pfsw-10q_20150630.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2015

OR

¨

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 000-28275

 

PFSweb, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

75-2837058

(State of Incorporation)

 

(I.R.S. Employer I.D. No.)

 

505 Millennium Drive, Allen, Texas

 

75013

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code: (972) 881-2900

 

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  ¨

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate website, 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  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer.

 

Large accelerated filer

 

¨

 

Accelerated filer

 

x

 

Non-accelerated filer

 

¨

 

Smaller Reporting Company

 

¨

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

At August 5, 2015 there were 18,031,738 shares of registrant’s common stock outstanding.

 

 

 

 


 

PFSWEB, INC. AND SUBSIDIARIES

Form 10-Q

June 30, 2015

INDEX

 

PART I. FINANCIAL INFORMATION

 

Page

Number

 

Item 1.

Financial Statements:

 

 

 

 

Consolidated Balance Sheets as of June 30, 2015 (Unaudited) and December 31, 2014

 

3

 

 

Unaudited Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2015 and 2014

 

4

 

 

Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014

 

5

 

 

Notes to Unaudited Consolidated Financial Statements

 

6

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

20

 

Item 3.

Quantitative and Qualitative Disclosure about Market Risk

 

28

 

Item 4.

Controls and Procedures

 

28

 

PART II. OTHER INFORMATION

 

 

Item 1.

 

Legal Proceedings

 

29

Item 1A.

 

Risk Factors

 

29

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

30

Item 3.

 

Defaults Upon Senior Securities

 

30

Item 4.

 

Mine Safety Disclosure

 

30

Item 5.

 

Other Information

 

30

Item 6.

 

Exhibits

 

31

 

SIGNATURES

 

33

 

 

 

2


PART I. FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

PFSweb, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Data)

 

 

(Unaudited)

 

 

 

 

 

 

June 30,

 

 

December 31,

 

 

2015

 

 

2014

 

ASSETS

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

Cash and cash equivalents

$

15,721

 

 

$

18,128

 

Restricted cash

 

374

 

 

 

521

 

Accounts receivable, net of allowance for doubtful accounts of $446 and $447 at

   June 30, 2015 and December 31, 2014, respectively

 

42,961

 

 

 

59,126

 

Inventories, net of reserves of $635 and $768 at June 30, 2015 and December 31,

   2014, respectively

 

10,333

 

 

 

10,534

 

Other receivables

 

4,565

 

 

 

5,638

 

Prepaid expenses and other current assets

 

4,551

 

 

 

7,103

 

Total current assets

 

78,505

 

 

 

101,050

 

PROPERTY AND EQUIPMENT, net

 

23,912

 

 

 

26,604

 

IDENTIFIABLE INTANGIBLES, net

 

1,813

 

 

 

2,170

 

GOODWILL

 

10,322

 

 

 

8,366

 

OTHER ASSETS

 

2,101

 

 

 

2,556

 

Total assets

$

116,653

 

 

$

140,746

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

Current portion of long-term debt and capital lease obligations

$

5,717

 

 

$

6,850

 

Trade accounts payable

 

27,839

 

 

 

38,842

 

Deferred revenue

 

6,806

 

 

 

9,098

 

Accrued expenses

 

24,124

 

 

 

28,473

 

Total current liabilities

 

64,486

 

 

 

83,263

 

LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, less current portion

 

3,739

 

 

 

4,062

 

DEFERRED REVENUE

 

4,481

 

 

 

5,355

 

DEFERRED RENT

 

4,561

 

 

 

4,870

 

OTHER LIABILITIES

 

368

 

 

 

3,091

 

Total liabilities

 

77,635

 

 

 

100,641

 

 

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY:

 

 

 

 

 

 

 

Preferred stock, $1.00 par value; 1,000,000 shares authorized; none issued or

   outstanding

 

 

 

 

 

Common stock, $0.001 par value; 35,000,000 shares authorized; 17,511,982 and

   17,047,093 shares issued at June 30, 2015 and December 31, 2014,

   respectively; and 17,478,515 and 17,013,622 outstanding at June 30, 2015

   and December 31, 2014, respectively

 

17

 

 

 

17

 

Additional paid-in capital

 

132,631

 

 

 

129,457

 

Accumulated deficit

 

(93,519

)

 

 

(89,926

)

Accumulated other comprehensive income

 

14

 

 

 

682

 

Treasury stock at cost, 33,467 shares

 

(125

)

 

 

(125

)

Total shareholders’ equity

 

39,018

 

 

 

40,105

 

Total liabilities and shareholders’ equity

$

116,653

 

 

$

140,746

 

 

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

 

 

3


PFSWEB, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Per Share Data)

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product revenue, net

$

13,658

 

 

$

18,120

 

 

$

30,312

 

 

$

39,842

 

Service fee revenue

 

39,075

 

 

 

27,384

 

 

 

75,783

 

 

 

54,982

 

Pass-through revenue

 

10,443

 

 

 

8,539

 

 

 

20,927

 

 

 

16,448

 

Total revenues

 

63,176

 

 

 

54,043

 

 

 

127,022

 

 

 

111,272

 

COSTS OF REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of product revenue

 

12,911

 

 

 

17,039

 

 

 

28,619

 

 

 

37,555

 

Cost of service fee revenue

 

26,645

 

 

 

19,160

 

 

 

51,800

 

 

 

38,380

 

Cost of pass-through revenue

 

10,443

 

 

 

8,539

 

 

 

20,927

 

 

 

16,448

 

Total costs of revenues

 

49,999

 

 

 

44,738

 

 

 

101,346

 

 

 

92,383

 

Gross profit

 

13,177

 

 

 

9,305

 

 

 

25,676

 

 

 

18,889

 

SELLING, GENERAL AND ADMINISTRATIVE

   EXPENSES, including stock based compensation expense

   of $1,150 and $862 in the three months ended

   June 30, 2015 and 2014, respectively, and $1,954 and

   $1,656 in the six months ended June 30, 2015 and 2014,

   respectively.

