DTLK Datalink Corp.

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x       Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended:  September 30, 2016

or

o Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from               to               

Commission file number: 000-29758

DATALINK CORPORATION

(Exact name of registrant as specified in its charter)

10050 Crosstown Circle, Suite 500

EDEN PRAIRIE, MINNESOTA 55344

(Address of Principal Executive Offices)

(952) 944-3462

(Registrant’s Telephone Number, Including Area Code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x    No   o

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

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

As of November 4, 2016, 22,420,595 shares of the registrant’s common stock, $.001 par value, were outstanding.

Table of Contents

DATALINK CORPORATION

Table of Contents

Table of Contents

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

4

Table of Contents

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

5

Table of Contents

Datalink Corporation

Table of Contents

compliance.  ASU 2016-02 is not effective until 2019 for calendar year public business entities and 2020 for all other calendar year entities. We are in the process of determining our implementation approach for this standard and assessing the impact it may have on our consolidated financial statements.

In January 2016, the FASB issued Accounting Standards Update 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”), which is the final standard on the recognition and measurement of financial instruments. ASU 2016-01 applies to all entities that hold financial assets or owe financial liabilities and represents the finalization of just one component of the FASB’s broader financial instruments project. The most far-reaching ramification of ASU 2016-01 is the elimination of the available-for-sale classification for equity securities and a new requirement to carry those equity securities with readily determinable fair values at fair value through net income. Other notable changes brought about by ASU 2016-01 involve: (a) applying a practicability exception from fair value accounting to equity securities that do not have a readily determinable fair value, (b) assessing the need for a valuation allowance for a deferred tax asset related to an available-for-sale debt security, (c) applying the fair value option to liabilities and the treatment of changes in fair value attributable to instrument-specific credit risk and (d) adding disclosures and eliminating certain disclosures. ASU 2016-01 is not effective until 2018 for calendar year public business entities, certain provisions can be early adopted by public business entities in financial statements that have not been issued, and by other entities, in financial statements that have not been made available for issuance. We are in the process of determining our implementation approach for this standard and assessing the impact it may have on our consolidated financial statements.

In September 2015, the FASB issued Accounting Standards Update 2015-16, Accounting for Measurement Period Adjustments in a Business Combination (“ASU 2015-16”), which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. ASU 2015-16 will be effective for annual and interim reporting periods beginning after December 15, 2015, although early adoption is permitted. The adoption of this standard did not have a material impact on our consolidated financial statements.

In July 2015, the FASB issued Accounting Standards Update 2015-11, Simplifying the Measurement of Inventory (“ASU 2015-11”), which simplifies the subsequent measurement of inventory by replacing the lower of cost or market test with a lower of cost or net realizable value (NRV) test.  NRV is calculated as the estimated selling price less reasonably predictable costs of completion, disposal and transportation.  ASU 2015-11 is effective for fiscal years and for interim periods within those fiscal years beginning after December 15, 2016, and prospective adoption is required.  We do not anticipate the adoption of this standard will have a material impact on our consolidated financial statements.

In July 2015, the FASB deferred the effective date of guidance that was originally issued in May 2014 in Accounting Standards Update 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. ASU 2014-09 is intended to provide a more robust framework for addressing revenue issues; improve comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets; and provide more useful information to users of financial statements through improved revenue disclosure requirements. The provisions of ASU 2014-09 will now be effective for interim and annual periods beginning after December 15, 2017. We are in the process of determining our implementation approach for this standard and assessing the impact it may have on our consolidated financial statements.

Entry into Merger Agreement

On November 6, 2016, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Insight Enterprises, Inc., a Delaware corporation (“Parent”), and Reef Acquisition Co., a Minnesota corporation and a wholly owned subsidiary of Parent (“Merger Sub”).  Pursuant to the Merger Agreement, Merger Sub will merge with and into our company and our company will continue as the surviving corporation and as a wholly owned subsidiary of Parent (the “Merger”).

Pursuant to the Merger Agreement, at the effective time of the Merger, each issued and outstanding share of our common stock (other than shares held (1) by Parent or Merger Sub or any direct or indirect wholly owned subsidiary of our company or Parent, and (2) by shareholders who have perfected and not withdrawn a demand for dissenters’ rights or who have not otherwise lost dissenters’ rights under Minnesota law with respect to such shares), will be cancelled and automatically converted into the right to receive $11.25 cash, without interest.

