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Home›Fishing Business›SYSTEMAX: Discussion and analysis by management of the financial situation and operating results. (form 10-K)

SYSTEMAX: Discussion and analysis by management of the financial situation and operating results. (form 10-K)

By Bridget Becker
March 19, 2021
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Overview

Systemax Inc., through its subsidiaries, is primarily a direct marketer of brand
name and private label industrial and business equipment and supplies in North
America going to market through a system of branded e-commerce websites and
relationship marketers.

As the coronavirus has become widespread in the United States, it has lead to
health screenings, domestic quarantines, government mandated business, school
and government agency shutdowns and lower domestic economic activity and
productivity. The resultant lower demand for certain of our core products and
other product lines was mitigated by stronger sales of pandemic and safety
related supplies.
Continuing Operations

The Company sells a wide array of industrial and general business hard goods and
supplies and to a lesser extent products that would fall into the generally
recognizable category of maintenance, repair and operational ("MRO") products,
which are marketed in North America. Many of these products are manufactured by
other companies. Some products are manufactured for us and sold under our brand
as a white label product, and some are manufactured to our own design and
marketed under the trademarks: Global™, GlobalIndustrial.com™, Nexel™ Paramount™
and Interion™.

Discontinued Operations

The discontinued operations of the Company include the results of the France company sold in August 2018, SARL companies sold in March 2017 and the NATG activity sold in december 2015 (see Note 1 and Note 6).

Operating conditions

The North American industrial products market is highly fragmented and we
compete against numerous competitors in multiple distribution channels.
Industrial products distribution is working capital intensive, requiring us to
incur significant costs associated with the warehousing of many products,
including the costs of maintaining inventory, leasing warehouse space, inventory
management systems, and employing personnel to perform the associated tasks. We
supplement our on-hand product
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availability by maintaining relationships with major distributors and manufacturers, using a combination of inventory and drop shipping.

The primary component of our operating expenses historically has been
employee-related costs, which includes items such as wages, commissions,
bonuses, employee benefits and equity-based compensation, as well as marketing
expenses, primarily comprised of digital marketing spend, and occupancy related
charges associated with our leased distribution and call center facilities. We
continually assess our operations to ensure that they are efficient, aligned
with market conditions and responsive to customer needs.

In the discussion of our results of operations, constant currency refers to the
adjustment of the results of our foreign operations to exclude the effects of
period to period fluctuations in currency exchange rates.

The discussion of our results of operations and financial condition that follows
will provide information that will assist in understanding our financial
statements, the factors that we believe may affect our future results and
financial condition as well as information about how certain accounting policies
and estimates affect the consolidated financial statements.

The Company has elected to omit discussion of the earliest year presented,
December 31, 2018, in MD&A. This discussion can be found in Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations in Form
10-K for the year ended December 31, 2019, filed on March 12, 2020.

Business outlook

As we look to 2021, the Company is focused on the continued execution of our
customer centric strategy, building on our financial performance and expanding
our higher margin private label line of Global products by adding additional
products and product categories. The strategy guides our actions across the
business and specifically in our customer end-to-end purchase, service and
delivery experience. In the year ahead, we will be making further investments
in: automation and technology in our customer service stack; our e-commerce
shopping experience to provide a seamless shopping journey filled with
educational content and solutions offerings; our distribution centers to
increase timeliness, quality and accuracy in customer order fulfillment, while
driving labor productivity and sales force productivity and automation, which
will continue to allow our managed sales force to proactively provide our
customers the solutions they need in order to operate their businesses. These
actions will enhance our end-to-end customer experience, drive the further
evolution of our e-commerce platform and strengthen our competitive position.
Accordingly, we expect our capital expenditures in 2021 to be in the range of
$5.0 to $7.0 million.



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Highlights from 2020
The following discussion of our results of operations and financial condition
will provide information that will assist in understanding our financial
statements and information about how certain accounting principles and estimates
affect the consolidated financial statements. This discussion should be read in
conjunction with the consolidated financial statements included herein.

•Consolidated sales increased 8.7% to $1.0 billion compared to $946.9 million in
the prior year.
•On a Non-GAAP*, average daily sales, constant currency basis, sales increased
7.0% compared to prior year.
•Consolidated operating income increased 27.2% to $84.1 million compared to
$66.1 million last year.
•Net income per diluted share from continuing operations increased 27.3% to
$1.68 compared to $1.32 in the prior year.