 

14,676

 

 

 

11,485

 

 

 

28,290

 

 

 

22,507

 

Loss from operations

 

(1,499

)

 

 

(2,180

)

 

 

(2,614

)

 

 

(3,618

)

INTEREST EXPENSE, net

 

223

 

 

 

173

 

 

 

541

 

 

 

316

 

Loss from operations before income taxes

 

(1,722

)

 

 

(2,353

)

 

 

(3,155

)

 

 

(3,934

)

INCOME TAX EXPENSE

 

178

 

 

 

42

 

 

 

438

 

 

 

271

 

NET LOSS

$

(1,900

)

 

$

(2,395

)

 

$

(3,593

)

 

$

(4,205

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET LOSS PER SHARE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

(0.11

)

 

$

(0.14

)

 

$

(0.21

)

 

$

(0.25

)

Diluted

$

(0.11

)

 

$

(0.14

)

 

$

(0.21

)

 

$

(0.25

)

WEIGHTED AVERAGE NUMBER OF SHARES

   OUTSTANDING:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

17,368

 

 

 

16,736

 

 

 

17,257

 

 

 

16,630

 

Diluted

 

17,368

 

 

 

16,736

 

 

 

17,257

 

 

 

16,630

 

COMPREHENSIVE LOSS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

$

(1,900

)

 

$

(2,395

)

 

$

(3,593

)

 

$

(4,205

)

Foreign currency translation adjustment

 

238

 

 

 

(40

)

 

 

(668

)

 

 

(98

)

TOTAL COMPREHENSIVE LOSS

$

(1,662

)

 

$

(2,435

)

 

$

(4,261

)

 

$

(4,303

)

 

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

 

 

 

4


PFSweb, Inc. and Subsidiaries

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

 

 

Six Months Ended

 

 

June 30,

 

 

2015

 

 

2014

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net loss

$

(3,593

)

 

$

(4,205

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

6,564

 

 

 

5,768

 

Gain on sale of fixed assets

 

20

 

 

 

 

Provision for doubtful accounts

 

16

 

 

 

78

 

Provision for excess and obsolete inventory

 

9

 

 

 

5

 

Deferred income taxes

 

39

 

 

 

39

 

Stock-based compensation expense

 

1,954

 

 

 

1,656

 

Non-cash compensation expense

 

87

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Restricted cash

 

34

 

 

 

(32

)

Accounts receivable

 

15,607

 

 

 

15,068

 

Inventories

 

109

 

 

 

400

 

Prepaid expenses, other receivables and other assets

 

3,854

 

 

 

(499

)

Deferred rent

 

(282

)

 

 

125

 

Accounts payable, deferred revenue, accrued expenses and other

   liabilities

 

(18,895

)

 

 

(13,433

)

Net cash provided by operating activities

 

5,523

 

 

 

4,970

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Purchases of property and equipment

 

(1,946

)

 

 

(2,925

)

Acquisitions, net of cash acquired

 

(2,921

)

 

 

 

Net cash used in investing activities

 

(4,867

)

 

 

(2,925

)

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Net proceeds from issuance of common stock

 

1,189

 

 

 

788

 

Decrease (Increase) in restricted cash

 

112

 

 

 

(107

)

Payments on capital lease obligations

 

(1,081

)

 

 

(1,238

)

Payments on debt, net

 

(2,212

)

 

 

(606

)

Net cash used in financing activities

 

(1,992

)

 

 

(1,163

)

 

 

 

 

 

 

 

 

EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS

 

(1,071

)

 

 

(105

)

 

 

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

(2,407

)

 

 

777

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, beginning of period

 

18,128

 

 

 

22,418

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, end of period

$

15,721

 

 

$

23,195

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION

 

 

 

 

 

 

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

Property and equipment acquired under long-term debt and capital leases

$

1,637

 

 

$

969

 

 

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

 

 

 

5


 

PFSweb, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

 

1. OVERVIEW AND BASIS OF PRESENTATION

PFSweb, Inc. and its subsidiaries are collectively referred to as the “Company”; “Supplies Distributors” refers to Supplies Distributors, Inc. and its subsidiaries; “Retail Connect” refers to PFSweb Retail Connect, Inc.; “REV” collectively refers to REV Solutions, Inc. and REVTECH Solutions India Private Limited; “LAL” refers to LiveAreaLabs, Inc., “Moda” refers to Moda Superbe Limited, and “PFSweb” refers to PFSweb, Inc. and its subsidiaries, excluding Supplies Distributors and Retail Connect.

PFSweb Overview

PFSweb is a global provider of omni-channel commerce solutions, including a broad range of technology, infrastructure and professional services, to major brand name companies and others seeking to optimize their supply chain and to enhance their online and traditional business channels and initiatives in the United States, Canada, and Europe. PFSweb’s service offerings include website design, creation and integration, digital agency and marketing, eCommerce technologies, order management, customer care, logistics and fulfillment, financial management and professional consulting.

Supplies Distributors Overview

Supplies Distributors and PFSweb operate under distributor agreements with Ricoh Company Limited and Ricoh USA, Inc., a strategic business unit within the Ricoh Family Group of Companies, (collectively hereafter referred to as “Ricoh”), under which Supplies Distributors acts as a distributor of various Ricoh products. The majority of Supplies Distributors’ revenue is generated by its sale of product purchased from Ricoh.

Supplies Distributors has obtained financing to fund the working capital requirements for the sale of primarily Ricoh products. Pursuant to the transaction management services agreements between PFSweb and Supplies Distributors, PFSweb provides to Supplies Distributors transaction management and fulfillment services, such as managed web hosting and maintenance, procurement support, web-enabled customer contact center services, customer relationship management, financial services including billing and collection services, information management, and international distribution services. Supplies Distributors does not have its own sales force and relies upon Ricoh’s sales force and product demand generation activities for its sale of Ricoh products. Supplies Distributors sells its products in the United States, Canada and Europe.

All of the agreements between PFSweb and Supplies Distributors were made in the context of a related party relationship and were negotiated in the overall context of PFSweb’s and Supplies Distributors’ arrangement with Ricoh. Although management believes the terms of these agreements are generally consistent with fair market values, there can be no assurance that the prices charged to or by each company under these arrangements are not higher or lower than the prices that may be charged by, or to, unaffiliated third parties for similar services. All of these transactions are eliminated upon consolidation.

Acquisition of REV

On September 3, 2014, Priority Fulfillment Services, Inc. (“PFS”), a wholly-owned subsidiary of PFSweb, acquired the outstanding capital stock of REV, which provides eCommerce website technical design, development and support services, enabling retailers, manufacturers and suppliers to optimize the customer experience across multiple channels.  REV maintains operations in the United States and India.  The initial consideration paid for the shares was $3.2 million in cash payments.  The purchase agreement provides for future earn-out payments (“REV Earn-out Payments”) payable in 2015 and 2016 based on REV’s achievement of certain 2014 and 2015 financial targets (the “2014 REV Earn-out Payments” and “2015 REV Earn-out Payments”, respectively), in each case, subject to guaranteed minimum and maximum payments and possible offsets for indemnification and other claims arising under the purchase agreement.  During the three months ended June 30, 2015, the Company paid $1.1 million and issued 27,407 shares of common stock of the Company (approximately $0.3 million in value as of payment date) in payment of the 2014 REV Earn-out Payments.  At PFS’ election, up to $0.2 million of the 2015 REV Earn-out Payments are payable in unregistered shares of common stock of the Company. As of June 30, 2015, the Company has recognized a total current liability of $1.7 million applicable to the 2015 REV Earn-out Payments which have a guaranteed minimum of $0.7 million and maximum of $1.8 million.

