ITEM
1A. RISK FACTORS
This
report and other documents we file with the Securities and Exchange Commission contain forward looking statements that are based
on current expectations, estimates, forecasts and projections about us, our future performance, our business, our beliefs and
our management’s assumptions. These statements are not guarantees of future performance and involve certain risks, uncertainties,
and assumptions that are difficult to predict. You should carefully consider the risks and uncertainties facing our business which
are set forth below. The risks described below are not the only ones facing us. Our business is also subject to risks that affect
many other companies, such as employment relations, general economic conditions, geopolitical events and international operations.
Further, additional risks not currently known to us or that we currently believe are immaterial also may impair our business,
operations, liquidity and stock price materially and adversely.
Our
success is in part dependent on the accuracy and proper utilization of our management information and communications systems.
We
have committed significant resources to the development of sophisticated systems that are used to manage our business. Our systems
support phone and web-based sales, marketing, purchasing, accounting, customer service, warehousing and distribution, and facilitate
the preparation of daily operating control reports which are designed to provide concise and timely information regarding key
aspects of our business. The systems allow us to, among other things, monitor sales trends, make informed purchasing decisions,
and provide product availability and order status information. In addition to the main computer systems, we have systems of networked
computers across all of our locations. We also use our management information systems to manage our inventory. We believe that
in order to remain competitive, we will need to upgrade our management information and communications systems on a regular basis,
which could require significant capital expenditures.
Our
success is dependent on the accuracy and proper utilization of our management information systems and our communications systems.
In addition to the costs associated with system upgrades, the transition to and implementation of new or upgraded solutions can
result in system delays or failures. We currently operate one of our management information systems using an HP3000 Enterprise
System, which was supported by HP until December 2010. We currently contract with a third party service provider specializing
in maintenance and support of this system to provide us adequate support until we finalize the upgrade of this system to the SAP
platform historically utilized by the En Pointe business. Any interruption, corruption, degradation or failure of our management
information systems or communications systems could adversely impact our ability to receive and process customer orders on a timely
basis.
In
addition to our systems upgrades that are currently being implemented, we also regularly upgrade our systems in an effort to better
meet the information requirements of our users, and believe that to remain competitive, it will be necessary for us to upgrade
these systems on a regular basis in the future. The implementation of any upgrades is complex, in part, because of the wide range
of processes and the multiple systems that may need to be integrated across our business.
In
connection with any system upgrades, we generally create a project plan to provide a reasonable allocation of resources to the
project; however, execution of any such plan, or a divergence from it, may result in cost overruns, project delays or business
interruptions. Furthermore, any divergence from any such project plan could affect the timing or the extent of benefits we may
expect to achieve from the system or any process efficiencies. Any such project delays, business interruptions or loss of expected
benefits could have a material adverse effect on our business, financial condition or results of operations.
Any
disruptions, delays or deficiencies in the design, operation or implementation of our various systems, or in the performance of
our systems, particularly any disruptions, delays or deficiencies that impact our operations, could adversely affect our ability
to effectively run and manage our business, including our ability to receive, process, ship and bill for orders in a timely manner
or our ability to properly manage our inventory or accurately present our inventory availability or pricing. We do not currently
have a redundant or back-up telephone system, nor do we have complete redundancy for our management information systems. Any interruption,
corruption, deficiency or delay in our management information systems, including those caused by natural disasters, could have
a material adverse effect on our business, financial condition or results of operations.
Changes
and uncertainties in the economic climate could negatively affect the rate of information technology spending by our customers,
which would likely have an impact on our business.
As
a result of the ongoing economic uncertainties, the direction and relative strength of the U.S. and Canadian economies remain
a considerable risk to our business, operating results and financial condition. This economic uncertainty could also increase
the risk of uncollectible accounts receivable from our customers. During previous economic downturns in the U.S., Canada, the
UK and elsewhere, customers generally reduced, often substantially, their rate of information technology spending. Additionally,
economic conditions and the level of consumer confidence has limited technology spending. Future changes and uncertainties in
the economic climate in the U.S., Canada, the UK and elsewhere could have a similar negative impact on the rate of information
technology spending of our current and potential customers, which would likely have a negative impact on our business, operating
results and financial condition, and could significantly hinder our growth and prevent us from achieving our financial performance
goals.
Our
earnings and growth rate could be adversely affected by negative changes in economic or geopolitical conditions
.
We
are subject to risks arising from adverse changes in domestic and global economic conditions and unstable geopolitical conditions.
If economic growth in the United States, Canada, the UK or other countries slows or declines, current and prospective customer
spending rates could be significantly reduced. This could result in reductions in sales of our products, longer sales and payment
cycles, slower adoption of new technologies and increased price competition, any of which could materially and adversely affect
our business, results of operations and financial condition. Weak general economic conditions or uncertainties in geopolitical
conditions could adversely impact our revenue, expenses and growth rate. In addition, our revenue, margins and earnings could
deteriorate in the future as a result of unfavorable economic or geopolitical conditions.
Our
revenue is dependent on sales of products from a small number of key manufacturers, and a decline in sales of products from these
manufacturers could materially harm our business.
Our
revenue is dependent on sales of products from a small number of key manufacturers and software publishers, including Adobe, Apple,
Cisco, Dell, Hewlett Packard Enterprise, HP Inc., Lenovo, Microsoft, Oracle, Samsung, Symantec and VMware. For example, products
manufactured by Microsoft represented approximately 11% and 13% of our net sales in the three months ended March 31, 2019 and
2018, respectively, and products manufactured by HP Inc. represented approximately 13% and 11% of our net sales in the three months
ended March 31, 2019 and 2018, respectively. A decline in sales of any of our key manufacturers’ products, whether due to
decreases in supply of or demand for their products, termination of any of our agreements with them, or otherwise, could have
a material adverse impact on our sales and operating results.
Certain
of our vendors provide us with incentives and other assistance that reduce our operating costs, and any decline in these incentives
and other assistance could materially harm our operating results.
Certain
of our vendors, including OEMs, software publishers and distribution partners, provide us with trade credit or substantial incentives
in the form of discounts, credits and cooperative advertising. We have agreements with many of our vendors under which they provide
us, or they have otherwise consistently provided us, with market development funds to finance portions of our advertising, marketing
and distribution costs based upon the amount of coverage we give to their respective products in our catalogs or other advertising
and marketing mediums. Any termination or interruption of our relationships with one or more of these vendors, or modification
of the terms or discontinuance of our agreements and market development fund programs and arrangements with these vendors, could
adversely affect our operating income and cash flow. For example, the amount of vendor consideration we receive from a particular
vendor may be impacted by a number of events outside of our control, including acquisitions, divestitures, management changes
or economic pressures affecting such vendor, any of which could materially affect the amount of vendor consideration we receive
from such vendor.
We
do not have long-term supply agreements or guaranteed price or delivery arrangements with our vendors.
In
most cases we have no guaranteed price or delivery arrangements with our vendors. As a result, we have experienced and may in
the future experience inventory shortages on certain products. Furthermore, our industry occasionally experiences significant
product supply shortages and customer order backlogs due to the inability of certain manufacturers to supply certain products
as needed. We cannot assure you that suppliers will maintain an adequate supply of products to fulfill our orders on a timely
basis, or at all, or that we will be able to obtain particular products on favorable terms or at all. Additionally, we cannot
assure you that product lines currently offered by suppliers will continue to be available to us. A decline in the supply or continued
availability of the products of our vendors, or a significant increase in the price of those products, could reduce our sales
and negatively affect our operating results.
Substantially
all of our agreements with vendors are terminable within 30 days.