Each party’s obligation to consummate the Merger is subject to satisfaction or waiver of a number of conditions set forth in the Merger Agreement.

2.             Net Earnings per Share

We compute basic net earnings per share using the weighted average number of shares outstanding.  Diluted net earnings per share amounts include the effect of common stock equivalents, if any, for each period.  Diluted net earnings per share amounts assume the conversion, exercise or issuance of all potential common stock instruments unless their effect is anti-dilutive.  The following table computes basic and diluted net earnings per share:

7

Table of Contents

We excluded the following restricted stock grants that have not vested from weighted average common shares outstanding used in the computation of basic net earnings per share:

We excluded the following restricted stock grants that have not vested from the computation of diluted earnings per share as their effect would have been anti-dilutive:

3.             Stockholders’ Equity

Repurchase of stock:

On September 14, 2015, our board of directors approved a stock repurchase program authorizing the repurchase of shares of our common stock in the open market or in privately negotiated purchases, or both, at an aggregate purchase price of up to $10 million. The timing and amount of any future share repurchases will be determined by our management based on market conditions and other factors. The repurchase programs are conducted pursuant to Rule 10b-18 of the Securities Exchange Act of 1934. The share repurchase program is expected to be completed by December 31, 2016. Under this program, we may from time to time purchase our outstanding common stock in the open market at management’s discretion, subject to share price, market conditions and other factors. The common stock repurchase program does not obligate us to repurchase any dollar amount or number of shares. During the nine months ended September 30, 2016, we repurchased 600,000 shares of our common stock at a total purchase price of $4.2 million under this program. As of September 30, 2016, we were authorized to repurchase additional shares of our common stock at a total purchase price of up to $992,000 under the stock repurchase program.

Restricted Stock:

Total stock-based compensation expense related to restricted stock was $1.2 million and $1.1 million for the three months ended September 30, 2016 and 2015, respectively.  Total stock-based compensation expense related to restricted stock was $2.9 million and $4.0 million for the nine months ended September 30, 2016 and 2015, respectively.  Unrecognized stock-based compensation expense related to restricted stock was $5.7 million at September 30, 2016, which we will amortize ratably through February 2021.

The following table summarizes our restricted stock activity for the nine months ended September 30, 2016:

8

Table of Contents

Stock Options:

Total stock-based compensation expense related to stock options was $161,000 and $0 for the three months ended September 30, 2016 and 2015, respectively. Total stock-based compensation expense related to stock options was $359,000 and $0 for the nine months ended September 30, 2016 and 2015, respectively. Unrecognized stock-based compensation expense related to stock options was $1.2 million at September 30, 2016, which we will amortize through February 2020.

The following table represents stock option activity for the nine months ended September 30, 2016:

On June 6, 2016 we granted 30,600 stock options to certain executives. Vesting of these options is based solely on the recipient’s continued service as follows: 1/3 of the shares or units vest upon the first grant anniversary date, 1/3 of the shares or units vest upon the second grant anniversary date, and 1/3 of the shares or units vest upon the third grant anniversary date, provided that the individual remains employed by us through such dates. We use the Black-Scholes option pricing model to estimate the fair value of stock options. The weighted-average fair value per option on the date of grant was $4.21. The fair value of stock options was estimated at the grant date using the following weighted average assumptions:

On February 26, 2016 we granted 414,020 stock options to certain executives. Vesting of these options is based solely on the recipient’s continued service as follows: 50% of the shares or units vest upon the second grant anniversary date, 25% of the shares or units vest upon the third grant anniversary date, and 25% of the shares or units vest upon the fourth grant anniversary date, provided that the individual remains employed by us through such dates. We use the Black-Scholes option pricing model to estimate the fair value of stock options. The weighted-average fair value per option on the date of grant was $3.51. The fair value of stock options was estimated at the grant date using the following weighted average assumptions:

Other:

Effective January 1, 2014 and pursuant to Deferred Stock Unit (“DSU”) Master Agreements, each member of our board of directors may elect to receive DSUs with a fair value equivalent to a percentage of each quarterly installment of the annual cash retainer for non-employee directors to which that member would otherwise be entitled for service as a Datalink director. In addition, each member of our board of directors may elect to receive a DSU award equal to a percentage of the award of shares of restricted stock to which that member would otherwise have been entitled as the equity component of the annual retainer. Annual DSUs are awarded during the second quarter but vest and become non-forfeitable on each of June 30, 2015, September 30, 2015, December 31, 2015 and March 31, 2016, provided the board member remains in service with Datalink. We will issue one share in payment and settlement of each vested DSU subject to the Master DSU Agreement following a termination of that board member’s service with Datalink.