* Average daily non-GAAP sales, in constant currency, are calculated based on the number of sales days in each period, with Canadian sales converted to US dollars using the average exchange rate for the previous year.

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                             Results of Operations

Key performance indicators (in millions):

                                                                    Years Ended December 31                       Change
                                                                 2020                  2019                       2020 vs. 2019
Results of continuing operations:
Consolidated net sales                                     $      1,029.0           $ 946.9                             8.7        %
Consolidated gross profit                                  $        356.9           $ 325.7                             9.6        %
Consolidated gross margin                                            34.7    %         34.4    %                        0.3        %
Consolidated SD&A costs                                    $        272.8           $ 260.4                             4.8        %
Consolidated SD&A costs as % of sales                                26.5    %         27.5    %                       (1.0)       %
Consolidated operating income                              $         84.1           $  66.1                            27.2        %
Consolidated operating margin from continuing operations:             8.2    %          7.0    %                        1.2        %
Effective income tax rate                                            23.7    %         24.4    %                       (0.7)       %
Net income from continuing operations                      $         64.1           $  50.0                            28.2        %
Net margin from continuing operations                                 6.2    %          5.3    %                        0.9        %

Net earnings (loss) from discontinued operations, net of tax $ 1.3

        $  (1.5)                          186.7        %



































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                                 SYSTEMAX INC.
                  Consolidated Summary Results(1) - Unaudited
                                 (In millions)
                                                                     Year Ended December 31,                      Change
GAAP:                                                              2020                     2019               2020 vs. 2019
Net sales                                                        $1,029.0                  $946.9                       8.7  %
Average daily sales*                                               $4.0                     $3.7                        7.0  %
Operating income                                                  $84.1                    $66.1                       27.2  %
 Operating margin %                                                8.2%                     7.0%                        1.2  %

Non-GAAP:
Average daily sales, constant currency**                           $4.0                     $3.7                        7.0  %


* Average daily sales are calculated based on the number of sales days in each

            period, converted to US Dollars using the current year's

average exchange rate. The

            were 257 selling days in 2020 and 253 selling days in 2019.


** Non-GAAP, average daily sales, at constant currency are calculated based on the

            number of selling days in each period, with Canadian sales 

converted to US dollars

            using the prior year's average exchange rate.


1 Systemax manages its activities and reports through a 52 to 53 week fiscal year that ends

            at midnight on the Saturday closest to December 31.  For

clarity of presentation,

            fiscal years and quarters are described as if they ended on the 

last day of the

            respective calendar month.  The actual fiscal quarter ended on 

January 2, 2021 and

            December 28, 2019.. The year ended 2020 included 53 weeks and 2019 included 52
            weeks.



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The following management discussion and analysis will include ongoing and discontinued operations.

NET SALES

The Company's net sales increased 8.7% to over $1.0 billion compared to $946.9
million as the Company's performance continued to benefit from investments in
our private label offerings, significant growth in pandemic related supplies and
equipment and a return to growth from our core product offerings in the second
half of the year despite the challenging macro environment. Net sales from our
Canada business grew 33.6%, 34.8% on a constant currency basis, compared to
prior year. U.S. revenue increased 7.4% compared to prior year. On a constant
currency basis, average daily sales increased 7.0% compared to prior year. There
were 257 selling days in 2020 compared to 253 selling days in 2019. The Company
expects that there will be challenging impacts in early in 2021 associated with
disruptions in the supply chain, including container shortages, high levels of
port congestion, and disruption to the domestic less-than-truckload ("LTL")
carrier network due to severe winter storms across much of the U.S.

GROSS MARGIN

Gross margin is dependent on variables such as product mix including sourcing
and category, competition, pricing strategy, vendor volume rebates, free freight
and freight discounting arrangements, inventory valuation and obsolescence and
other variables, any or all of which may result in fluctuations in gross margin.
The Company expects to see continued margin variability due to the current
economic environment, freight pricing fluctuations, changes in mix as a result
of our customer's strong demand of personal protective equipment ("PPE") and
other related products, significant price fluctuations of PPE based upon market
availability and historical seasonality.

Gross margin was 34.7% compared to 34.4% in the prior year primarily driven by
improvements in price rationalization, as well as a product mix shift to in
stock and private label products and the higher margins these sourcing channels
provide as compared to nationally branded products fulfilled through a drop ship
model. The Company did experience a number of margin pressures during the fourth
quarter related to freight promotions, increased parcel shipping costs
associated with an extended peak season and ocean freight costs. We expect these
costs to continue into the first quarter of 2021, and will also incur, what we
believe to be temporary additional freight costs as we transition to a new third
party logistics partner in an effort to further improve service levels and our
customers' experience.