The transaction was accounted for using the purchase method of accounting for business combinations and, accordingly, the assets acquired and liabilities assumed, including an allocation of purchase price, and the results of operations of REV have been included in the Company's consolidated financial statements since the date of acquisition. The Company determined fair value using a combination of the discounted cash flow, market multiple and market capitalization valuation methods.

6


PFSweb, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

 

The following table summarizes the estimated fair value of the tangible and intangible assets acquired and liabilities assumed (in thousands):

 

Cash and cash equivalents

$

765

 

Accounts receivable

 

1,753

 

Property and equipment

 

289

 

Identifiable intangibles

 

1,019

 

Other assets

 

16

 

Total assets acquired

 

3,842

 

Total liabilities assumed

 

655

 

Net assets acquired

 

3,187

 

Goodwill

 

2,756

 

Total purchase price

$

5,943

 

 

Purchase price for REV is as follows (in thousands):

 

Number of shares of common stock issued

 

27,407

 

Multiplied by PFSweb Inc.'s stock price

$

10.95

 

Share consideration for settlement of performance-based contingent payments

$

300

 

Aggregate cash payments

 

4,254

 

Performance-based contingent payments (based on fair value at acquisition date)

 

1,389

 

Total purchase price

$

5,943

 

 

The excess of the purchase price over the fair value of the net identifiable assets acquired and liabilities assumed was allocated to goodwill. Total goodwill of $2.8 million, none of which is deductible for tax purposes, is not being amortized but is subject to an annual impairment test using a fair-value-based approach.

The Company is amortizing the identifiable intangible assets acquired using a pattern in which the economic benefit of the assets are expected to be realized by the Company over their estimated remaining useful lives. There are no residual values for any of the intangible assets subject to amortization acquired during the REV acquisition.                                                                                                 

Definite lived intangible assets acquired in the REV acquisition consist of (in thousands):

 

 

 

 

 

 

 

June 30, 2015

 

 

Estimated

 

 

Fair Value

 

 

Accumulated

 

 

Net Carrying

 

 

Useful Life

 

 

at Acquisition

 

 

Amortization

 

 

Value

 

 

from Acquisition

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-compete agreements

 

$

94

 

 

$

(37

)

 

$

57

 

 

1-3.5 years

Leasehold

 

 

45

 

 

 

(15

)

 

 

30

 

 

2.5 years

Customer relationships

 

 

880

 

 

 

(233

)

 

 

647

 

 

6 years

Total definite lived intangible assets

 

$

1,019

 

 

$

(285

)

 

$

734

 

 

 

Acquisition of LAL

On September 22, 2014, PFS acquired the outstanding capital stock of LAL, which provides digital agency services including strategy, branding, website design, visual design, copywriting, interactive development and support services primarily to manufacturers and retailers.  LAL operates in the United States. Consideration paid for the shares included an initial $4.0 million cash payment and 54,604 unregistered shares of common stock of the Company (approximately $0.5 million in value as of acquisition date).  The purchase agreement provides for future earn out payments (“LAL Earn-out Payments”) payable in 2015 and 2016 based on LAL’s achievement of certain 2014 and 2015 financial targets (the “2014 LAL Earn-out Payments” and “2015 LAL Earn-out Payments,” respectively), in each case, subject to a maximum payment and possible offsets for indemnification and other claims arising under the purchase agreement. During the three months ended June 30, 2015, the Company paid $1.0 million for the 2014 LAL Earn-out Payments.  As of June 30, 2015, the Company has recognized a total current liability of $1.8 million applicable to the projected 2015 LAL Earn-out Payments with a maximum payment of $2.0 million. At PFS’ election, up to 25% of the 2015 LAL Earn-out Payments are payable in unregistered shares of common stock of the Company.

7


PFSweb, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

 

The transaction was accounted for using the purchase method of accounting for business combinations and, accordingly, the assets acquired and liabilities assumed, including an allocation of purchase price, and the results of operations of LAL have been included in the Company's consolidated financial statements since the date of acquisition. The Company determined fair value using a combination of the discounted cash flow, market multiple and market capitalization valuation methods.

The following table summarizes the estimated fair value of the tangible and intangible assets acquired and liabilities assumed (in thousands):

 

Cash

$

30

 

Accounts receivable, net

 

1,299

 

Property and equipment

 

253

 

Identifiable intangibles

 

1,290

 

Other assets

 

28

 

Total assets acquired

 

2,900

 

Total liabilities assumed

 

1,617

 

Net assets acquired

 

1,283

 

Goodwill

 

5,610

 

Total purchase price

$

6,893

 

 

Purchase price for LAL is as follows (in thousands, except share data):

 

Number of shares of common stock issued

 

54,604

 

Multiplied by PFSweb Inc.'s stock price

$

9.96

 

Share consideration

$

544

 

Aggregate cash payments

 

4,950

 

Performance-based contingent payments (based on fair value at acquisition date)

 

1,399

 

Total purchase price

$

6,893

 

 

The excess of the purchase price over the fair value of the net identifiable assets acquired and liabilities assumed was allocated to goodwill. Total goodwill of $5.6 million, none of which is deductible for tax purposes, is not being amortized but is subject to an annual impairment test using a fair-value-based approach.

The Company is amortizing the identifiable intangible assets acquired using a pattern in which the economic benefit of the assets are expected to be realized by the Company over their estimated remaining useful lives. There are no residual values for any of the intangible assets subject to amortization acquired during the LAL acquisition.

Definite lived intangible assets acquired in the LAL acquisition consist of (in thousands):

 

 

 

 

 

 

 

June 30, 2015

 

 

Estimated

 

 

Fair Value

 

 

Accumulated

 

 

Net Carrying

 

 

Useful Life

 

 

at Acquisition

 

 

Amortization

 

 

Value

 

 

from Acquisition

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-compete agreements

 

$

150

 

 

$

(32

)

 

$

118

 

 

3.5 years

Trade name

 

 

150

 

 

 

(50

)

 

 

100

 

 

2.25 years

Customer relationships

 

 

990

 

 

 

(234

)

 

 

756

 

 

6 years

Total definite lived intangible assets

 

$

1,290

 

 

$

(316

)

 

$

974

 

 

 

Acquisition of Moda

On June 11, 2015, PFS acquired the outstanding capital stock of Moda, an eCommerce system integrator and consultancy that provides unique digital experiences for fashion brands and retailers.  Moda maintains primary operations in London.  Consideration paid for the shares included an initial £650,000 (approximately $1.0 million) cash payment and 16,116 unregistered shares of Company stock (approximately $0.3 million in value as of the acquisition date).  The purchase agreement provides for (i) a further adjustment based on Moda’s shareholders’ equity balance as of the date of acquisition and (ii) future earn-out payments (“Moda Earn-out Payments”) payable in 2016 and 2017 based on Moda’s achievement of certain 2015 and 2016 financial targets, with no

8


PFSweb, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

 

guaranteed minimum and an aggregate maximum each year of £500,000 (approximately $0.8 million), in each case, subject to possible offsets for indemnification and other claims arising under the purchase agreement.  At PFS’ election, up to 25% of each of the 2015 and 2016 Moda Earn-out Payments are payable in restricted shares of common stock of the Company.

