The Company allows its customers to return product for exchange or credit subject to certain limitations. A liability is recorded at the time of sale for estimated product returns based upon historical experience and an asset is recognized for the amount expected to be recorded in inventory upon product return. The Company also provides rebates and other discounts to certain customers which are considered variable consideration. A provision for customer rebates and other discounts is recorded as a reduction of revenue at the time of sale based on an evaluation of the contract terms and historical experience.
The Company considers shipping and handling activities as costs to fulfill the sales of products. Shipping revenue is included in net sales when control of the product is transferred to the customer, and the related shipping and handling costs are included in the cost of products sold. Taxes imposed by governmental authorities on the Company’s revenue producing activities with customers, such as sales taxes and value added taxes, are excluded from net sales.
The Company disaggregates its operating revenue by segment, geography and timing of revenue recognition, which the Company believes provides a meaningful depiction of the nature of its revenue. See Note 16 – Segment Information.
Hardware and software products sold by the Company are generally delivered via shipment from the Company’s facilities, drop shipment directly from the vendor, or by electronic delivery of keys for software products. The majority of the Company’s business involves shipments directly from its vendors to its customers. In these transactions, the Company is generally responsible for negotiating price both with the vendor and customer, payment to the vendor, establishing payment terms with the customer, product returns, and has risk of loss if the customer does not make payment. As the principal with the customer, the Company recognizes revenue upon receiving notification from the vendor that the product was shipped. Control of software products is deemed to have passed to the customer when they acquire the right to use or copy the software under license as substantially all product functionality is available to the customer at the time of sale.
The Company performs an analysis of the number of days of sales in-transit to customers at the end of each reporting period based on an analysis of commercial delivery terms that include drop-shipment arrangements. This analysis is the basis upon which the Company estimates the amount of net sales in-transit at the end of the period and adjusts revenue and the related costs to reflect only what has been delivered to the customer. Changes in delivery patterns may result in a different number of business days estimated to make this adjustment. The Company also performs a weighted average analysis of the
10
estimated number of days between order fulfillment and beginning of the renewal term for term licenses recorded on a gross basis, and a deferral estimate is recorded for term license renewals fulfilled prior to commencement date.
Generally, software products are sold with accompanying third-party delivered software assurance, which is a product that allows customers to upgrade, at no additional cost, to the latest technology if new capabilities are introduced during the period that the software assurance is in effect. The Company evaluates whether the software assurance is a separate performance obligation by assessing if the third-party delivered software assurance is critical or essential to the core functionality of the software itself. This involves considering if the software provides its original intended functionality to the customer without the updates, if the customer would ascribe a higher value to the upgrades versus the up-front deliverable, if the customer would expect frequent intelligence updates to the software (such as updates that maintain the original functionality), and if the customer chooses to not delay or always install upgrades. If the Company determines that the accompanying third-party delivered software assurance is critical or essential to the core functionality of the software license, the software license and the accompanying third-party delivered software assurance are recognized as a single performance obligation. The value of the product is primarily the accompanying support delivered by a third party and therefore the Company is acting as an agent in these transactions and recognizes them on a net basis at the point the associated software license is delivered to the customer. The Company sells cloud computing solutions that utilize third-party vendors to enable customers to access data center functionality in a cloud-based solution, including storage, computing and networking and access to software in the cloud that enhances office productivity, provides security or assists in collaboration. The Company recognizes revenue for cloud computing solutions for arrangements with one-time invoicing to the customer at the time of invoice on a net basis as the Company is acting as an agent in the transaction. For monthly subscription-based arrangements, the Company is acting as an agent in the transaction and recognizes revenue as it invoices the customer for its monthly usage on a net basis. For software licenses where the accompanying third-party delivered software assurance is not critical or essential to the core functionality, the software assurance is recognized as a separate performance obligation, with the associated revenue recognized on a net basis at the point the related software license is delivered to the customer.
The Company also sells some of its products and services as part of bundled contract arrangements containing multiple deliverables, which may include a combination of products and services. For each deliverable that represents a distinct performance obligation, total arrangement consideration is allocated based upon the standalone selling prices (“SSP”) of each performance obligation. SSP is determined based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through established standard prices, we use judgement and estimate the standalone selling price considering available information such as market pricing and pricing related to similar products.
The Company records freight billed to its customers as net sales and the related freight costs as cost of sales when the underlying product revenue is recognized. For freight not billed to its customers, the Company records the freight costs as cost of sales. The Company’s typical shipping terms result in shipping being performed before the customer obtains control of the product. The Company considers shipping to be a fulfillment activity and not a separate performance obligation.
The Company pays commissions and related payroll taxes to sales personnel when customers are invoiced. These costs are recorded as selling, general and administrative expenses in the period earned as all our performance obligations are complete within a short window of processing the order.
6. Acquisition:
On August 18, 2022, the Company entered into a Share Purchase Agreement pursuant to which the Company purchased the entire share capital of Spinnakar Limited (“Spinnakar”) for an aggregate purchase price of approximately £
The purchase consideration included approximately $
11
7. Goodwill and Other Intangible Assets:
The following table summarizes the changes in the carrying amount of goodwill for the nine months ended September 30, 2023:
Balance January 1, 2023 | $ | | |
Translation adjustments | | ||
Balance September 30, 2023 | $ | |
Information related to the Company’s other intangibles, net is as follows:
As of September 30, 2023 | |||||||||