SALES, DISTRIBUTION AND ADMINISTRATION COSTS (“SD&A”), EXCLUDING EARNINGS AND SPECIAL COSTS

Selling, distribution and administration costs total $ 272.8 million and
$ 260.4 million for the past years December 31, 2020 and 2019, respectively.

SD&A costs as a percentage of sales improved in 2020 compared to 2019 by 100
basis points. This improved SD&A leverage reflects our continued optimization in
marketing spend, as well as fixed cost leverage as sales volume grew.
Significant cost savings were generated from lower net advertising spend of
approximately $7.7 million and lower net catalog and trade shows costs of
approximately $1.8 million. Offsetting these decreased costs was increased
salary and related costs of approximately $13.9 million, of which $7.0 million
related to variable bonus and commission expense, which is directly attributable
to the Company's financial performance in the current year. Additional increased
costs related to consulting expenses of approximately $3.2 million primarily
related to our customer centric strategy initiatives, increased facility costs
of approximately $2.2 million, and additional credit card fees of approximately
$1.5 million.

CONTINUING OPERATIONS GAINS AND SPECIAL EXPENSES

The Company did not incur any special charges in connection with continuing operations in 2020. During the third quarter of 2019 and for the year ended December 31, 2019, the former German branch of the Company recorded windfall gains of approximately $ 0.8 million linked to a buyback for its current rental obligation.

DISCONTINUED ACTIVITIES SPECIAL GAINS AND EXPENSES

The discontinued operations of the Company include the results of the France company sold in August 2018, SARL companies sold in March 2017 and NATG activities sold in december 2015 (see Note 1 and Note 6).

Total special gains included in discontinued operations totaled $1.4 million and
$0.0 million for the years ended December 31, 2020 and 2019, respectively. The
Company's NATG discontinued operations recorded approximately $1.9 million in
restitution
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revenue offset by $ 0.5 million professional fees in 2020. No special expense (gain) was recorded in discontinued operations in 2019.

OPERATING MARGIN

The Company’s operating margin increase of 120 basis points in 2020 compared to 2019 is due to the improvement in gross margin resulting from the reorientation of the product line towards in-stock and branded products. of distributor, the effectiveness of our marketing efforts, a better leverage effect within our structure of increased sales volume, as well as the benefit of the force reduction action implemented in april 2020.

The consolidated operating margin was impacted by exceptional gains of $ 0.0 million and
$ 0.8 million for the past years December 31, 2020 and 2019, respectively.

INTEREST AND OTHER (INCOME) EXPENSES, NET

Interest and other (income) charges, net of continuing operations were $ 0.1 million for 2020 and $ 0.0 million in 2019.

INCOME TAXES

The Company recorded net tax expense in continuing operations for 2020 of $19.9
million, or 23.7%, and a net tax expense in discontinued operations of $0.5
million. Tax expense from continuing operations was primarily the result of
pretax income in the U.S. and India operations, including tax expense for
certain U.S. states. The tax rate was benefited by pre-tax income in Canada of
approximately $3.2 million as the Company has full valuation allowances against
the deferred tax assets, including net operating losses, of its Canadian
subsidiary and taxable income is fully offset by these net operating losses. Tax
expense from continuing operations was also benefited by approximately $0.6
million of stock option exercises and dividend equivalent payments.
Non-deductible expenses, including executive compensation, was approximately
$0.7 million. Tax expense in discontinued operations is attributed to pretax
income recorded in the discontinued NATG business.

The Company recorded net tax expense in continuing operations for 2019 of $16.1
million, or 24.4%, and a net tax benefit in discontinued operations of $0.6
million. Tax expense from continuing operations was primarily the result of
pretax income in the U.S. and was benefited by approximately $0.5 million of
stock option exercises and approximately $0.2 million from dividend equivalent
payments. Non-deductible expense, including executive compensation, was
approximately $0.8 million. Tax benefit in discontinued operations is primarily
attributed to pretax losses incurred in the discontinued NATG business.