The transaction was accounted for using the purchase method of accounting for business combinations and, accordingly, the assets acquired and liabilities assumed, including a preliminary allocation of purchase price, and the results of operations of Moda have been included in the Company's consolidated financial statements since the date of acquisition. The following table summarizes the preliminary unaudited, estimated fair value of the tangible and intangible assets acquired and liabilities assumed. This allocation requires the significant use of estimates and is based on the information available to management at the time these financial statements were prepared. As the acquisition was only recently completed, the Company has not yet completed its assessment of the fair value of the tangible and intangible assets acquired, nor recorded the potentially related amortization expense applicable to such assets, and liabilities assumed.  As such, the estimated purchase price in excess of net assets acquired and liabilities assumed has initially been recorded as goodwill and intangible assets. Goodwill is not deductible for tax purposes and will not be amortized but is subject to annual impairment tests using a fair-value-based approach. The Company is in the process of finalizing the purchase price allocation and, accordingly, the following preliminary allocation of the purchase price is subject to adjustment.

The following table summarizes the unaudited estimated fair value of the tangible and intangible assets acquired and liabilities assumed (in thousands):

 

Cash and cash equivalents

$

126

 

Accounts receivable

 

335

 

Property and equipment

 

27

 

Other assets

 

23

 

Total assets acquired

 

511

 

Total liabilities assumed

 

542

 

Net liabilities assumed

 

(31

)

Goodwill and intangible assets

 

1,957

 

Total purchase price

$

1,926

 

 

The estimated purchase price for Moda is as follows (in thousands, except share data):

 

Number of shares of common stock issued

 

16,116

 

Multiplied by PFSweb Inc.'s stock price

$

14.60

 

Share consideration

$

235

 

Aggregate cash payments

 

1,005

 

Performance-based contingent payments (based on fair value at acquisition date)

 

686

 

Total purchase price

$

1,926

 

Pro Forma Information

The following table presents selected pro forma information, for comparative purposes, assuming the acquisitions of REV and LAL had occurred on January 1, 2014 (unaudited) and now include the impact of the acquisition related amortization of intangible assets (approximately $0.2 million per quarter), which were previously omitted (in thousands, except per share amounts):

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2014

 

 

2014

 

Total revenues

$

58,239

 

 

$

118,780

 

Net loss

 

(1,934

)

 

 

(3,938

)

Basic and diluted net loss per share

 

(0.12

)

 

 

(0.24

)

 

The unaudited pro forma information combines the historical unaudited consolidated results of the Company’s operations and REV’s and LAL’s operations for the three and six months ended June 30, 2014 giving effect to the acquisitions and related events as if they had been consummated on January 1, 2014.  The unaudited pro forma total revenues and pro forma net loss are not necessarily indicative of the consolidated results of operations for future periods or the results of operations that would have been realized had the

9


PFSweb, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

 

Company consolidated REV and LAL during the period noted.  Moda did not meet the significance test requirements in order to be included in the pro forma presentation above.

Definite Lived Intangible Asset Amortization

The Company recognized $0.2 million and $0.5 million of amortization expense, related to the REV and LAL definite lived intangible assets in selling, general and administrative expenses in three and six months ended June 30, 2015, respectively. The estimated amortization expense for each of the next five years is as follows (in thousands):

 

2015

$

951

 

2016

 

533

 

2017

 

345

 

2018

 

200

 

2019

 

138

 

Basis of Presentation

The interim consolidated financial statements as of June 30, 2015, and for the three and six months ended June 30, 2015 and 2014, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and are unaudited. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to the rules and regulations promulgated by the SEC. In the opinion of management and subject to the foregoing, the unaudited interim consolidated financial statements of the Company include all adjustments necessary for a fair presentation of the Company’s financial position as of June 30, 2015, its results of operations for the three and six months ended June 30, 2015 and 2014 and its cash flows for the six months ended June 30, 2015 and 2014. Results of the Company’s operations for interim periods may not be indicative of results for the full fiscal year.

 

2. SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of consolidated financial statements and related disclosures in conformity with U.S. GAAP requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. The recognition and allocation of certain revenues and selling, general and administrative expenses in these consolidated financial statements also require management estimates and assumptions.

Estimates and assumptions about future events and their effects cannot be determined with certainty. The Company bases its estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances. These estimates may change as new events occur, as additional information is obtained and as the operating environment changes. These changes have been included in the consolidated financial statements as soon as they became known. In addition, management is periodically faced with uncertainties, the outcomes of which are not within its control and will not be known for prolonged periods of time. These uncertainties are discussed in this report and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 in the section entitled “Risk Factors.” Based on a critical assessment of accounting policies and the underlying judgments and uncertainties affecting the application of those policies, management believes the Company’s consolidated financial statements are fairly stated in accordance with U.S. GAAP, and provide a fair presentation of the Company’s financial position and results of operations.

Revenue and Cost Recognition

The Company derives revenue primarily from services provided under contractual arrangements with its clients or from the sale of products under its distributor agreements. The following revenue recognition policies define the manner in which the Company accounts for sales transactions.

10


PFSweb, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

 

The Company recognizes revenue when persuasive evidence of a sales arrangement exists, product shipment or delivery has occurred or services are rendered, the sales price or fee is fixed or determinable, and collectability is reasonably assured.

In instances where revenue is derived from sales of third-party vendor services, the Company records revenue on a gross basis when the Company is a principal to the transaction and net of costs when the Company is acting as an agent between the customer or client and the vendor.  The Company considers several factors to determine whether it is a principal or an agent, most notably whether the Company is the primary obligor to the vendor or customer, has established its own pricing and has inventory and credit risks, if applicable.

Product Revenue Activity

Depending on the terms of the customer arrangement, Supplies Distributors recognizes product revenue and product cost either upon the shipment of product to customers or when the customer receives the product. Supplies Distributors permits its customers to return product for credit against other purchases, which include returns for defective products (that Supplies Distributors then returns to the manufacturer) and incorrect shipments. Supplies Distributors provides a reserve for estimated returns and allowances and offers terms to its customers that it believes are standard for its industry.

Freight costs billed to customers are reflected as components of product revenue. Freight costs incurred are recorded as a component of cost of goods sold.