9

Table of Contents

We recognized expenses of $111,000 and $60,000 during the three months ended September 30, 2016 and 2015, respectively, related to awards of 13,537 shares and 10,047 shares, respectively, of fully vested common stock to members of our board of directors.  Of the 13,537 shares of fully vested stock awarded to members of our board of directors during the three months ended September 30, 2016, 4,905 shares were DSUs. Of the 10,047 shares of fully vested stock awarded to members of our board of directors during the three months ended September 30, 2015, 4,047 shares were DSUs. During the nine months ended September 30, 2016 and 2015, we recognized expenses of $311,000 and $279,000, respectively, related to awards of 36,996 shares and 30,765 shares, respectively, of fully vested common stock to members of our board of directors.  Of the 36,996 shares of fully vested stock awarded to members of our board of directors during the nine months ended September 30, 2016, 13,736 shares were DSUs. Of the 30,765 shares of fully vested stock awarded to members of our board of directors during the nine months ended September 30, 2015, 14,265 shares were DSUs. Unrecognized stock-based compensation expense related to unvested awards of shares to members of our board of directors was $210,000 at September 30, 2016, which we will recognize through March 2017.

4.             Income Taxes

We base the provision for income taxes upon estimated annual effective tax rates in the tax jurisdictions in which we operate.  For the three months ended September 30, 2016 and 2015, our annual effective tax rate was 28.2% and 41.8%, respectively, excluding discrete items.  For the nine months ended September 30, 2016 and 2015, our annual effective tax rate was 36.3% and 41.8%, respectively, excluding discrete items.  The decrease in our tax rate for the three and nine months ended September 30, 2016, as compared to the same periods in 2015 is primarily due to the estimated impact of federal and state Research & Development tax credits (“R&D credits”) for 2016. Without the estimated 2016 R&D credit, the annual effective tax rate would have been 44.6% and 42.7% for the three months and nine months ended September 30, 2016, respectively. We expect our annual effective tax rate for 2016 to be approximately 36.3%.

As part of the process of preparing financial statements, we estimate federal and state income taxes. Management estimates the actual current tax and assesses temporary differences resulting from different treatments for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which we include within our consolidated balance sheets. Management must then assess the likelihood that we will realize deferred tax assets, and has concluded that all deferred tax assets, with the exception of capital loss carryovers, are expected to be realized. For the three and nine months ended September 30, 2016, we recorded an income tax expense of $18,000 and an income tax benefit of $222,000 with an effective tax rate of 3.2% and (5.9%), respectively, inclusive of discrete items. We recognized a discrete tax benefit of $141,000 and $1.6 million during the three and nine months ended September 30, 2016, respectively. The discrete adjustments include tax benefits for federal and state R&D credits claimed, net of accrued liabilities and interest related to the IRS audit for 2012, 2013 and 2014.

Included in the gross balance of unrecognized tax benefits at September 30, 2016 and December 31, 2015 are potential benefits of $2.5 million and $209,000, respectively, that, if recognized, would impact the effective tax rate. We anticipate the settlement of unrecognized tax benefits associated with the IRS audit in the next 12 months.

We classify income tax-related interest and penalties arising as a component of income tax expense. For the nine months ended September 30, 2016 and 2015, we had $210,000 and $0, respectively, of accrued interest or penalties which are included in the gross balance above.

We file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. As of September 30, 2016, we were no longer subject to federal income tax examinations for taxable years before 2012. We are currently under IRS examination for the 2012-2014 tax years and have recorded a reserve for unrecognized tax benefits for the estimated tax and interest associated with this ongoing examination.

Our ability to utilize a portion of our net operating loss carryforwards to offset future taxable income may be subject to certain limitations under Section 382 of the Internal Revenue Code due to changes in our equity ownership. As a result of the acquisition of Bear Data Solutions, Inc. (“Bear Data”) in October 2014, utilization of U.S. net operating losses and tax credits of Bear Data are subject to annual limitations under Internal Revenue Code Sections 382 and 383, respectively.