Financial situation, liquidity and capital resources

Selected liquidity data (in millions):

                                                      December 31,
                                                   2020         2019        $ Change
Cash and cash equivalents                        $  22.4      $  97.2      $  (74.8)
Accounts receivable, net                         $ 102.3      $  88.2      $   14.1
Inventories                                      $ 132.3      $ 112.5      $   19.8
Prepaid expenses and other current assets        $   6.8      $   6.4      $    0.4
Accounts payable                                 $ 125.4      $ 115.9      

$ 9.5

Accrued expenses and other current liabilities   $  50.7      $  34.0      $   16.7
Operating lease liabilities                      $  10.3          9.9      $    0.4
Working capital                                  $  77.4      $ 144.5      $  (67.1)







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Historical Cash Flows
                                                                                Year Ended December 31,
                                                                              2020                2019

Net cash flow from operating activities of continuing operations $

67.3 $ 70.3
Net cash provided by (used in) operating activities of discontinued operations

                                                              $         0.9          $   (1.9)
Net cash used in investing activities from continuing operations        $   

(2.7) $ (6.9)

Net cash flow used in financing activities from continuing operations $

(138.8) $ (259.6)

Effects of exchange rates on cash                                       $         0.1          $   (0.1)
Net decrease in cash and cash equivalents                               $   

(73.2) $ (198.2)



Our primary liquidity needs are to support working capital requirements in our
business, funding recently declared and any future dividends, funding capital
expenditures, continuing investment in upgrading and expanding our technological
capabilities and information technology infrastructure specifically related to
our e-commerce shopping experience, and sales force productivity and automation,
continuing investment in upgrading and expanding our distribution footprint, and
funding acquisitions. We rely principally upon operating cash flows to meet
these needs. We currently believe that current cash on hand and cash flow from
operations will be sufficient to fund our working capital and other cash
requirements for at least the next twelve months. We believe our current capital
structure and cash resources are adequate for our internal growth initiatives.
To the extent our growth initiatives expand, including major acquisitions, we
would seek to raise additional capital. We believe that, if needed, we can
access public or private funding alternatives to raise additional capital.

Our working capital decreased $67.1 million primarily related to the $2.00 per
share special dividend declared, totaling $75.5 million, of which $75.1 million
was paid in December 2020, increased accounts payable balances and accrued
expenses and other current liabilities balances offset by increased accounts
receivable and inventory balances. Our inventory balance increase is primarily
associated with strategic investment in personal protective equipment items in
response to continuing demand for Covid-19 related safety products, as well as
increased stocking levels of certain core products which turned slower in 2020
given lower demand due to business and government shutdowns, but has shown
continued recovery in the last quarter of 2020. Accounts receivable days
outstanding were 37.4 in 2020 compared to 35.9 in 2019. Inventory turns were 5.3
in 2020 compared to 5.9 in 2019 and accounts payable days outstanding were 68.3
in 2020 compared to 68.7 in 2019. We expect that future accounts receivable,
inventory and accounts payable balances will fluctuate with net sales and the
product mix of our net sales.

Operating activities

Net cash provided by operating activities from continuing operations was $67.3
million attributable to cash generated from net income adjusted by other
non-cash items which provided $73.6 million in 2020 compared to $61.2 million
provided by these items in 2019. This increase is primarily related to the
higher net income from continuing operations in 2020 compared to 2019. Partially
offsetting this increase are the changes in our working capital accounts, which
used $6.3 million in cash compared to $9.1 million provided in 2019, primarily
the result of changes in the inventory, accounts receivable, accounts payable
and accrued expenses and other current liabilities and non-current liabilities
balances in 2020. Net cash provided by operating activities from discontinued
operations was $0.9 million in 2020 and net cash used in discontinued operations
in 2019 was $1.9 million.

Investing Activities

Net cash used in investing activities from continuing operations totaled $2.7
million and $6.9 million for 2020 and 2019, respectively. In 2020, investing
activities primarily related to leasehold improvements, warehouse machinery and
equipment, molds and computer equipment. In 2019, investing activities were
primarily related to the new Texas distribution center other warehouse projects
including wire decking, in-rack sprinkler systems, video security systems and
warehouse lighting. Net cash used in investing activities from discontinued
operations was zero for 2020 and 2019.