Under its distributor agreements, Supplies Distributors bills Ricoh for reimbursements of certain expenses, including: pass-through customer marketing programs, including rebates and co-op funds; certain freight costs; direct costs incurred in passing on any price decreases offered by Ricoh to Supplies Distributors or its customers to cover price protection and certain special bids; the cost of products provided to replace defective product returned by customers; and certain other expenses as defined. Supplies Distributors records these reimbursable amounts as they are incurred as other receivables in the consolidated balance sheet with a corresponding reduction in either inventory or cost of product revenue. Supplies Distributors also records pass-through customer marketing programs as a reduction of both product revenue and cost of product revenue.

Service Fee Revenue Activity

The Company’s service fee revenue primarily relates to its distribution services, order management/customer care services, professional digital agency and technology services. The Company typically charges its service fee revenue on either a cost-plus basis, a percent of shipped revenue basis, on a time and materials, project or retainer basis for professional services, or a per transaction basis, such as a per item basis for fulfillment services or a per labor hour basis for web-enabled customer contact center services. Additional fees are billed for other services.

The Company evaluates its contractual arrangements to determine whether or not they include multiple service elements.  Revenue recognition is determined for the separate service elements of the contract in accordance with the requirements of Accounting Standards Codification 605, “Revenue Recognition.” A deliverable constitutes a separate unit of accounting when it has standalone value and there are no return rights or other contingencies present for the delivered elements. The Company allocates revenue to each element based on estimated selling price. Each of the Company’s client contracts, and the related services, is unique, with individual needs and criteria customized for each client.  Each client engagement is scoped and priced separately and as such the Company is not able to establish vendor specific objective evidence of fair value for its services, nor is third-party evidence available to establish stand-alone selling prices. Accordingly the Company uses management’s best estimate of selling price for the deliverables. The Company establishes its estimates considering internal factors such as margin objectives, pricing practices and controls as well as market conditions such as competitor pricing strategies.

Distribution services relate primarily to inventory management, product receiving, warehousing and fulfillment (i.e., picking, packing and shipping) and facilities and operations management. Service fee revenue for these activities is recognized as earned, which is either (i) on a per transaction basis or (ii) at the time of product fulfillment, which occurs at the completion of the distribution services.

Order management/customer care services relate primarily to taking customer orders for the Company’s clients’ products. These services also include addressing customer questions related to orders, as well as cross-selling/up-selling activities. Service fee revenue for this activity is recognized as the services are rendered. Fees charged to the client are on a per transaction basis based on either (i) a pre-determined fee per order or fee per telephone minutes incurred, (ii) a per dedicated agent fee, or (iii) are included in the product fulfillment service fees that are recognized on product shipment.

11


PFSweb, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

 

Professional consulting and technology service revenues primarily relate to design, implementation, service and support of eCommerce platforms, website design and solutions and quality control for the Company’s clients.  Additionally, the Company provides digital agency services that enable client marketing programs to attract new customers, convert buyers and increase website value. These fees are typically charged on either a per labor hour basis, or transaction basis, a dedicated resource model, a fixed price arrangement, or a percent of merchandise shipped basis. Service fee revenue for this activity is generally recognized as the services are rendered.

The Company performs front-end set-up and integration services to support client eCommerce plaftorms and websites. When the Company determines that these front-end set-up and integration services do not meet the criteria for recognition as a separate unit of accounting, the Company defers the start-up fees received and the related costs, and recognizes them over the contract term, which the Company believes approximates the performance period. When the Company determines that these front-end set-up and integration services do meet the criteria for recognition as a separate unit of accounting, for time and material arrangements, the Company recognizes revenue as services are rendered and costs as they are incurred. For fixed-price arrangements, if reasonable and reliable cost estimates for a project cannot be made, the Company uses the completed contract method to recognize revenues and costs. If reasonable and reliable costs estimates for a project can be made, the Company recognizes revenue over the contract term on a proportional performance basis, as determined by the relationship of actual costs incurred compared to the estimated total contract costs.

The Company’s billings for reimbursement of out-of-pocket expenses, including travel and certain third-party vendor expenses such as shipping and handling costs and telecommunication charges, are included in pass-through revenue. The related reimbursable costs are reflected as cost of pass-through revenue.

The Company’s cost of service fee revenue, representing the cost to provide the services described above, is recognized as incurred. Cost of service fee revenue also includes certain costs associated with technology collaboration and ongoing technology support that include maintenance, web hosting and other ongoing programming activities. These activities are primarily performed to support the distribution and order management/customer care services and are recognized as incurred.

Accounts Receivable

The Company recognizes revenue and records trade accounts receivable, pursuant to the methods described above, when collectability is reasonably assured. Collectability is evaluated in the aggregate and on an individual customer or client basis taking into consideration payment due date, historical payment trends, current financial position, results of independent credit evaluations and payment terms. Related reserves are determined by either using percentages applied to certain aged receivable categories based on historical results, reevaluated and adjusted as additional information is received, or a specific identification method. After all attempts to collect a receivable have failed, the receivable is written off against the allowance for doubtful accounts.

Deferred Revenues and Deferred Costs

The Company primarily performs its services under multiple-year contracts, certain of which include early termination provisions, and clients are obligated to pay for services performed. In conjunction with these long-term contracts, the Company sometimes receives start-up fees to cover its implementation costs, including certain technology infrastructure and development costs. When the Company determines that these start-up and integration activities do not meet the criteria for recognition as a separate unit of accounting, the Company defers the start-up fees received, and the related costs, and recognizes them over the contract term, which the Company believes approximates the performance period. The amortization of deferred revenue is included as a component of service fee revenue. The amortization of deferred implementation costs is included as a cost of service fee revenue. To the extent implementation costs for non-technology infrastructure and development exceed the corresponding fees received, the excess costs are expensed as incurred.

Investment in Subsidiaries

PFS has made advances to Supplies Distributors that are evidenced by a Subordinated Demand Note (the “Subordinated Note”). Under the terms of certain of the Company’s debt facilities, the outstanding balance of the Subordinated Note cannot be increased to more than $5.0 million or decreased to less than $2.5 million without prior approval of certain of the Company’s lenders. As of June 30, 2015 and December 31, 2014, the outstanding balance of the Subordinated Note was $2.5 million. The Subordinated Note is eliminated in the Company’s consolidated financial statements.

12


PFSweb, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

 

Concentration of Business and Credit Risk

One service fee client relationship represented approximately 14% of the Company’s consolidated total net revenues, including pass-through revenue, during the six months ended June 30, 2015.  No customer or service fee client exceeded 10% of consolidated accounts receivable.

A summary of the nonaffiliated customer and client concentrations as a percentage of product revenue and service fee revenue, respectively, is as follows:

 

 

Six Months Ended

 

 

June 30,

 

 

2015

 

 

2014

 

Product Revenue (as a percentage of total Product Revenue):

 

 

 

 

 

 

 

Customer 1

 

15

%

 

 

12

%

Customer 2

 

14

%

 

 

12

%

Service Fee Revenue (as a percentage of total Service Fee Revenue):

 

 

 

 

 

 

 

Client 1

 

15

%

 

 

 

 

The Company currently anticipates that its product revenue from the customers identified above will decline during the next twelve months.