Substantially
all of our vendor agreements are terminable upon 30 days’ notice or less. Vendors that currently sell their products or
services through us could decide to sell, or increase their sales of, their products or services directly or through other resellers
or channels. Any termination, interruption or adverse modification of our relationship with a key vendor or a significant number
of other vendors would likely adversely affect our operating income, cash flow and future prospects.
Our
success is dependent in part upon the ability of our vendors to develop and market products that meet changes in market demand,
as well as our ability to sell popular products from new vendors.
The
products and services we sell are generally subject to rapid technological change and related changes in marketplace demand. Our
success is dependent in part upon the ability of our vendors to develop and market products and services that meet these changes
in market demand. Our success is also dependent on our ability to develop relationships with and sell products and services from
new vendors that address these changes in market demand. To the extent products that address changes in marketplace demand are
not available to us, or are not available to us in sufficient quantities or on acceptable terms, we could encounter increased
price and other competition, which would likely adversely affect our business, financial condition and results of operations.
We
may not be able to maintain existing vendor relationships or preferred provider status with our vendors, or business sources,
which may affect our ability to offer a broad selection of products at competitive prices and negatively impact our results of
operations.
We
purchase products and services for resale both directly from manufacturers and software publishers and indirectly through distributors
and other sources, all of whom we consider our vendors. We also maintain certain qualifications and preferred provider status
with several of our vendors, which provides us with preferred pricing, vendor training and support, preferred access to products
and services, and other significant benefits. We also benefit from our involvement with, or qualification as a preferred provider
for, large contract vehicles or organizations as other indirect sources of business. In many cases, vendors require us to meet
certain minimum standards in order to retain these qualifications and preferred provider status. If we do not maintain our existing
relationships or preferred provider certifications or authorizations, or if we fail to build new relationships with vendors on
acceptable terms, including favorable pricing, vendor consideration or reseller qualifications, we may not be able to offer a
broad selection of products and services or continue to offer products and services from these vendors at competitive prices or
at all. From time to time, vendors may be acquired by other companies, terminate our right to sell some or all of their products,
modify or terminate our preferred provider or qualification status, change the applicable terms and conditions of sale or reduce
or discontinue the incentives or vendor consideration that they offer us. For example, one of our major vendors adopted heightened
sales growth and dedicated sales personnel standards for its preferred provider designation. Our failure to meet these heightened
standards could cause us to lose preferred provider status with the vendor. Any termination of our preferred provider status with
any of our major vendors, or our failure to build new vendor relationships, could have a negative impact on our operating results.
Additionally, some products are subject to manufacturer, publisher or distributor allocation, which limits the number of units
of those products that are available to us and may adversely affect our operating results.
Part
of our business strategy includes the opportunistic acquisition of other companies, and we may have difficulties integrating acquired
companies into our operations in a cost-effective manner, if at all
.
One
element of our business strategy involves the potential expansion through opportunistic acquisitions of businesses, assets, personnel
or technologies that allow us to complement our existing operations, expand our market coverage, enter new geographic markets,
or add new business capabilities. We continually evaluate and explore strategic opportunities as they arise, including business
combination transactions, strategic partnerships, and the purchase or sale of assets. Our acquisition strategy depends on the
availability of suitable acquisition candidates at reasonable prices and our ability to resolve challenges associated with integrating
acquired businesses into our existing business. Since 2015, we completed four strategic acquisitions and are focused on integrating
these acquisitions into our operations. No assurance can be given that the benefits or synergies we may expect from acquisitions
will be realized to the extent or in the time frame we anticipate. We may lose key employees, customers, distributors, vendors
and other business partners of the companies we acquire after announcement of acquisition plans. In addition, acquisitions may
involve a number of risks and difficulties, including expansion into new geographic markets and business areas in which our management
has limited prior experience, the diversion of management’s attention to the operations and personnel of the acquired company,
the integration of the acquired company’s personnel, operations and management information (ERP) systems, changing relationships
with customers, suppliers and strategic partners, differing regulatory requirements in new geographic markets and new business
areas, and potential short-term adverse effects on our operating results. These challenges can be magnified as the size of the
acquisition increases. Any delays or unexpected costs incurred in connection with the integration of acquired companies or otherwise
related to acquisitions could have a material adverse effect on our business, financial condition and results of operations.
Acquisitions
may require large one-time charges and can result in increased debt or other contingent liabilities, adverse tax consequences,
deferred compensation charges, the recording and later amortization of amounts related to deferred compensation and certain purchased
intangible assets, and the refinement or revision of fair value acquisition estimates following the completion of acquisitions,
any of which items could negatively impact our business, financial condition and results of operations. In addition, we may record
goodwill in connection with an acquisition and incur goodwill impairment charges in the future. Any of these charges could cause
the price of our common stock to decline.
An
acquisition could absorb substantial cash resources, require us to incur or assume debt obligations, or involve our issuance of
additional equity securities. If we issue equity securities in connection with an acquisition, we may dilute our common stock
with securities that have an equal or a senior interest in our company. If we incur additional debt to pay for an acquisition,
it may significantly reduce amounts that would otherwise be available under our credit facility, increase our interest expense,
leverage and debt service requirements and could negatively impact our ability to comply with applicable financial covenants in
our credit facility or limit our ability to obtain credit from our vendors. Acquired entities also may be highly leveraged or
dilutive to our earnings per share, or may have unknown liabilities. In addition, the combined entity may have lower revenues
or higher expenses and therefore may not achieve the anticipated results. Any of these factors relating to acquisitions could
have a material adverse impact on our business, financial condition and results of operations.
We
cannot assure you that we will be able to identify suitable acquisition opportunities, consummate any pending or future acquisitions
or that we will realize any anticipated benefits from any such acquisitions. Even if we do find suitable acquisition opportunities,
we may not be able to consummate the acquisitions on commercially acceptable terms, and any decline in the price of our common
stock may make it significantly more difficult and expensive to initiate or consummate additional acquisitions. We cannot assure
you that we will be able to implement or sustain our acquisition strategy or that our strategy will ultimately prove profitable.
Narrow
margins magnify the impact of variations in operating costs and of adverse or unforeseen events on operating results.
We
are subject to intense price competition with respect to the technology offerings we provide. As a result, our gross and operating
margins have historically been narrow, and we expect them to continue to be narrow. We have recently experienced increasing price
competition, which has a negative impact on our margins. Narrow margins magnify the impact of variations in operating costs and
of adverse or unforeseen events on operating results. Future increases in costs such as the cost of merchandise, wage levels,
shipping rates, freight costs and fuel costs may negatively impact our margins and profitability. We are not always able to raise
the sales price to offset cost increases. If we are unable to maintain our margins in the future, it could have a material adverse
effect on our business, financial condition or results of operations. In addition, because price is an important competitive factor
in our industry, we cannot assure you that we will not be subject to increased price competition in the future. If we become subject
to increased price competition in the future, we cannot assure you that we will not lose market share, that we will not be forced
to reduce our prices and further reduce our margins, or that we will be able to compete effectively.
We
experience variability in our net sales and net income on a quarterly basis as a result of many factors.