Fundraising activities

Net cash used in financing activities was $138.8 million and $259.6 million in
2020 and 2019, respectively. In 2020, net cash used in financing activities
primarily related to the special dividend of $2.00 per share declared in
December 2020, the $1.00 per share special dividend declared in February 2020
and the regular quarterly dividends of $0.14 per share, which totaled
approximately $134.3 million. Also, during 2020, the Company purchased treasury
shares totaling approximately $7.2 million.
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Proceeds from the issuance of common stock from stock option exercises, net of
payments for payroll taxes through shares withheld, totaled $1.9 million and
proceeds from the issuance of common stock from our employee stock purchase plan
totaled $0.8 million. In 2019, cash used in financing activities was primarily
related to the payment of the special dividend declared in December 2018 of
$243.5 million and regularly quarterly dividends that totaled approximately
$18.1 million. Proceeds from stock option exercises, net of payments for payroll
taxes through shares withheld, totaled $1.2 million and proceeds from the
issuance of common stock from our employee stock purchase plan totaled $0.8
million.

The Company maintains a $75.0 million secured revolving credit facility with one
financial institution which has a five-year term, maturing on October 28, 2021
and provides for borrowings in the United States.  The Company expects to renew
this facility before its expiration in 2021. The credit agreement contains
certain operating, financial and other covenants, including limits on annual
levels of capital expenditures, availability tests related to payments of
dividends and stock repurchases and fixed charge coverage tests related to
acquisitions.  The revolving credit agreement requires that a minimum level of
availability be maintained. If such availability is not maintained, the Company
will be required to maintain a fixed charge coverage ratio (as defined).  The
borrowings under the agreement are subject to borrowing base limitations of up
to 85% of eligible accounts receivable and the inventory advance rate computed
as the lesser of 60% or 85% of the net orderly liquidation value ("NOLV").
Borrowings are secured by substantially all of the Borrower's assets, as
defined, including all accounts receivable, inventory and certain other assets,
subject to limited exceptions, including the exclusion of certain foreign assets
from the collateral.  The interest rate under the amended and restated facility
is computed at applicable market rates based on the London interbank offered
rate ("LIBOR"), the Federal Reserve Bank of New York ("NYFRB") or the Prime
Rate, plus an applicable margin. The applicable margin varies based on borrowing
base availability.  As of December 31, 2020, eligible collateral under the
credit agreement was $75.0 million, total availability and excess availability
was $72.6 million and there were no outstanding borrowings. The Company has
restricted cash collateralizing letters of credit outstanding of $1.6 million at
December 31, 2020 recorded within Other assets in the accompanying Consolidated
Balance Sheets. The Company was in compliance with all of the covenants of the
credit agreement in place as of December 31, 2020.

Levels of earnings and cash flows are dependent on factors such as consolidated
gross margin and selling, distribution and administrative costs, product mix and
relative levels of domestic and foreign sales. Unusual gains or expense items,
such as special (gains) charges and settlements, may impact earnings and are
separately disclosed.  We expect that past performance may not be indicative of
future performance due to the competitive nature of our business segments where
the need to adjust prices to gain or hold market share is prevalent.

Macroeconomic conditions, such as business and consumer sentiment, may affect
our revenues, cash flows or financial condition.  However, we do not believe
that there is a direct correlation between any specific macroeconomic indicator
and our revenues, cash flows or financial condition.  We are not currently
interest rate sensitive, as we have minimal debt.

The expenses, capital expenditures and exit activities described above will
require significant levels of liquidity, which we believe can be adequately
funded from our currently available cash resources and borrowing under our
current credit facility. In 2021 we anticipate capital expenditures in the range
of $5.0 to $7.0 million, though at this time we are not contractually committed
to incur these expenditures.

In the past we have engaged in opportunistic acquisitions, choosing to pay the
purchase price in cash, and may do so in the future as favorable situations
arise.  However, a deep and prolonged period of reduced business spending could
adversely impact our cash resources and force us to either forego future
acquisition opportunities or to pay the purchase price using debt, which could
have an adverse effect on our earnings. We believe that our cash balances and
future cash flows from operations will be sufficient to fund our working capital
and other cash requirements for at least the next twelve months.

We maintain our cash and cash equivalents in money market funds or their
equivalent that have maturities of less than three months and in non-interest
bearing accounts that partially offset banking fees. As of December 31, 2020, we
had no investments with maturities of greater than three months.  Accordingly,
we do not believe that our cash balances have significant exposure to interest
rate risk. At December 31, 2020 cash balances held in foreign subsidiaries
totaled approximately $3.4 million. These balances are held in local country
banks and are held primarily to support local working capital needs. The Company
had in excess of $93 million of liquidity (cash, restricted cash and an undrawn
line of credit) in the U.S. as of December 31, 2020. This facility expires in
October 2021, however the Company expects to renew this facility before its
expiration in 2021.