The Company has provided certain collateralized guarantees of its subsidiaries’ financings and credit arrangements. These subsidiaries’ ability to obtain financing on similar terms would be significantly impacted without these guarantees.

The Company has multiple arrangements with International Business Machines Corporation (“IBM”) and Ricoh. These arrangements include Supplies Distributors’ distributor agreements and certain of Supplies Distributors’ working capital financing agreements. The majority of Supplies Distributors’ revenue is generated by its sale of product purchased from Ricoh. Supplies Distributors also relies upon Ricoh’s sales force and product demand generation activities and the discontinuance of such services would have a material impact upon Supplies Distributors’ business. In addition, Supplies Distributors has product sales to IBM and Ricoh business affiliates.

As a result of certain operational restructuring of its business, Ricoh has implemented, and will continue to implement, certain changes in the sale and distribution of Ricoh products. The changes have resulted, and are expected to continue to result, in reduced revenues and profitability for Supplies Distributors.

Inventories

Inventories (all of which are finished goods) are stated at the lower of weighted average cost or market. The Company establishes inventory reserves based upon estimates of declines in values due to inventories that are slow moving or obsolete, excess levels of inventory or values assessed at lower than cost.

Supplies Distributors assumes responsibility for slow-moving inventory under its Ricoh distributor agreements, subject to certain termination rights, but has the right to return product rendered obsolete by engineering changes, as defined. In the event PFS, Supplies Distributors and Ricoh terminate the distributor agreements, the agreements provide for the parties to mutually agree on a plan of disposition of Supplies Distributors’ then existing inventory.

Operating Leases

The Company leases certain real estate for its warehouse, call center and corporate offices, as well as certain equipment, under non-cancelable operating leases that expire at various dates through 2024. Management expects that, in the normal course of business, leases that expire will be renewed or replaced by other similar leases. The Company recognizes escalating lease payments on a straight-line basis over the term of each respective lease with the difference between cash payments and rent expense recognized being recorded as deferred rent in the accompanying consolidated balance sheets.

13


PFSweb, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

 

Property and Equipment

The Company’s property held under capital leases totaled approximately $4.7 million and $4.8 million, net of accumulated amortization of approximately $3.6 million and $4.0 million, at June 30, 2015 and December 31, 2014, respectively. Depreciation and amortization expense related to capital leases during the six months ended June 30, 2015 and 2014 was $1.0 million and $1.2 million, respectively.

Income Taxes

The Company records a tax provision primarily associated with state income taxes and its foreign operations. The Company has recorded a valuation allowance for the majority of its domestic net deferred tax assets, which are primarily related to its net operating loss carryforwards and for certain foreign deferred tax assets.

Cash Paid for Interest and Taxes

The Company made payments for interest of approximately $0.3 million in each of the six month periods ended June 30, 2015 and 2014. Income taxes of approximately $0.7 million and $0.4 million were paid by the Company during the six month periods ended June 30, 2015 and 2014, respectively.

Impact of Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which outlines a single, comprehensive model for entities to use in accounting for revenue arising from contracts with customers. ASU 2014-09 is applicable for fiscal years beginning after December 15, 2016, including interim periods therein, and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption.  Early adoption is not permitted. The proposed guidance (ASU 2014-09), if approved, would allow a one-year deferral of adoption.  The Company is currently evaluating the impact of the new guidance on the consolidated financial statements and related disclosures.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”) which will require management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. ASU 2014-15 is effective for annual and interim periods beginning after December 15, 2016. The Company currently intends to adopt ASU 2014-15 as of and for the annual period ending December 31, 2016 and does not expect the adoption of this standard to have any impact on its consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, Interest – Imputation of Interest  (Topic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”) which will require debt issuance costs related to a  recognized debt liability be presented on the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs is not affected by ASU 2015-03.  This guidance is effective for annual and interim periods beginning after December 15, 2015, and early adoption is permitted. The Company currently expects to adopt ASU 2015-03 during the quarter ending September 30, 2015 by recognizing debt issuance costs as a direct deduction of the related debt liability.

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, which modifies existing requirements regarding measuring inventory at the lower of cost or market. Under existing standards, the market amount requires consideration of replacement cost, net realizable value (NRV), and NRV less an approximately normal profit margin. The new ASU replaces market with NRV, defined as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This eliminates the need to determine and consider replacement cost or NRV less an approximately normal profit margin when measuring inventory. This standard is effective for the Company prospectively beginning January 1, 2017, with early adoption permitted. The Company is currently assessing this ASU’s impact on the Company’s consolidated financial statements.

 

3. NET LOSS PER COMMON SHARE

Basic and diluted net loss per common share are computed by dividing net loss by the weighted-average number of common shares outstanding for the reporting period. Stock options not included in the calculation of diluted net loss per common share for the six months ended June 30, 2015, and 2014 were 1.3 million and 1.8 million, respectively, as the effect would be anti-dilutive.

14


PFSweb, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

 

 

4. STOCK AND STOCK OPTIONS

On March 23, 2015, pursuant to the Company’s Employee Stock and Incentive Plan, as amended and restated (“the Plan”), the Company issued approximately 12,000 Other Stock-Based Awards and approximately 38,000 Restricted Stock Unit Awards (as such terms are defined in the Plan) to certain of the Company’s executive officers and senior management. The Restricted Stock Unit Awards are subject to three year vesting based on continued employment.

In March 2015, the Company issued Restricted Stock Units and Performance-Based Share Awards (as such terms are defined in the Plan) to the Company’s executives and senior management.  Under the terms of the 2015 awards, the number of restricted stock units and performance shares that each such individual may receive is subject to, and calculated by reference to, the achievement by the Company of a performance goal measured by a range of targeted financial performance, as defined, for 2015, as well as, for certain of the restricted stock units, individual performance goals, as defined.  Assuming achievement of the highest financial and individual performance goal, the aggregate maximum number of restricted stock units is 86,500 and the aggregate maximum number of performance shares is approximately 280,000, which performance shares are subject to annual vesting based upon continued employment, and for certain of the performance shares, the comparative performance (on an annual and cumulative basis) of the Company’s common stock on NASDAQ compared to the Russell Micro Cap Index.

During the six months ended June 30, 2015 the Company issued an aggregate of 156,000 options to purchase shares of common stock, which generally vest over a three-year period.

Total stock-based compensation expense was $2.0 million and $1.7 million for the six month periods ended June 30, 2015 and 2014, respectively, and was included as a component of selling, general and administrative expenses in the consolidated statements of operations.