We
experience variability in our net sales and net income on a quarterly basis as a result of many factors. These factors include:
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the
relative mix of hardware products, software and services sold during the period;
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the
general economic environment and competitive conditions, such as pricing;
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the
timing of procurement cycles by our business, government and educational institution customers;
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seasonality
in customer spending and demand for technology offerings we provide;
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variability
in vendor programs;
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the
introduction of new and upgraded products, services or solutions;
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changes
in prices from our suppliers;
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promotions;
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the
loss or consolidation of significant suppliers or customers;
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our
ability to control costs;
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the
timing of our capital expenditures;
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the
condition of our industry in general;
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customer
acceptance of new purchasing models;
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deferral
of customer orders in anticipation of new offerings;
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product
or solution enhancements or operating system changes;
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any
inability on our part to obtain adequate quantities of products, services or solutions;
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delays
in the release by suppliers of new products, services or solutions and inventory adjustments;
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our
expenditures on new business ventures and acquisitions;
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performance
of acquired businesses;
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adverse
weather conditions that affect supply or customer response;
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distribution
or shipping to our customers; and
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geopolitical
events.
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Our
planned operating expenditures each quarter are based on sales forecasts for the quarter. If our sales do not meet expectations
in any given quarter, our operating results for the quarter may be materially adversely affected. Our narrow margins may magnify
the impact of these factors on our operating results. We believe that period-to-period comparisons of our operating results are
not necessarily a good indication of our future performance. In addition, our results in any quarterly period are not necessarily
indicative of results to be expected for a full fiscal year. In future quarters, our operating results may be below the expectations
of public market analysts or investors and as a result the market price of our common stock could be materially adversely affected.
Our
focus on commercial and public sector sales presents numerous risks and challenges, and may not improve our profitability or result
in expanded market share.
An
important element of our business is focused on commercial and public sector sales and related market share growth. In competing
in these markets, we face numerous risks and challenges, including competition from a wider range of sources and the need to continually
develop and enhance strategic relationships. We cannot assure you that our focus on commercial and public sector sales will result
in expanded market share or increased profitability. Furthermore, revenue from our public sector business is derived from sales
to federal, state and local governmental departments and agencies, as well as to educational institutions, through various contracts
and open market sales. Government contracting is a highly regulated area, and noncompliance with government procurement regulations
or contract provisions could result in civil, criminal, and administrative liability, including substantial monetary fines or
damages, termination of government contracts, and suspension, debarment or ineligibility from doing business with the government.
The effect of any of these possible actions by any governmental department or agency with which we contract could adversely affect
our business or results of operations. Moreover, contracting with governmental departments and agencies involves additional risks,
such as longer payment terms, limited recourse against the government agency in the event of a business dispute, requirements
that we provide representations, warranties and indemnities related to our offerings, the potential lack of a limitation of our
liability for damages from our product sales or our provision of services to the department or agency, and the potential for changes
in statutory or regulatory provisions that negatively affect the profitability of such contracts. Similarly, many large commercial
businesses also require us to regularly enter into complex contractual relationships involving various risks and uncertainties
such as requirements that we provide representations, warranties and indemnities to our customers and potential lack of limitation
of our liability for damages under some of such contracts. Additionally, our operating results from our Commercial segment are
impacted by certain commercial customer diverse supplier requirements and relationships we maintain with third party diverse supplier
partners. Changes in any of these diverse supplier customer requirements or failure of our diverse supplier relationships to satisfy
any such requirements at any time could have a material adverse effect on our results of operations or financial condition.
Our
strategy and investments in increasing the productivity of our account executives, and our focus on sales and delivery of technology
solutions may not improve our profitability or result in expanded market share.
We
have made and are currently making efforts to increase our market share by investing in training and retention of our sales force.
We have also incurred, and expect to continue to incur, significant expenses resulting from infrastructure investments related
to our sales force. Our customers are increasingly consuming IT in different and evolving ways and utilizing more elaborate solutions.
In response, we are investing in our capabilities and portfolio and are working with our customers to identify areas where they
can gain efficiencies by outsourcing to us traditional technology functions. Specifically, we are focused on and investing in
solutions, including around centers (which includes storage and security solutions), cloud computing, collaboration, virtualization,
secure mobility, borderless networks and enterprise software solutions. We cannot assure you that any of our investments in our
sales force or sales support resources or our focus on our services and solutions capabilities and portfolio will result in expanded
market share or increased profitability in the near or long term.
Our
financial performance could be adversely affected if we are not able to retain and increase the experience of our sales force
or if we are not able to maintain or increase their productivity.
Our
sales and operating results may be adversely affected if we are unable to increase the average tenure of our account executives
or if the sales volumes and profitability achieved by our account executives do not increase with their increased experience.
Existing
or future government and tax laws and regulations and related risks could expose us to liabilities or costly changes in our business
operations, and could reduce demand for our products and services.
We
may be subject to state or local taxes on income, gross receipts, sales or use or a similar measure. State and local governments
may seek to impose such taxes in cases where they believe the taxpayer may have a significant economic presence by reason of significant
sales to customers located in the states. The responsibility to pay or collect taxes has also been the subject of court actions
and various legislative efforts. There can be no assurance that these taxes will not be imposed upon us and our subsidiaries in
a manner that could materially adversely impact our financial condition or results of operations.
We
are subject to a number of general business laws and regulations, including laws and regulations specifically governing companies
that do business over the Internet. These laws and regulations may cover user privacy, marketing and promotional practices (including
electronic communications with our customers and potential customers), data protection and privacy, pricing, content, copyrights,
distribution, contracts and other communications, consumer protection, product safety, the provision of online payment services,
copyrights, patents and other intellectual property rights, unauthorized access (including the Computer Fraud and Abuse Act),
and the characteristics and quality of products and services. Additionally, some of our subsidiaries which are government contractors
or subcontractors are subject to laws and regulations related to companies that sell to the government, including but not limited
to regulations of the Department of Labor and laws and regulations related to our procurement of products and services and our
sales to the government.
In
addition, we may be subject to federal, state or local taxes on income, gross receipts, sales or use or a similar measure. State
and local governments may seek to impose such taxes in cases where they believe the taxpayer may have a sufficient economic presence
by reason of sales or services to customers located in the applicable jurisdiction. The responsibility to pay or collect taxes
has been the subject of court actions and various legislative efforts. There can be no assurance that these taxes or tax collection
obligations will not be imposed upon us and our subsidiaries in a manner that could materially adversely impact our financial
condition or results of operations.
While
we have sought to implement processes, programs and systems in an effort to achieve compliance with existing laws and regulations
applicable to our business, many of these laws and regulations are unclear and have yet to be interpreted by courts, or may be
subject to conflicting interpretations by courts or regulatory agencies. Further, no assurances can be given that new laws or
regulations will not be enacted or adopted, or that our processes, programs and systems will be sufficient to comply with present
or future laws or regulations, which might adversely affect our business, financial condition or results of operations.
The
Tax Cuts and Jobs Act of 2017 was approved by Congress and signed into law in December 2017. This legislation made significant
changes to the U.S. Internal Revenue Code. Such changes include a reduction in the corporate tax rate and limitations on certain
corporate deductions and credits, among other changes. Certain of these changes could have a negative impact on our business.
Moreover, further legislative and regulatory changes may be more likely in the current political environment, particularly to
the extent that Congress and the U.S. presidency are controlled by the same political party and significant reform of the tax
code has been described publicly as a legislative priority. Significant further changes to the tax code could have an adverse
impact on our business, financial condition and results of operations.
Such
existing and future laws and regulations may also impede our business. Additionally, it is not always clear how existing laws
and regulations apply to our businesses. Unfavorable resolution of these issues may expose us to liability and costly changes
in our business operations, and could reduce customer demand for our offerings.