We are held under non-cancellable operating leases for the rental of most of our facilities and some of our equipment which expire on various dates through 2032. We have sublease agreements for the space unused that we rent in United States. In the event that the sub-tenant is not able to fulfill his obligations, we would be responsible for the rents due under the leases.

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Below is a summary of our contractual obligations for future principal payments on our non-cancellable operating leases and minimum payments on our other purchase obligations as of December 31, 2020 (in millions):

                                              Less than                                       More than
                                  Total         1 year        1-3 years       3-5 years        5 years
Contractual Obligations:

Operating lease debts $ 112.6 $ 14.8 $ 39.9

$ 27.7 $ 30.2

Purchase & other obligations       30.1             6.5            12.2     

11.4

Total contractual obligations $ 142.7 $ 21.3 $ 52.1

$ 39.1 $ 30.2

See note 4 of the notes to the consolidated financial statements for more details on obligations related to operating leases.

Our purchasing and other obligations consist primarily of product purchase commitments, certain employment contracts and service contracts.

We are party to certain litigation, the outcome of which we believe, based on
discussions with legal counsel, will not have a material adverse effect on our
consolidated financial statements.

Tax contingencies are related to uncertain tax positions taken on income tax
returns that may result in additional tax, interest and penalties being paid to
taxing authorities. As of December 31, 2020, the Company had no material
uncertain tax positions.

Interrupted operations

The discontinued operations of the Company include the results of the France company sold in August 2018, SARL companies sold in March 2017 and the NATG activity sold in december 2015 (see Note 1 and Note 6).

Off-balance sheet provisions

We have not created, and are not party to, any special-purpose or off-balance
sheet entities for the purpose of raising capital, incurring debt or operating
our business. We do not have any arrangements or relationships with entities
that are not consolidated into the financial statements that are reasonably
likely to materially affect our liquidity or the availability of capital
resources.

Critical accounting conventions and estimates

Our significant accounting policies are described in Note 1 to the Consolidated
Financial Statements included in Item 15 of this Form 10-K. Certain accounting
policies require the application of significant judgment by management in
selecting the appropriate assumptions for calculating financial estimates. By
their nature, these judgments are subject to an inherent degree of uncertainty,
and as a result, actual results could differ materially from those estimates.
These judgments are based on historical experience, observation of trends in the
industry, information provided by customers, forecasts of future economic
conditions and information available from other outside sources, as appropriate.
Management believes that full consideration has been given to all relevant
circumstances that we may be subject to, and the consolidated financial
statements of the Company accurately reflect management's best estimate of the
consolidated results of operations, financial position and cash flows of the
Company for the years presented. We identify below a number of policies that
entail significant judgments or estimates, the assumptions and/or judgments used
to determine those estimates and the potential effects on reported financial
results if actual results differ materially from these estimates.

Leases

The Company has operating and finance leases for office and warehouse
facilities, headquarters and call centers and certain computer, communications
equipment and machinery and equipment which provide the right to use the
underlying assets in exchange for agreed upon lease payments, determined by the
payment schedule contained in each lease. The Company determines if an
arrangement is an operating or finance lease at the inception of the lease. The
Company has elected not to
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apply recognition requirements to leases with terms of one year or less. All
other leases are recorded on the balance sheet, with Operating lease
right-of-use ("ROU") assets representing the right to use the underlying asset
for the lease term and Operating lease liabilities representing the obligation
to make lease payments arising from the lease. The Company's lease portfolio
consists primarily of operating leases which expire at various dates through
2032.

The ROU assets and corresponding lease liabilities are recorded based upon the
net present value of the remaining lease payments, discounted using interest
rates determined by utilizing such factors as the Company's current credit
facility terms, the length of the remaining term of the lease, the Company's
expected debt credit rating and comparable company term loan yields. Certain
leases may include options to extend the lease, however the Company is not
including any impact of such options in the valuation of its ROU assets or
liabilities as they are not currently probable of being extended. The Company's
lease agreements do not contain residual value guarantees or restrictive
covenants. The Company has sublease agreements for certain unused facilities.