 

5. VENDOR FINANCING

Supplies Distributors has a short-term credit facility with IBM Credit LLC to finance its distribution of Ricoh products in the United States, providing financing for eligible Ricoh inventory and certain receivables up to $15.0 million. The agreement has no stated maturity date and provides either party the ability to exit the facility following a 90-day notice. Given the structure of this facility and as outstanding balances, which represent inventory purchases, are repaid within twelve months, the Company has classified the outstanding amounts under this facility, which were $7.9 million and $8.4 million as of June 30, 2015 and December 31, 2014, respectively, as accounts payable in the consolidated balance sheets. As of June 30, 2015, Supplies Distributors had $2.5 million of available credit under this facility. The credit facility contains cross default provisions, various restrictions upon the ability of Supplies Distributors to, among other things, merge, consolidate, sell assets, incur indebtedness, make loans and payments to related parties (including entities directly or indirectly owned by PFSweb, Inc.), provide guarantees, make investments and loans, pledge assets, make changes to capital stock ownership structure and pay dividends. The credit facility also contains financial covenants, such as annualized revenue to working capital, net profit after tax to revenue, and total liabilities to tangible net worth, as defined, and is secured by certain of the assets of Supplies Distributors, as well as a collateralized guaranty of PFSweb. Additionally, PFS is required to maintain a minimum Subordinated Note receivable balance from Supplies Distributors of $2.5 million and the Company is required to maintain a minimum shareholders’ equity of $18.0 million. Borrowings under the credit facility accrue interest, after a defined free financing period, at prime rate plus 0.5% (3.75% as of June 30, 2015). The facility also includes a monthly service fee.

In August 2015, the Company amended this facility with IBM Credit LLC.  See Note 9 below.

 

15


PFSweb, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

 

6. DEBT AND CAPITAL LEASE OBLIGATIONS;

Outstanding debt and capital lease obligations consist of the following (in thousands):

 

 

June 30,

 

 

December 31,

 

 

2015

 

 

2014

 

Loan and security agreements

 

 

 

 

 

 

 

Supplies Distributors

$

2,167

 

 

$

3,267

 

PFS

 

1,704

 

 

 

1,890

 

Master lease agreements

 

5,370

 

 

 

5,589

 

Other

 

215

 

 

 

166

 

Total

 

9,456

 

 

 

10,912

 

Less current portion of long-term debt

 

5,717

 

 

 

6,850

 

Long-term debt, less current portion

$

3,739

 

 

$

4,062

 

 

Loan and Security Agreement – Supplies Distributors

Supplies Distributors has a loan and security agreement with Wells Fargo Bank, National Association (“Wells Fargo”) to provide financing for up to $12 million of eligible accounts receivable in the United States and Canada. As of June 30, 2015, Supplies Distributors had $2.9 million of available credit under this agreement. The Wells Fargo facility expires on the earlier of March 2016 or the date on which the parties to the Ricoh distributor agreement no longer operate under the terms of such agreement and/or Ricoh no longer supplies products pursuant to such agreement. Borrowings under the Wells Fargo facility accrue interest at prime rate plus 0.25% to 0.75% (3.75% as of June 30, 2015) or Eurodollar rate plus 2.5% to 3.0%, dependent on excess availability and subject to a minimum of 3.0%, as defined. The interest rate as of June 30, 2015 was 3.75% for $1.2 million of outstanding borrowings and 3.0% for $1.0 million of outstanding borrowings. As of December 31, 2014, the interest rate was 3.75% for $2.3 million of outstanding borrowings and 3.0% for $1.0 million of outstanding borrowings. This agreement includes a monthly service fee and contains cross default provisions, various restrictions upon the ability of Supplies Distributors to, among other things, merge, consolidate, sell assets, incur indebtedness, make loans and payments to related parties (including entities directly or indirectly owned by PFSweb, Inc.), provide guarantees, make investments and loans, pledge assets, make changes to capital stock ownership structure and pay dividends. This agreement also contains financial covenants, such as minimum net worth, as defined, and is secured by all of the assets of Supplies Distributors, as well as a collateralized guaranty of PFS. Additionally, PFS is required to maintain a Subordinated Note receivable balance from Supplies Distributors of no less than $2.5 million, may not maintain restricted cash of more than $5.0 million and is restricted with regard to transactions with related parties, indebtedness and changes to capital stock ownership structure. Supplies Distributors has entered into blocked account agreements with its banks pursuant to which a security interest was granted to Wells Fargo for all U.S. and Canadian customer remittances received in specified bank accounts.

In August 2015, the Company replaced this Wells Fargo facility with a new credit facility with Regions Bank.  See Note 9 below.

Loan and Security Agreement – PFS

PFS has a Loan and Security Agreement (“Comerica Agreement”) with Comerica Bank (“Comerica”). The Comerica Agreement provides for up to $17.0 million ($20.0 million during certain seasonal peak months) of eligible accounts receivable financing (“Working Capital Advances”) through March 2016. The Comerica Agreement also provided for up to $2.0 million of eligible equipment advances (“Equipment Advances”) through March 2015, with a final maturity date of September 15, 2017. As of June 30, 2015, PFS had $16.9 million of available credit under the Working Capital Advance portion of this facility and no available credit for Equipment Advances. Effective March 31, 2014, borrowings under the Working Capital Advance portion of the Comerica Agreement accrue interest at prime rate plus 1% (4.25% at June 30, 2015) while the Equipment Advances accrue interest at prime rate plus 1.5% (4.75% at June 30, 2015). The Comerica Agreement includes a monthly service fee and contains cross default provisions and various restrictions upon PFS’ ability to, among other things, merge, consolidate, sell assets, incur indebtedness, make loans and payments to related parties (including entities directly or indirectly owned by PFSweb, Inc.), make capital expenditures, make investments and loans, pledge assets, make changes to capital stock ownership structure, as well as financial covenants of a minimum tangible net worth of $20 million, as defined, a minimum earnings before interest and taxes, plus depreciation, amortization and non-cash compensation accruals, if any, as defined, and a minimum liquidity ratio, as defined. The Comerica Agreement restricts the amount of the Subordinated Note receivable from Supplies Distributors to a maximum of $5.0 million. Comerica has provided approval for PFS to advance incremental amounts subject to certain financial covenants, as defined, to certain of its subsidiaries and/or affiliates, if needed. The Comerica Agreement is secured by all of the assets of PFS, as well as a guarantee of PFSweb, Inc.

16


PFSweb, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

 

In August 2015, the Company replaced this Comerica facility with a new credit facility with Regions Bank.  See Note 9 below.