Additionally,
although historically only a small percentage of our total sales in any given quarter or year are made to customers outside of
the continental United States, we recently entered the Canadian market with our acquisitions in Canada, which subjected us to
laws and regulations applicable to companies doing business in the multiple Canadian provinces. We also commenced operations in
the United Kingdom in the first quarter of 2017. Further, there is a possibility that other foreign jurisdictions may take the
position that our business is subject to their laws and regulations, which could impose restrictions or burdens on us and expose
us to tax and other potential liabilities and could also require costly changes to our business operations with respect to those
jurisdictions. In some cases, our sales related to foreign jurisdictions could also be subject to export control laws and foreign
corrupt practice laws and there is a risk that we could face allegations from U.S. or foreign governmental authorities alleging
our failure to comply with the requirements of such laws subjecting us to costly litigation and potential significant governmental
penalties or fines.
If
goodwill or intangible assets become impaired, we may be required to record a significant charge to earnings.
The
purchase price allocation for our historical acquisitions resulted in a material amount allocated to goodwill and intangible assets.
In accordance with GAAP, we review our intangible assets for impairment when events or changes in circumstances indicate the carrying
value may not be recoverable. We review the fair values of our goodwill and intangible assets with indefinite useful lives and
test them for impairment annually or whenever events or changes in circumstances indicate an impairment may have occurred. Factors
that may be considered a change in circumstances indicating that the carrying value of our goodwill or intangible assets may not
be recoverable include a decline in stock price and market capitalization, reduced future cash flow estimates, and slower growth
rates in our industry. We may be required to record a significant non-cash charge to earnings in our consolidated financial statements
during the period in which any impairment of our goodwill or intangible assets is determined, which could have a material adverse
effect on our results of operations.
If
significant negative industry or economic trends, including decreases in our market capitalization, slower growth rates or lack
of growth in our business occurs in the future it may indicate that impairment charges are required. If we are required to record
any impairment charges, this could have a material adverse effect on our consolidated financial statements. In addition, the testing
of goodwill for impairment requires us to make significant estimates about the future performance and cash flows of our company,
as well as other assumptions. These estimates can be affected by numerous factors, including changes in economic, industry or
market conditions, changes in underlying business operations, future reporting unit operating performance, existing or new product
market acceptance, changes in competition, or changes in technologies. Any changes in key assumptions, or actual performance compared
with those assumptions, about our business and future prospects or other assumptions could affect the fair value of one or more
reporting units, resulting in an impairment charge.
We
may not be able to maintain profitability on a quarterly or annual basis.
Our
ability to maintain profitability on a quarterly or annual basis given our planned business strategy depends upon a number of
factors discussed in these risk factors, including our ability to effectively compete in the marketplace with our competitors.
Our ability to maintain profitability on a quarterly or annual basis will also depend on our ability to manage and control operating
expenses and to generate and sustain adequate levels of revenue. Many of our expenses are fixed in the short term, and we may
not be able to quickly reduce spending if our revenue is lower than what we project. In addition, we may find that our business
plan costs more to execute than what we currently anticipate. Some of the factors that affect our ability to maintain profitability
on a quarterly or annual basis are beyond our control, including general economic trends and uncertainties.
Our
operating results are difficult to predict and may adversely affect our stock price.
Our
operating results have fluctuated in the past and are likely to vary significantly in the future based upon a number of factors,
many of which we cannot control. We operate in a highly dynamic industry and future results could be subject to significant fluctuations.
These fluctuations could cause us to fail to meet or exceed financial expectations of investors or analysts, which could cause
our stock price to decline rapidly and significantly. Revenue and expenses in future periods may be greater or less than revenue
and expenses in the immediately preceding period or in the comparable period of the prior year. Therefore, period-to-period comparisons
of our operating results are not necessarily a good indication of our future performance. Some of the factors that could cause
our operating results to fluctuate include:
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changes
in the mix of products, services or solutions that we sell;
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the
amount and timing of operating costs and capital expenditures relating to any expansion of our business operations and infrastructure;
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price
competition that results in lower sales volumes, lower profit margins, or net losses;
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the
availability of vendor programs, authorizations or certifications;
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our
ability to attract and retain key personnel and the related costs,
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fluctuations
in the demand for our products, services or solutions or overstocking or under-stocking of our products;
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economic
conditions;
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changes
in the amounts of information technology spending by our customers;
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the
amount and timing of advertising and marketing costs;
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fluctuations
in levels of inventory theft, damage or obsolescence that we incur;
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our
ability to successfully integrate operations and technologies from any past or future acquisitions or other business combinations;
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revisions
or refinements of fair value estimates relating to acquisitions or other business combinations;
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changes
in the number of visitors to our websites or our inability to convert those visitors into customers;
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technical
difficulties, including system or Internet failures;
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introduction
of new or enhanced products, services or solutions;
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fluctuations
in warehousing and shipping costs; and
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foreign
currency exchange rates.
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If
we fail to accurately predict and manage our inventory risks, our margins may decline as a result of required inventory write
downs due to lower prices obtained from older or obsolete products.
We
derive a significant amount of our gross sales from products sold out of owned inventory at our directly operated and distributor
partner warehouse and distribution facilities. We assume the inventory damage, theft and obsolescence risks, as well as price
erosion risks for products that are sold out of such inventory. These risks are especially significant because many of the products
we sell are characterized by rapid technological change, obsolescence and price erosion, and because at times we may stock large
quantities of particular types of inventory. There can be no assurance that we will be able to identify and offer products necessary
to remain competitive, maintain our margins, or avoid or minimize losses related to excess and obsolete inventory. We currently
have limited return rights with respect to products we purchase from some of our largest vendor partners, but these rights vary
by product line, are subject to specified conditions and limitations and can be terminated or changed at any time. We also recently
have decided to move more of our inventory warehousing and distribution functions to third party distributor partners in replacement
of our historic directly operated facility in Memphis Tennessee. Moving these operations to third party facilities will result
in greater dependence on these third parties for portions of our warehousing and distribution needs. As a result, we will now
be subject to third party contractual relationships for these replaced operations, which could result in future cost increases
and other contractual risk allocations which we have not historically faced and may not be able control.
We
may need additional financing and may not be able to raise additional financing on favorable terms or at all, which could increase
our costs, limit our ability to grow and dilute the ownership interests of existing stockholders.
We
require substantial working capital to fund our business. We believe that our current working capital, including our existing
cash balance, together with our expected future cash flows from operations and available borrowing capacity under our existing
credit facility, which functions as a working capital line of credit, will be adequate to support our current operating plans
for at least the next twelve months. However, if we need additional financing, such as for acquisitions or expansion of our business
or the businesses of our subsidiaries or to finance our operations during a significant downturn in sales or an increase in operating
expenses, there are no assurances that adequate financing will be available on acceptable terms, if at all. We may in the future
seek additional financing from public or private debt or equity financings to fund additional expansion, or take advantage of
strategic opportunities or favorable market conditions. There can be no assurance such financings will be available on terms favorable
to us or at all. To the extent any such financings involve the issuance of equity securities, existing stockholders could suffer
dilution. If we raise additional financing through the issuance of equity, equity-related or debt securities, those securities
may have rights, preferences or privileges senior to those of the rights of our common stock and our stockholders will experience
dilution of their ownership interests. If additional financing is required but not available, we would have to implement further
measures to conserve cash and reduce costs. However, there is no assurance that such measures would be successful. Our failure
to raise required additional financing could adversely affect our ability to maintain, develop or enhance our product offerings,
take advantage of future strategic opportunities, respond to competitive pressures or continue operations.
Economic
volatility and geopolitical uncertainty could result in disruptions of the capital and credit markets. Problems in these areas
could have a negative impact on our ability to obtain future financing if we need additional funds, such as for acquisitions or
expansion, to fund changes in our sales or an increase in our operating expenses, or to take advantage of strategic opportunities
or favorable market conditions. We may seek additional financing from public or private debt or equity issuances; however, there
can be no assurance that such financing will be available at acceptable terms, if at all. Also, there can be no assurance that
the cost or availability of future borrowings, if any, under our credit facility or in the debt markets will not be impacted by
disruptions in the capital and credit markets.