Revenue recognition

The Company recognizes revenue from contracts with its customers utilizing the
following steps:
•Identifying the contract with the customer
?Identifying the performance obligations under the contract
?Determine the transaction price
?Allocate transaction price to performance obligations, if necessary
?Recognizing revenue as performance obligations are satisfied

The Company's invoice, and the terms and conditions of sale contained therein,
constitutes the evidence of an arrangement and is a contract with the customer.
The performance obligations are generally delivery of the products listed on the
invoice and the transaction price for each product is listed. Allocation of
transaction price is generally not needed. Performance obligations are
satisfied, and revenue is recognized upon the shipment of goods from one of the
Company's distribution centers or drop shippers for most contracts or in certain
cases revenue will be recognized upon delivery and acceptance by the customer.
Customer acceptance occurs when the customer accepts the shipment. The Company's
standard terms, provided on its invoices as well as on its websites, are
included in communications with the customer and have standard payment terms of
30 days. Certain customers may have extended payment terms that have been
pre-approved by the Company's credit department, but generally none extend
longer than 120 days.
Provisions for sales returns and allowances are estimated based on historical
data and are recorded concurrently with the recognition of revenue. These
provisions are reviewed and adjusted periodically by the Company. Revenue is
presented net of sales taxes collected from customers and remitted to government
authorities. Revenue is reduced for any early payment discounts or volume
incentive rebates offered to customers.

The Company's revenue is shown as "Net sales" in the accompanying Consolidated
Statements of Operations and is measured as the determined transaction price,
net of any variable consideration consisting primarily of rights to return
product. The Company has elected to treat shipping and handling revenues as
activities to fulfill its performance obligation. Billings for freight and
shipping and handling are recorded in net sales and costs of freight and
shipping and handling are recorded in cost of sales in the accompanying
Consolidated Statements of Operations.

The Company will record a contract liability in cases where customers pay in
advance of the Company satisfying its performance obligation. The Company did
not have any material unsatisfied performance obligations or liabilities as
of December 31, 2020.

The Company offers customers rights to return product within a certain time,
usually 30 days. The Company estimates its sales returns liability quarterly
based upon its historical returns rates as a percentage of historical sales for
the trailing twelve-month period. The total accrued sales returns liability was
approximately $1.9 million at December 31, 2020 and 2019, respectively, and was
recorded as a refund liability in Accrued expenses and other current liabilities
in the accompanying Consolidated Balance Sheets.






                                       31
--------------------------------------------------------------------------------

Provision for credit losses

On January 1, 2020 the Company adopted ASU 2016-13, Financial Instruments -
Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic
326). The Company's trade accounts receivable are subject to this standard. The
adoption of this ASU did not have a material impact on the Company's financial
position or results of operations.

The Company's trade accounts receivable is one portfolio comprised of commercial
businesses operating in the U.S. and to a much lesser extent, Canada. The
Company develops its allowances for credit losses, which represent an estimate
of expected losses over the remaining contractual life of its receivables,
considering customer financial condition, historical loss experience with its
customers, current market economic conditions and forecasts of future economic
conditions when appropriate. When the Company becomes aware of a customer's
inability to meet its financial obligation, a specific reserve is recorded to
reduce the receivable to the expected amount to be collected. For the balance of
its trade receivables, the Company uses a loss rate method to estimate its
credit loss reserve. Historical loss experience rates are calculated using
receivable write offs over a trailing twelve-month period and comparing that to
the average receivable balances over the same period. That rate is applied to
the current accounts receivable portfolio, excluding accounts that have been
specifically reserved. Any write offs incurred are recorded against the
established reserves.

The Company grants credit to commercial business customers using an electronic
application process that evaluates the customer's detailed credit report,
reference responses, availability under credit facilities, existing liens,
tenure of management and business history, among other factors. Credit terms are
typically net 30 days payment required with larger businesses eligible for up to
net 90 day terms, if qualified.

Our estimates for the years ended December 31, 2020 and 2019 have not been
materially different than our actual experience. While bad debt allowances have
been within expectations, there can be no assurance that we will continue to
experience the same allowance rate we have in the past particularly if business
or economic conditions change or actual results deviate from historical trends.

Inventory valuation

We value our inventories at the lower of cost or net realizable value; cost
being determined on the first-in, first-out method. Excess and obsolete or
unmarketable merchandise are written down based on historical experience,
assumptions about future product demand and market conditions. If market
conditions are less favorable than projected or if technological developments
result in accelerated obsolescence, additional write-downs may be required.
While obsolescence and resultant markdowns have been within expectations, there
can be no guarantee that we will continue to experience the same level of
markdowns we have in the past. The Company estimates the net realizable value of
its inventory by considering factors such as inventory levels, historical
write-off information, historical and current demand trends, market conditions,
estimated direct selling costs and physical condition of the inventory as well
as credits that we may obtain for returned merchandise.