5.             Goodwill and Finite-Lived Intangible Assets

We assess the carrying amount of our goodwill for potential impairment annually or more frequently if events or a change in circumstances indicate that impairment may have occurred.  We perform an impairment test for finite-lived assets, such as intangible assets, and other long-lived assets, such as fixed assets, whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable.  Circumstances that could represent triggering events and therefore require an interim impairment test of goodwill or evaluation of our finite-lived intangible assets or other long-lived assets include the following:  loss of key personnel, unanticipated competition, higher or earlier than expected customer attrition, deterioration of operating performance, significant adverse industry, economic or regulatory changes or a significant decline in market capitalization.

10

Table of Contents

We have only one operating and reporting unit that earns revenues, incurs expenses and makes available discrete financial information for review by our chief operations decision maker.  Accordingly, we complete our goodwill impairment testing on this single reporting unit.

In conducting the annual impairment test of our goodwill, qualitative factors are first examined to determine whether the existence of events or circumstances indicate that it is more likely than not that the fair value of the reporting unit is less than its carrying amount.  If it is determined that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, a two-step impairment test is applied.  The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of our market capitalization with the carrying value of our net assets. If our total market capitalization is at or below the carrying value of our net assets, we perform the second step of the goodwill impairment test to measure the amount of impairment loss we record, if any.  We consider goodwill impairment test estimates critical due to the amount of goodwill recorded on our consolidated balance sheets and the judgment required in determining fair value amounts.

Goodwill was $47.1 million as of each of September 30, 2016 and December 31, 2015.  We conducted our annual goodwill impairment test as of December 31, 2015, our last measurement date.  Based on this analysis, we determined that there was no impairment to goodwill.  We will continue to monitor conditions and changes that could indicate impairment of our recorded goodwill.

At each of September 30, 2016 and December 31, 2015, we determined that no triggering events had occurred and our finite-lived assets and long-lived assets were not impaired.

Identified intangible assets are summarized as follows (in thousands):

Amortization expense for identified intangible assets is recorded in operating expenses within our consolidated statements of operation and is summarized below:

Based on the identified intangible assets recorded at September 30, 2016, scheduled future amortization expense is as follows:

6.             Short-Term Investments

Our short-term investments consist of commercial paper and corporate bonds. We categorize these investments as trading securities and record them at fair value. We classify investments with maturities of 90 days or less from the date of purchase as cash equivalents;

11

Table of Contents

investments with maturities of greater than 90 days from the date of purchase but less than one year generally as short-term investments; and investments with maturities of greater than one year from the date of purchase generally as long-term investments. The following table summarizes our short-term investments:

Our $30.0 million of short-term investments at September 30, 2016 is comprised of commercial paper with maturities within one year and interest rates ranging from 0.5% to 1.1%.

7.             Fair Value Measurements

Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  In determining fair value for assets and liabilities required or permitted to be recorded at fair value, we consider the principal or most advantageous market in which it would transact and the assumptions that market participants would use when pricing the asset or liability.  We apply fair value measurements for both financial and nonfinancial assets and liabilities.  We have no nonfinancial assets or liabilities that require measurement at fair value on a recurring basis as of September 30, 2016.

The fair value of our financial instruments, including cash and cash equivalents, short-term investments, accounts receivable, accounts payable, floor plan line of credit and accrued expenses, approximate cost because of their short maturities.

We use the three-level fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair values.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).  The three levels of the fair value hierarchy are described below:

·                   Level 1 — Unadjusted quoted prices available in active markets for the identical assets or liabilities at the measurement date.

·                   Level 2 — Significant other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly.

·                   Level 3 — Significant unobservable inputs that we cannot corroborate by observable market data and thus reflect the use of significant management judgment.  We generally determine these values using pricing models based on assumptions our management believes other market participants would make.

The fair value hierarchy requires the use of observable market data when available.  In instances in which the inputs used to measure fair value fall into different levels of the fair value hierarchy, we determine the fair value measurement based on the lowest level input that is significant to the fair value measurement in its entirety.  Our assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.  The following table sets forth, by level within the fair value hierarchy, the accounting of our financial assets and/or liabilities at fair value on a recurring basis as of September 30, 2016 and December 31, 2015 according to the valuation techniques we used to determine their fair value(s).