Rising
interest rates could negatively impact our results of operations and financial condition.
A
significant portion of our working capital requirements and our real estate acquisitions have historically been funded through
borrowings under our working capital credit facility or through long term notes. These facilities bear interest at variable rates
tied to the LIBOR or prime rate, and the long-term notes generally have initial terms of between five and seven years. If the
variable interest rates on our borrowings increase, we could incur greater interest expense than we have in the past. Rising interest
rates, and our increased interest expense that would result from them, could negatively impact our results of operations and financial
condition.
We
may be subject to claims regarding our intellectual property, including our business processes, or the products, services or solutions
we sell, any of which could result in expensive litigation, distract our management or force us to enter into costly royalty or
licensing agreements.
Third
parties have asserted, and may in the future assert, that our business or the technologies we use or sell infringe on their intellectual
property rights. As a result, we may be subject to intellectual property legal proceedings and claims in the ordinary course of
our business. We cannot predict whether third parties will assert additional claims of infringement against us in the future or
whether any future claims will prevent us from offering popular products or operating our business as planned. If we are forced
to defend against any third-party infringement claims, whether they are with or without merit or are determined in our favor,
we could face expensive and time-consuming litigation, which could result in the imposition of a preliminary injunction preventing
us from continuing to operate our business as currently conducted throughout the duration of the litigation or distract our technical
and management personnel. If we are found to infringe, we may be required to pay monetary damages, which could include treble
damages and attorneys’ fees for any infringement that is found to be willful, and either be enjoined or required to pay
ongoing royalties with respect to any technologies found to infringe. Further, as a result of infringement claims either against
us or against those who license technology to us, we may be required, or deem it advisable, to develop non-infringing technology,
which could be costly and time consuming, or enter into costly royalty or licensing agreements. Such royalty or licensing agreements,
if required, may be unavailable on terms that are acceptable to us, or at all. If a third party successfully asserts an infringement
claim against us and we are enjoined or required to pay monetary damages or royalties or we are unable to develop suitable non-infringing
alternatives or license the infringed or similar technology on reasonable terms on a timely basis, our business, results of operations
and financial condition could be materially harmed. Similarly, we may be required incur substantial monetary and diverted resource
costs in order to protect our intellectual property rights against infringement by others.
Furthermore,
we sell products, services and solutions manufactured, published and distributed by third parties, some of which may be defective.
If any product, service or solution that we sell were to cause physical injury or damage to property, the injured party or parties
could bring claims against us as the retailer of the product or solution. Our insurance coverage may not be adequate to cover
every claim that could be asserted. If a successful claim were brought against us in excess of our insurance coverage, it could
expose us to significant liability. Even unsuccessful claims could result in the expenditure of funds and management time and
could decrease our profitability.
Costs
and other factors associated with pending or future litigation could materially harm our business, results of operations and financial
condition.
From
time to time we receive claims and become subject to litigation, including consumer protection, employment, intellectual property
and other litigation and government or third party audits related to the conduct of our business. Additionally, we may from time
to time institute legal proceedings against third parties to protect our interests. For example, we are currently involved in
several disputes related to the En Pointe acquisition. These proceedings are described under the heading “
Legal Proceedings
”
in Part I, Item 1, Note 10 to the Notes to the Consolidated Financial Statements of this report. Any litigation, arbitration,
audit, investigation or other dispute resolution process that we become a party to could be costly and time consuming and could
divert our management and key personnel from our business operations. In connection with any such matters, we may be subject to
significant damages or equitable remedies relating to the operation of our business and could incur significant costs in asserting,
defending, or settling any such matters. We cannot determine with any certainty the costs or outcome of such pending or future
matters, and they may materially harm our business, results of operations or financial condition.
We
may fail to expand our hardware product, software or service categories and offerings, our websites or our processing systems
in a cost-effective and timely manner as may be required to efficiently operate our business.
We
may be required to expand or change our hardware product, software or service categories or offerings, our websites or our processing
systems in order to compete in our highly competitive and rapidly changing industry or to efficiently operate our business. Any
failure on our part to expand or change the way we do business in a cost-effective and timely manner in response to any such requirements
would likely adversely affect our operating results, financial condition or future prospects. Additionally, we cannot assure you
that we will be successful in implementing any such changes when and if they are required.
We
have generated substantial portions of our revenue in the past from the sale of computer hardware, software and accessories and
consumer electronics products. Expansion into new hardware product, software and service categories, including for example our
efforts to grow managed and advanced technology services and solutions, may require us to incur significant marketing expenses,
develop relationships with new vendors and comply with new regulations. In addition, demand for the solutions we sell to our customers
could decrease if we are unable to adapt in areas like cloud technology, IaaS, SaaS, PaaS, SDN or other emerging technologies.
We may lack the necessary expertise in a new category or offering to realize the expected benefits of that new category or offering.
These requirements could strain our managerial, financial and operational resources. Additional challenges that may affect our
ability to expand into new hardware product, software or service categories and offerings include our ability to:
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establish
or increase awareness of our new brands and categories and offerings;
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acquire,
attract and retain customers at a reasonable cost;
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achieve
and maintain a critical mass of customers and orders across all of our categories and offerings;
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attract
a sufficient number of new customers to whom any new categories and offerings are targeted;
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successfully
market our new categories or offerings to existing customers;
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maintain
or improve our margins and fulfillment costs;
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attract
and retain vendors to provide expanded lines of business to our customers on terms that are acceptable to us; and
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manage
our inventory in new categories and offerings.
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We
cannot be certain that we will be able to successfully address any or all of these challenges in a manner that will enable us
to expand our business in a cost-effective or timely manner. If our new categories or offerings are not received favorably, or
if our suppliers fail to meet our customers’ expectations, our results of operations would suffer and our reputation and
the value of the applicable new brand and our other brands could be damaged. The lack of market acceptance of our new categories
or our inability to generate satisfactory revenue from any such expanded categories or offerings to offset their cost could harm
our business, financial condition or results of operations.
The
evolution of cloud-based offerings may negatively impact our sales of hardware products, software and related services.
Our
customers are increasingly able to access technology solutions necessary to their operations through cloud-based offerings. Increasing
demand for cloud-based offerings may reduce demand for certain of our existing technology solution offerings. We are investing
in our cloud-based capabilities, including products and services related to our own direct and third-party cloud-based offerings,
such as our hybrid cloud data center and NOC services, Azure Cloud solutions, Office 365 and Enterprise Mobility Suite. Our agreements
with these vendor partners may impose obligations on our company to indemnify such partners from misuse of the contracted services
by our customers. We expect to continue to increasingly invest in our cloud-based capabilities in support of anticipated customer
evolution towards cloud-based solutions. There can be no assurance that our investments in cloud-based offerings will result in
improved sales or profitability, avoid unforeseen liabilities in connection with those cloud-based services, or allow us to offset
any reductions in sales of our more traditional hardware product, software and related service offerings which may result from
our customers’ increased adoption of cloud-based solutions. Any such reductions in sales or increase in liabilities may
have a material adverse effect on our business, financial condition or results of operations.
We
may not be able to attract and retain key personnel such as senior management, sales and services personnel or information technology
specialists.
Our
future performance will depend to a significant extent upon the efforts and abilities of certain key management and other personnel,
including Frank F. Khulusi, our Chairman of the Board and Chief Executive Officer, as well as other executive officers and senior
management. The loss of service of one or more of our key management members could have a material adverse effect on our business.