Our inventory reserve estimates for the years ended December 31, 2020 and 2019
have not been materially different than our actual experience. However, if in
the future our estimates are materially different than our actual experience we
could have a material loss adjustment.

Good will and intangible assets

Our business acquisition activity results in the recording of goodwill and
intangible assets as part of the purchase price allocation process. We apply the
provisions of relevant accounting guidance in our valuation of goodwill,
trademarks, domain names, client lists and other intangible assets. Relevant
accounting guidance requires that goodwill and indefinite lived intangibles be
reviewed at least annually for impairment or more frequently if indicators of
impairment exist.

The Company operates in one reporting unit and in the fourth quarter of each
year performs a quantitative assessment of its goodwill by comparing the
Company's fair market value, or market capitalization, to the carrying value of
the Company, including goodwill, to determine if impairment exists.

We have approximately, in aggregate, $7.0 million in goodwill and intangible
assets at December 31, 2020.  We do not believe it is reasonably likely that the
estimates or assumptions used to determine whether any of our remaining goodwill
or intangible
                                       32
--------------------------------------------------------------------------------

assets are impaired will change materially in the future. However, there can be
no assurances that we will not incur impairment charges that are material in the
future.

Long-lived Assets

Management exercises judgment in evaluating our long-lived assets for impairment
and in their depreciation and amortization methods and lives including
evaluating undiscounted cash flows. The impairment analysis for long-lived
assets requires management to make judgments about useful lives and to estimate
fair values of long-lived assets. It may also require us to estimate future cash
flows of related assets using a discounted cash flow model. Our estimates of
future cash flows involve assumptions concerning future operating performance
and economic conditions. While we believe that our estimates of future cash
flows are reasonable, different assumptions regarding such cash flows could
materially affect our evaluations. We have not made any material changes to our
long-lived assets policy in the past four years and we do not anticipate making
any material changes to this policy in the future.

We do not believe that it is reasonably probable that the estimates and assumptions used to determine the impairment of long-lived assets will vary significantly in the future. However, if our estimates are significantly different from our actual experience, we could have a significant adjustment for gain or loss.

Income taxes

We are subject to the taxation of federal, state and foreign jurisdictions and determining our tax liability is complex and requires significant management judgment.

We conduct operations in numerous U.S. states and several foreign locations. Our
effective tax rate depends upon the geographic distribution of our pre-tax
income or losses among locations with varying tax rates and rules. As the
geographic mix of our pre-tax results among various tax jurisdictions changes,
the effective tax rate may vary from period to period. We are also subject to
periodic examination from domestic and foreign tax authorities regarding the
amount of taxes due. These examinations include questions regarding the timing
and amount of deductions and the allocation of income among various tax
jurisdictions. We establish as needed, and periodically reevaluate, an estimated
income tax reserve on our consolidated balance sheet to provide for the
possibility of adverse outcomes in income tax proceedings. While management
believes that we have identified all reasonably identifiable exposures and
whether or not a reserve is appropriate, it is possible that additional
exposures exist and/or that exposures may be settled at amounts different than
the amounts reserved. The determination of deferred tax assets and liabilities
and any valuation allowances that might be necessary requires management to make
significant judgments concerning the ability to realize net deferred tax assets.
The realization of our net deferred tax assets is significantly dependent upon
the generation of future taxable income. In estimating future taxable income
there are judgments and uncertainties related to the development of forecasts of
future results that may not be reliable. Significant management judgment is also
necessary to evaluate the operating environment and economic conditions that
exist to develop a forecast for a reporting unit. Where management has
determined that it is more likely than not that some portion or the entire
deferred tax asset will not be realized, we have provided a valuation allowance.
If the realization of those deferred tax assets in the future is considered more
likely than not, an adjustment to the deferred tax assets would increase net
income in the period such determination is made. We have not made any material
changes to our income tax policy in the past four years and we do not anticipate
making any material changes to this policy in the near future.

We do not believe it is reasonably likely that the estimates or assumptions used
to determine our deferred tax assets and liabilities and related valuation
allowances will change materially in the future. However, if our estimates are
materially different than our actual experience we could have a material gain or
loss adjustment.

Recent accounting positions

For information about recent accounting pronouncements, see Note 2, Summary of
Significant Accounting Policies, in the Notes to the Consolidated Financial
Statements included in Part II, Item 8, Financial Statements and Supplemental
Data, of this Annual Report on Form 10-K.

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