12

Table of Contents

8.                                       Sales-Type Leases Receivables and Sales-Leaseback Arrangements

We occasionally enter into sales-type lease agreements with our customers resulting from the sale of certain products. Our lease receivables are recorded at cost within the accounts receivable and long-term lease receivables balances on our consolidated balance sheets and are due in installments over the lives of the leases. Cash received and applied against the receivable balance is recorded within changes in operating assets and liabilities in the net cash provided by operating activities section of the consolidated statements of cash flows.  Finance income is derived over the term of the sales-type lease arrangement as the unearned income on financed sales-type leases is earned. Unearned income is amortized over the life of the lease using the interest method.  The present value of net investment in sales-type lease receivables of $9.7 million and $10.4 million at September 30, 2016 and December 31, 2015, respectively, is reflected net of unearned interest income of $326,000 and $492,000 at September 30, 2016 and December 31, 2015, respectively. As of September 30, 2016, scheduled maturities of minimum lease payments receivable were as follows for the fiscal years ending December 31:

Lease receivables are individually evaluated for impairment. In the event we determine that a lease receivable may not be paid, we include in our allowance an amount for the outstanding balance related to the lease receivable. At September 30, 2016, there were no material amounts past due related to lease receivables.

Our lease receivables typically generate monthly cash inflows with average lease durations of 24 to 36 months. To better match cash outflows related to these receivables, we occasionally finance the equipment associated with our leases receivable through sales-leaseback arrangements over a period commensurate with the receivable. Gains associated with these sales are deferred in accordance with the accounting for sales-leaseback transactions and are amortized over the lives of the related lease agreements.  As of September 30, 2016, our contractual cash obligations for future minimum lease payments were as follows for the fiscal years ending December 31:

Of the $8.1 million of contractual cash obligations for future minimum lease payments at September 30, 2016, $322,000 represented interest.

9.                                       Line of Credit

On July 17, 2013, we entered into a Credit Agreement (“Credit Agreement”) with Castle Pines Capital LLC (“CPC”), an affiliate of Wells Fargo Bank, National Association (“Wells Fargo”). The Credit Agreement provided for a channel finance facility (“Floor Plan Line of Credit”) and a revolving facility (“Revolving Facility” and, together with the Floor Plan Line of Credit, “Combined Facility”) in a maximum combined aggregate amount of $40 million. On May 21, 2015, we entered into the Second Amendment to Credit Agreement (the “Amended Agreement”), which provides an increase to the Combined Facility for a maximum combined aggregate borrowing amount of $75 million. Under the Amended Agreement, borrowing under the Revolving Facility cannot exceed the lesser

13

Table of Contents

of (i) $75 million minus the amount outstanding under the Floor Plan Line of Credit or (ii) a borrowing base consisting of 85% of certain eligible accounts and 100% of channel financed inventory, subject to CPC’s ability to impose reserves in the future. The Floor Plan Line of Credit will finance certain purchases of inventory by us from vendors approved by CPC, and the Revolving Facility may be used for working capital purposes and permitted acquisitions.

The amounts outstanding under the Revolving Facility bear interest at a per annum rate of 2.0% above Wells Fargo’s one-month LIBOR rate (approximately 0.53% at September 30, 2016). Advances under the Floor Plan Line of Credit will not bear interest so long as they are paid by the applicable payment due date and advances that remain outstanding after the applicable payment due date will bear interest at a per annum rate of LIBOR plus 4%. Under the Credit Agreement, we were obligated to pay quarterly to CPC an unused commitment fee equal to 0.50% per annum on the average daily unused amount of the Combined Facility, with usage including the sum of any advances under either the Floor Plan Line of Credit or the Revolving Facility. The Amended Agreement eliminates the unused commitment fee. The Combined Facility and certain bank product obligations owed to Wells Fargo or its affiliates are secured by substantially all of our personal property. The Amended Agreement terminates on January 9, 2018 and we will be obligated to pay certain prepayment fees if the Credit Agreement is terminated prior to that date.

The Amended Agreement contains customary representations, warranties, covenants and events of default, including but not limited to, covenants restricting our ability to (i) grant liens on our assets, (ii) make certain fundamental changes, including merging or consolidating with another entity or making any material change in the nature of our business, (iii) make certain dividends or distributions, (iv) make certain loans or investments, (v) guarantee or become liable in any way on certain liabilities or obligations of any other person or entity, or (vi) incur certain indebtedness.