Our success and plans for future growth will also depend in part on our management’s continuing ability to hire, train and
retain skilled personnel in all areas of our business such as sales, services and IT personnel. For example, our management information
systems and processes require the services of employees with extensive knowledge of these systems and processes and the business
environment in which we operate, and in order to successfully implement and operate our systems and processes we must be able
to attract and retain a significant number of information technology specialists. We also require the services of personnel with
extensive knowledge related to our performance under various of our service contracts, which may contain service level performance
requirements and other obligations which are dependent on our ability to attract and retain such personnel. We may not be able
to attract, train and retain the skilled personnel required to, among other things, implement, maintain, and operate our information
systems and processes or to offer and support our managed and advanced technology solutions and service contracts, and any failure
to do so would likely have a material adverse effect on our operations.
If
we fail to achieve and maintain adequate internal controls, we may not be able to produce reliable financial reports in a timely
manner or prevent financial fraud.
We
monitor and periodically test our internal control procedures. We may from time to time identify deficiencies which we may not
be able to remediate in a timely or cost-effective manner. In addition, if we fail to achieve and maintain the adequacy of our
internal controls, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls
over financial reporting. Effective internal controls, particularly those related to revenue recognition, are necessary for us
to produce reliable financial reports and are important in helping prevent financial fraud. If we cannot provide reliable financial
reports on a timely basis or prevent financial fraud, our business and operating results could be harmed, investors could lose
confidence in our reported financial information, and the trading price of our stock could drop significantly.
Any
inability to effectively manage our growth and achieve economies of scale may prevent us from successfully expanding our business.
The
growth of our business has required us to make significant additions in personnel and has significantly increased our working
capital requirements. Although we have experienced significant sales growth in the past, such growth should not be considered
indicative of future sales growth. Such growth has resulted in new and increased responsibilities for our management personnel
and has placed and continues to place significant strain upon our management, operating and financial systems, and other resources.
Any future growth, whether organic or through acquisition, may result in increased strain. There can be no assurance that current
or future strain will not have a material adverse effect on our business, financial condition, and results of operations. Also
crucial to our success in managing our growth will be our ability to achieve additional economies of scale. We cannot assure you
that we will be able to achieve such economies of scale, and the failure to do so could have a material adverse effect upon our
business, financial condition or results of operations.
Our
advertising and marketing efforts may be costly and may not achieve desired results.
We
incur substantial expense in connection with our advertising and marketing efforts. Although we target our advertising and marketing
efforts on current and potential customers who we believe are likely to be in the market for the products we sell, we cannot assure
you that our advertising and marketing efforts will achieve our desired results. In addition, we periodically adjust our advertising
expenditures in an effort to optimize the return on such expenditures. Any decrease in the level of our advertising expenditures
which may be made to optimize such return could adversely affect our sales.
We
are exposed to the credit risk of some of our customers and to credit exposures in weakened markets, which could negatively impact
our business, operating results and financial condition.
Business
customers who qualify are provided credit terms and while we monitor individual customer payment capability and maintain reserves
we believe are adequate to cover exposure for doubtful accounts, we have exposure to credit risk in the event that customers fail
to meet their payment obligations. Additionally, to the degree that there may be tightness in the credit markets that makes it
more difficult for some customers to obtain financing, those customers’ ability to meet their payment obligations to us
could be adversely impacted, which in turn could have a material adverse impact on our business, operating results, and financial
condition.
Increased
product returns or a failure to accurately predict product returns could decrease our revenue and impact profitability.
We
make allowances for product returns in our consolidated financial statements based on historical return rates. We are responsible
for returns of certain products shipped from our distribution center, as well as products that are shipped to our customers directly
from our vendors. If our actual product returns significantly exceed our allowances for returns, our revenue and profitability
could decrease. In addition, because our allowances are based on historical return rates, the introduction of new merchandise
categories, new products, changes in our product mix, or other factors may cause actual returns to exceed return allowances, perhaps
significantly. In addition, any policies that we adopt that are intended to reduce the number of product returns may result in
customer dissatisfaction and fewer repeat customers.
Our
business may be harmed by fraudulent activities.
We
have received in the past, and anticipate that we will receive in the future, communications from customers due to purported fraudulent
activities, including fraudulent activities on our websites such as fraudulent credit card transactions. Negative publicity generated
as a result of fraudulent conduct by third parties could damage our reputation and diminish the value of our brand name. Fraudulent
activities could also subject us to losses and could lead to scrutiny from lawmakers and regulators regarding the operation of
our businesses, including the operation of our websites. We expect to continue to receive requests from customers for reimbursement
due to purportedly fraudulent activities or threats of legal action against us if no reimbursement is made.
Breaches
of data security could significantly impact our business and expose us to material costs and liability.
We
are subject to data security laws that are becoming more widespread and burdensome, and increasingly require notification of security
breaches to affected individuals, regulators and other third parties. At the same time, cyber attacks and other efforts by bad
actors to steal personal information or company proprietary information, and to disrupt service, are on the rise. Our systems
contain personal, financial and other information that is entrusted to us by our customers and employees, as well as financial,
proprietary, and other confidential information relating to our business. Despite the security measures we have in place, security
breaches involving our systems or the systems of our third-party vendors may occur, and could result in system and service disruptions
or the theft or disclosure of personal or confidential information. In addition to risks we face from cyber attacks or security
attacks directly targeted at our systems, we offer our products, services and solutions to companies, such as healthcare or financial
institutions, under contracts which may expose us to significant liabilities for data breaches or losses which could arise out
of or result from products, services or solutions we may sell to these institutions. As newer and more sophisticated technologies
evolve, and the portfolio of the service providers we share confidential information with grows, we could be exposed to increased
risks from breaches in security, including those from human error, negligence or mismanagement or from illegal or fraudulent acts,
such as cyberattacks. The occurrence of any of these security breaches, or the claim that our company has suffered such a security
breach, whether accurate or not, could result in adverse publicity, loss of customer confidence, increased costs, reduced sales
and profits, criminal penalties, and civil liabilities. In addition, in order to ensure customer confidence in our solutions and
services, we may choose to remediate actual or perceived security concerns by implementing further security measures which could
require us to expend significant resources. The FTC and state consumer protection authorities have brought a number of enforcement
actions against U.S. companies for alleged deficiencies in companies’ data security practices, and they may continue to
bring such actions. Enforcement actions, which may or may not be based upon actual cyber attacks, security breaches, or other
disclosures of personal information, present an ongoing risk to us, could result in a loss of customers, damage to our reputation
and monetary damages. This liability could also include claims for other misuses of personal information, including for unauthorized
marketing purposes. Other liability could include claims alleging misrepresentation or violation of our privacy and data security
practices. Any such liability could decrease our profitability and materially adversely affect our financial condition.
Laws
or regulations relating to privacy and data protection may adversely affect the growth of our business or our marketing efforts
and expose us to material costs and liability.
We
market to names in our proprietary customer database and to potential customers whose names we obtain from rented or exchanged
mailing lists. Worldwide public concern regarding personal privacy has subjected the rental and use of customer mailing lists
and other customer information to increased scrutiny and regulation. As a result, we are subject to increasing regulation relating
to privacy and the use of personal information. For example, we are subject to various telemarketing and anti-spam laws that regulate
the manner in which we may solicit future suppliers and customers. Such regulations, along with increased governmental or private
enforcement, may increase the cost of operating and growing our business. In addition, several states have proposed legislation
that would limit the uses of personal information gathered online or require online services to establish privacy policies. The
Federal Trade Commission has adopted regulations regarding the collection and use of personal identifying information obtained
from children under 13 years of age. Bills proposed in Congress would expand online privacy protections already provided to adults.
Moreover, in the United States, Canada, the United Kingdom, the European Union and elsewhere, laws and regulations, such as the
General Data Protection Regulation (GDPR), are becoming increasingly protective of consumer privacy, with a trend toward requiring
companies to establish procedures to notify users of privacy and security policies, to obtain consent from users for collection
and use of personal information, and to provide users with the ability to access, correct and delete personal information stored
by companies. Such privacy and data protection laws and regulations, and efforts to enforce such laws and regulations, may restrict
our ability to collect, use or transfer demographic and personal information from users, which could be costly or harm our marketing
efforts. Further, any violation of domestic or foreign privacy or data protection laws and regulations, including the U.S. national
do-not-call list and CAN-SPAM Act, the Canadian Anti-Spam Legislation, GDPR and the UK Privacy and Electronic Communications Regulations,
may subject us to fines, penalties and damages, which could decrease our revenue and profitability.
The
growth and demand for online commerce has and may continue to result in more stringent consumer protection laws that impose additional
compliance burdens on online companies. We also could incur additional costs and liability exposures if new laws or regulations
regarding the use of personal information are introduced. These privacy protection laws could result in substantial compliance
costs and could decrease our profitability. Further, additional regulation of the Internet may lead to a decrease in Internet
usage, which could adversely affect our business. Growing public concern about privacy and the collection, distribution and use
of information about individuals may subject us to increased regulatory scrutiny or litigation. In the past, the FTC has investigated
companies that have used personally identifiable information without permission or in violation of a stated privacy policy. If
we are accused of violating the stated terms of our privacy policy, we may face a loss of customers or damage to our reputation
and may be forced to expend significant amounts of financial and managerial resources to defend against these accusations, face
potential liability and be subject to extended regulatory oversight in the form of a long-term consent order.
The
security risks of eCommerce may discourage customers from purchasing products, services or solutions from us.
In
order for the eCommerce market to be successful, we and other market participants must be able to transmit confidential information
securely over public networks. Third parties may have the technology or know-how to breach the security of customer transaction
data. Any breach could cause customers to lose confidence in the security of our websites and choose not to purchase from our
websites. If someone is able to circumvent our security measures, he or she could destroy or steal valuable information or disrupt
our operations. Concerns about the security and privacy of transactions over the Internet could inhibit the growth of Internet
usage and eCommerce.
Credit
card fraud could decrease our revenue and profitability.
We
do not carry insurance against the risk of credit card fraud, so the failure to adequately control fraudulent credit card transactions
could reduce our revenues or increase our operating costs. We may in the future suffer losses as a result of orders placed with
fraudulent credit card data even though the associated financial institution approved payment of the orders. Under current credit
card practices, we may be liable for fraudulent credit card transactions. If we are unable to detect or control credit card fraud,
or if credit card companies require more burdensome terms or refuse to accept credit card charges from us, our revenue and profitability
could decrease.
Our
facilities and systems are vulnerable to natural disasters or other catastrophic events.
Our
headquarters, customer service center and a part of our infrastructure, including computer servers, are located near Los Angeles,
California and in other areas that are susceptible to earthquakes, floods, wildfires, severe weather and other natural disasters.
Our owned and third party distribution facilities, which house the product inventory from which a material amount of our orders
may be shipped, are located in areas that are susceptible to natural disasters and extreme weather conditions such as earthquakes,
fire, floods and major storms. Our operations in the Philippines are also in an area that is periodically subject to extreme weather.
A natural disaster or other catastrophic event, such as an earthquake, fire, flood, severe storm, break-in, terrorist attack or
other comparable events in the areas in which we operate could cause interruptions or delays in our business and loss of data
or render us unable to accept and fulfill customer orders in a timely manner, or at all. Our systems, including our management
information systems, websites and communications systems, are not fully redundant, and we do not have redundant geographic locations
or earthquake insurance. Further, power outages in any locations where our systems are located could disrupt our operations. Our
business interruption insurance may not adequately compensate us for losses that may occur.
We
rely on independent shipping companies to deliver the products we sell.
We
rely upon third party carriers, especially FedEx and UPS, for timely delivery of our product shipments. As a result, we are subject
to carrier disruptions and increased costs due to factors that are beyond our control, including employee strikes, inclement weather
and increased fuel costs. Any failure to deliver products to our customers in a timely and accurate manner may damage our reputation
and brand and could cause us to lose customers. We do not have a written long-term agreement with any of these third party carriers,
and we cannot be sure that these relationships will continue on terms favorable to us, if at all. If our relationship with any
of these third party carriers is terminated or impaired, or if any of these third parties are unable to deliver products for us,
we would be required to use alternative carriers for the shipment of products to our customers. We may be unable to engage alternative
carriers on a timely basis or on terms favorable to us, if at all. Potential adverse consequences include:
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reduced
visibility of order status and package tracking;
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delays
in order processing and product delivery;
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increased
cost of delivery, resulting in reduced margins; and
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reduced
shipment quality, which may result in damaged products and customer dissatisfaction.
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Furthermore,
shipping costs represent a significant operational expense for us. Any future increases in shipping rates could have a material
adverse effect on our business, financial condition and results of operations.
We
may not be able to compete successfully against existing or future competitors, which include some of our largest vendors.
The
business of direct marketing of the technology offerings we provide is highly competitive and driven in large part by price, products
and services availability, speed and accuracy of delivery and performance, effectiveness of sales and marketing programs, credit
availability, ability to tailor specific solutions to customer needs, quality and breadth of product lines and services, availability
of talented sales and service personnel and the availability of technical information. We compete with other solution providers,
including CDW, Insight Enterprises, Presidio and Connection. In addition, we compete with large value added resellers such as
CompuCom Systems and World Wide Technology, and computer retail stores and resellers, including superstores such as Best Buy and
Staples, certain hardware and software vendors such as Apple and Dell Computer that sell or are increasing sales directly to end
users, online resellers such as Amazon.com, government resellers such as CDWG and GovConnection, software focused resellers such
as SoftwareOne, Soft Choice and Software House International and other direct marketers and value added resellers of hardware,
software, technology services and computer-related and electronic products, including Amazon Business and Web Services, and Google
Business Services. In the technology solution provider and resale industries, barriers to entry are relatively low and the risk
of new competitors entering the market is high. Certain of our existing competitors have substantially greater financial resources
than we have. There can be no assurance that we will be able to continue to compete effectively against existing competitors,
consolidations of competitors or new competitors that may enter the market.
Furthermore,
the manner in which our technology offerings are distributed and sold is changing, and new methods of sale and distribution have
emerged and serve an increasingly large portion of the market. Computer hardware and software OEM vendors have sold, and may intensify
their efforts to sell, their products directly to end users. From time to time, certain OEM vendors have instituted programs for
the direct sale of large quantities of hardware and software to certain large business accounts. These types of programs may continue
to be developed and used by various vendors. Software publishers also may attempt to increase the volume of software products
distributed electronically directly to end users’ personal computers. Any of these competitive programs, if successful,
could have a material adverse effect on our business, financial condition or results of operations.
We
are exposed to the risks of business and other conditions in Asia, Canada and the United Kingdom.