The Amended Agreement contains certain covenants regarding our financial performance, including (i) a minimum tangible net worth of at least $30 million and (ii) a minimum quarterly free cash flow requirement, which requires us to have free cash flow of at least $5 million at the end of each fiscal quarter for the trailing twelve-month period then ended. As of December 31, 2015, we were in compliance with the aforementioned financial covenants as set forth in the Amended Agreement. However, subsequent to September 30, 2016, we notified CPC that we did not have free cash flow of at least $5 million at the end of the fiscal quarter ended September 30, 2016, and we requested a waiver of the relevant provision of the Amended Agreement. On October 31, 2016, we entered into the Fourth Amendment to Credit Agreement, which modifies the minimum quarterly free cash flow requirement such that, at any time and from time to time that our cash as reported on our fiscal quarterly consolidated balance sheet is less than $25,000,000, we shall have free cash flow of at least $1.00 at the end of such fiscal quarter for the trailing twelve-month period then ended, and shall continue to have free cash flow of at least $1.00 at the end of our trailing twelve-month period ending each fiscal quarter thereafter, until such time as our cash as reported on our fiscal quarterly consolidated balance sheet is greater than $25,000,000, commencing December 31, 2015 and continuing at the end of each fiscal quarter thereafter.

Of the $75 million maximum borrowing amount available at September 30, 2016 under the Combined Facility, advances of $31.7 million and $24.3 million were outstanding on the Floor Plan Line of Credit at September 30, 2016 and December 31, 2015, respectively, related to the purchase of inventory from certain vendors.

Table of Contents

These statements reflect our current views with respect to future events and are based on assumptions subject to risks and uncertainties. We do not intend to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. Additional risks, uncertainties and other factors are included in the “Risk Factors” section on our Annual Report on Form 10-K for the year ended December 31, 2015.  All forward-looking statements are quantified by, and should be considered in conjunction with, such cautionary statements. Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission that advises interested parties of the risks and factors that may affect our business.

OVERVIEW

We provide information technology (IT) services and solutions that help organizations transform technology, operations and service delivery to meet business challenges. Focused on midsize and large companies, we provide a full life cycle of services including consulting, strategy, design, deployment, management, and support. We leverage technology from the industry’s leading original equipment manufacturers as part of our IT solutions portfolio. Our portfolio of services and solutions spans four practices: cloud, data center transformation, next-generation technology and security. We offer a full suite of practice-specific consulting, analysis, design, implementation, management, and support services.

Our solutions can include hardware products, such as servers, disk arrays, tape systems, networking and interconnection components and software products.  Our data center strategy is supported through multiple trends in the market and involves supporting the market and our clients with a single vendor to provide their data center infrastructure needs.  As of September 30, 2016, we had 34 locations, including both leased facilities and home offices, throughout the United States.  We historically have derived our greatest percentage of net sales from clients located in the central part of the United States.

We sell support service contracts to most of our clients.  In about half of the support service contracts that we sell, our clients purchase support services through us, resulting in clients receiving the benefit of integrated system-wide support.  We have a qualified, independent support desk that takes calls from clients, diagnoses the issues they are facing and either solves the problem or coordinates with our and/or vendor technical staff to meet the client’s needs.  Our support service agreements with our clients include an underlying agreement with the product manufacturer.  The manufacturer provides on-site support assistance if necessary. The other half of the support service contracts that we sell to our clients are directly between the client and the product manufacturer. For all support service contracts we sell, we defer revenues and direct costs resulting from these contracts, and amortize these revenues and expenses into operations, over the term of the contracts, generally one to three years.

The data center infrastructure solutions and services market is rapidly evolving and highly competitive.  Our competition includes other independent storage, server and networking system integrators, high-end value-added resellers, distributors, consultants and the internal sales force of our suppliers.  Our ability to hire and retain qualified outside sales representatives and engineers with enterprise-class information storage, server and networking experience is critical to effectively compete in the marketplace and achieve our growth strategies.

In the past, we have experienced fluctuations in the timing of orders from our clients, and we expect to continue to experience these fluctuations in the future.  These fluctuations have resulted from, among other things, the time required to design, test and evaluate our data center infrastructure solutions before clients deploy them, the size of client orders, the complexity of our clients’ network environments, necessary system configuration to deploy our solutions and new product introductions by suppliers.  Current economic conditions and competition also affect our clients’ decisions and timing to place orders with us and the size of those orders.  As a result, our net sales may fluctuate from quarter to quarter.

Pending Merger . On November 6, 2016, we entered into the Merger Agreement with Insight Enterprises, Inc. and Reef Acquisition Co.  Please see Note 1 to our financial statements for further information.  The consummation of the Merger remains subject to certain customary closing conditions, including the approval of our shareholders and completion of regulatory review. Important information regarding certain risks associated with the Merger Agreement and Merger are discussed under the heading “Risk Factors” in Part I, Item 1A of this Form 10-Q.