All
or portions of certain of the products we sell are produced, or have major components produced, in Asia. We engage in U.S. dollar
denominated transactions with U.S. divisions and subsidiaries of companies located in that region as well. We also entered the
Canadian market in 2015 with our Acrodex and Systemax acquisitions and the UK market in 2017. As a result, we may be indirectly
affected by risks associated with international events, including economic and labor conditions, such as fluctuating oil prices,
political instability, tariffs and taxes, availability of products, natural disasters and currency fluctuations in the U.S. dollar
versus the regional currencies. In the past, countries in Asia have experienced volatility in their currency, banking and equity
markets. In addition, the referendum in the UK electing to withdraw from the European Union has created significant uncertainty
about the future relationship between the UK and the European Union, including with respect to the laws and regulations that will
apply as the UK determines which European Union laws to replace or replicate in the event of a withdrawal. Future volatility in
any of these international markets could adversely affect the supply and price of the products we sell and their components and
ultimately, our results of operations.
We
also maintain an office in the Philippines and have historically received third party back office support from Pakistan, as a
result of our En Pointe acquisition, and we may increase our offshore operations in the future. Establishing and transitioning
offshore operations may entail considerable expense before we realize cost savings, if any, from these initiatives. The risks
associated with doing business overseas and international events could prevent us from realizing the expected benefits from our
international operations or any other offshore operations that we may establish.
The
increasing significance of our foreign operations exposes us to risks that are beyond our control and could affect our ability
to operate successfully.
In
order to enhance the cost-effectiveness of our operations, we have increasingly sought to shift portions of our operations to
jurisdictions with lower cost structures than that available in the United States. The transition of even a portion of our business
operations to new facilities in a foreign country involves a number of logistical and technical challenges that could result in
operational interruptions, which could reduce our revenues and adversely affect our business. We may encounter complications associated
with the set-up, migration and operation of business systems and equipment in a new facility. This could result in disruptions
that could damage our reputation and otherwise adversely affect our business and results of operations.
To
the extent that we shift any operations or labor offshore to jurisdictions with lower cost structures, we may experience challenges
in effectively managing those operations as a result of several factors, including time zone differences and regulatory, legal,
cultural and logistical issues. Additionally, the relocation of labor resources may have a negative impact on our existing employees,
which could negatively impact our operations. If we are unable to effectively manage our offshore personnel and any other offshore
operations, our business and results of operations could be adversely affected.
We
cannot be certain that any shifts in our operations to offshore jurisdictions will ultimately produce the expected cost savings.
We cannot predict the extent of government support, availability of qualified workers, future labor rates, or monetary and economic
conditions in any offshore locations where we may operate. Although some of these factors may influence our decision to establish
or increase our offshore operations, there are inherent risks beyond our control, including:
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political
unrest or uncertainties;
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wage
inflation;
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exposure
to foreign currency fluctuations;
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tariffs
and other trade barriers; and
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foreign
regulatory restrictions and unexpected changes in regulatory environments.
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We
will likely be faced with competition in these offshore markets for qualified personnel, and we expect this competition to increase
as other companies expand their operations offshore. If the supply of such qualified personnel becomes limited due to increased
competition or otherwise, it could increase our costs and employee turnover rates. One or more of these factors or other factors
relating to foreign operations could result in increased operating expenses and make it more difficult for us to manage our costs
and operations, which could cause our operating results to decline and result in reduced revenues.
International
operations expose us to currency exchange risk and we cannot predict the effect of future exchange rate fluctuations on our business
and operating results.
We
have operation centers in Canada and the Philippines that have historically provided back-office administrative support and customer
service support, and we recently began selling technology solutions in the Canadian market in connection with three business acquisitions
and launched a new business in the United Kingdom in 2017. Our international operations are sensitive to currency exchange risks.
We have currency exposure arising from both sales and purchases denominated in foreign currencies, as well as intercompany transactions.
Significant changes in exchange rates between foreign currencies in which we transact business and the U.S. dollar may adversely
affect our results of operations and financial condition. Historically, we have not entered into any hedging activities, and,
to the extent that we continue not to do so in the future, we may be vulnerable to the effects of currency exchange-rate fluctuations.
In
addition, our international operations also expose us to currency fluctuations as we translate the financial statements of our
foreign operations to the U.S. dollar. Although the effect of currency fluctuations on our financial statements has not generally
been material in the past, there can be no guarantee that the effect of currency fluctuations will not be material in the future.
We
are subject to risks associated with consolidation within our industry.
Many
technology solution providers are consolidating operations and acquiring or merging with other providers to achieve economies
of scale, expanded product and service offerings, and increased efficiency. The current industry reconfiguration and the trend
towards consolidation could cause the industry to become even more competitive, further increase pricing pressures and make it
more difficult for us to maintain our operating margins or to increase or maintain the same level of net sales or gross profit.
Declining prices, resulting in part from technological changes, may require us to sell a greater number of products, services
or solutions to achieve the same level of net sales and gross profit. Such a trend could make it more difficult for us to continue
to increase our net sales and earnings growth. In addition, growth in the information technology market has slowed. If the growth
rate of the information technology market were to further decrease, our business, financial condition and operating results could
be materially adversely affected.
If
we are unable to provide satisfactory customer service and support, we could lose customers or fail to attract new customers.
Our
ability to provide satisfactory levels of customer service depends, to a large degree, on the efficient and uninterrupted operation
of our customer service and support operations. Any material disruption or slowdown in our order processing systems resulting
from labor disputes, telephone or Internet failures, upgrading our management information systems, power or service outages, natural
disasters or other events could make it difficult or impossible to provide adequate customer service and support. Furthermore,
we may be unable to attract and retain adequate numbers of competent customer service representatives and relationship managers
for our business customers, each of which is essential in creating a favorable interactive customer experience. If we are unable
to continually provide adequate staffing and training for our customer service and support operations, our reputation could be
seriously harmed and we could lose customers or fail to attract new customers. In addition, if our e-mail and telephone call volumes
exceed our present system capacities, we could experience delays in placing orders, responding to customer inquiries and addressing
customer concerns. Because our success depends largely on keeping our customers satisfied, any failure to provide high levels
of customer service would likely impair our reputation and decrease our revenues.
Following
our acquisition of En Pointe, we received third party back office support in Pakistan to supplement our captive support operations
in other geographies. The agreement for these outsourced services in Pakistan expired in the third quarter of 2017. We have transitioned
these IT, accounting, customer service and order management and other support services to our wholly-owned service operations
in the Philippines and other geographies. Any transition of historical support operations involves risks of business disruption
and management distraction. We cannot be certain that any such transition in our support operations will ultimately produce the
expected benefits to our business or our customers.
Our
stock price may be volatile.
We
believe that certain factors, such as sales of our common stock into the market by existing stockholders, fluctuations in our
quarterly operating results, changes in market conditions affecting stocks of computer hardware and software manufacturers and
resellers generally and companies in the Internet and eCommerce industries in particular, could cause the market price of our
common stock to fluctuate substantially. Other factors that could affect our stock price include, but are not limited to, the
following:
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failure
to meet investors’ expectations regarding our operating performance;
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changes
in securities analysts’ recommendations or estimates of our financial performance;
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publication
of research reports by analysts;
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changes
in market valuations of similar companies;
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announcements
by us or our competitors of significant contracts, acquisitions, commercial relationships, joint ventures or capital commitments;
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actual
or anticipated fluctuations in our operating results;
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litigation
developments; and
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general
economic and market conditions or other economic factors unrelated to our performance, including disruptions in the capital
and credit markets.
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The
stock market in general, and the stocks of computer and software resellers, and companies in the Internet and electronic commerce
industries in particular, and other technology or related stocks, have in the past experienced extreme price and volume fluctuations
which have been unrelated to corporate operating performance. Such market volatility may adversely affect the market price of
our common stock. In the past, following periods of volatility in the market price of a public company’s securities, securities
class action litigation has often been instituted against that company. Such litigation, if asserted against us, could result
in substantial costs to us and cause a likely diversion of our management’s attention from the operations of our company.
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