Debt Covenants

To the extent the Company or any of its subsidiaries fail to comply with its covenants applicable to its debt or vendor financing obligations, including the monthly financial covenant requirements, such as profitability and cash flow, and required level of shareholders’ equity or net worth (as defined), the Company would be required to obtain a waiver from the lender or the lender would be entitled to accelerate the repayment of any outstanding credit facility obligations, and exercise all other rights and remedies, including sale of collateral and enforcement of payment under the Company parent guarantee. Any acceleration of the repayment of the credit facilities may have a material adverse impact on the Company’s financial condition and results of operations and no assurance can be given that the Company would have the financial ability to repay all of such obligations. As of and for the six months ended June 30, 2015, the Company was in compliance with all debt covenants.

Master Lease Agreements

The Company has various agreements that provide for leasing or financing transactions of equipment and other assets and will continue to enter into such arrangements as needed to finance the purchasing or leasing of certain equipment or other assets. Borrowings under these agreements, which generally have terms of three to five years, are generally secured by the related equipment, and in certain cases, by a Company parent guarantee.

 

7. SEGMENT INFORMATION

The Company is currently organized into two primary operating segments, which generally align with its corporate organization structure. In the first segment, PFSweb is a global provider of various infrastructure, technology, and digital agency solutions and operates as a service fee business. In the second operating segment (“Business and Retail Connect”), subsidiaries of the Company purchase inventory from clients and resell the inventory to client customers. In this segment, the Company generally recognizes product revenue.  

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Revenues (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PFSweb

$

49,434

 

 

$

36,138

 

 

$

96,143

 

 

$

71,890

 

Business and Retail Connect

 

17,062

 

 

 

21,676

 

 

 

37,896

 

 

 

47,458

 

Eliminations

 

(3,320

)

 

 

(3,771

)

 

 

(7,017

)

 

 

(8,076

)

 

$

63,176

 

 

$

54,043

 

 

$

127,022

 

 

$

111,272

 

Income (loss) from operations (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PFSweb

$

(1,869

)

 

$

(2,677

)

 

$

(3,531

)

 

$

(4,530

)

Business and Retail Connect

 

370

 

 

 

497

 

 

 

917

 

 

 

912

 

 

$

(1,499

)

 

$

(2,180

)

 

$

(2,614

)

 

$

(3,618

)

Depreciation and amortization (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PFSweb

$

3,290

 

 

$

2,834

 

 

$

6,521

 

 

$

5,681

 

Business and Retail Connect

 

19

 

 

 

44

 

 

 

43

 

 

 

87

 

 

$

3,309

 

 

$

2,878

 

 

$

6,564

 

 

$

5,768

 

Capital expenditures (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PFSweb

$

676

 

 

$

1,321

 

 

$

1,946

 

 

$

2,902

 

Business and Retail Connect

 

 

 

16

 

 

 

 

 

23

 

 

$

676

 

 

$

1,337

 

 

$

1,946

 

 

$

2,925

 

 

17


PFSweb, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

 

 

June 30,

 

 

December 31,

 

 

2015

 

 

2014

 

Assets (in thousands):

 

 

 

 

 

 

 

PFSweb

$

92,080

 

 

$

104,372

 

Business and Retail Connect

 

36,442

 

 

 

47,682

 

Eliminations

 

(11,869

)

 

 

(11,308

)

 

$

116,653

 

 

$

140,746

 

 

 

8. COMMITMENTS AND CONTINGENCIES

The Company received municipal tax abatements in certain locations. In prior years, the Company received notice from a municipality that it did not satisfy certain criteria necessary to maintain the abatements and that the municipal authority planned to make an adjustment to the Company’s tax abatement. The Company disputed the adjustment and such dispute has been settled with the municipality. However, the amount of additional property taxes to be assessed against the Company and the timing of the related payments has not been finalized. As of June 30, 2015, the Company believes it has adequately accrued for the expected assessment.

In April 2010, a sales employee of eCOST (the former name of Retail Connect) was charged with violating various federal criminal statutes in connection with the sales of eCOST products to certain customers, and approximately $620,000 held in an eCOST deposit account was seized and turned over to the Office of the U.S. Attorney in connection with such activity. In August 2012, the employee pleaded guilty to a misdemeanor. Neither the Company nor eCOST have been charged with any criminal activity, and the Company is seeking the recovery of the funds that are currently classified as other receivables on the June 30, 2015 and December 31, 2014 balance sheets. Based on the information available to date, the Company is unable to determine the amount of the loss, if any, relating to the seizure of such funds. No assurance can be given, however, that the seizure of such funds, or the inability of the Company to recover such funds or any significant portion thereof, or any costs and expenses incurred by the Company in connection with this matter will not have a material adverse effect upon the Company’s financial condition or results of operations.

 

In connection with a client project, the Company has provided a $1.3 million performance bond which may be drawn upon in the event of a default by the Company of its obligations under the project, or, in the absence of a default, upon successful completion of the project, the bond will be returned.

The Company is subject to claims in the ordinary course of business, including claims of alleged infringement by the Company or its subsidiaries of the patents, trademarks and other intellectual property rights of third parties. PFS is generally required to indemnify its service fee clients against any third party claims asserted against such clients alleging infringement by PFS of the patents, trademarks and other intellectual property rights of third parties.

 

 

9. SUBSEQUENT EVENT

Acquisition

On August 5, 2015, the Company and a newly formed subsidiary (the “Buyer”), entered into, and consummated the transactions contemplated by, an asset purchase agreement (the “Purchase Agreement”) dated August 4, 2015 with CrossView, Inc. (“CrossView”) and its shareholders. CrossView is an ecommerce systems integrator and performs a wide range of ecommerce services in the U.S., Canada and India.  Pursuant to the terms of the Purchase Agreement, the Buyer purchased substantially all of the assets and assumed substantially all of the liabilities of CrossView.  

Consideration paid by the Company included an initial cash payment of $30.7 million and will include 553,223 unregistered shares of Company common stock (approximately $7.2 million in value as of the acquisition date).  The Purchase Agreement also provides for (i) adjustment of the initial cash payment based upon a post-closing balance sheet reconciliation and (ii) future earn-out payments (“CrossView Earn-out Payments”) payable in 2016, 2017 and 2018 based on CrossView and the Buyer’s achievement of certain 2015, 2016 and 2017 financial targets.  The CrossView Earn-out Payments have no guaranteed minimum and an aggregate maximum of $18.0 million and are subject to possible offsets for indemnification and other claims arising under the Purchase Agreement.  The Company will pay 20% of the 2015 earn-out and 15% of the 2016 earn-out and 2017 earn-out in restricted shares of Company common stock, based on its then current market value at the time of issuance.  

18


PFSweb, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

 

New and Amended Financing Agreements

On August 5, 2015, the Company and its U.S. subsidiaries entered into a credit agreement (“Credit Agreement”) with Regions Bank, as agent for itself and one or more lenders now or hereafter made a party thereto (the “Lenders”). Under this Credit Agreement, and subject to the terms set forth therein, the Lenders have agreed to provide the Company’s subsidiary, PFS, with an initial $30 million revolving loan facility and an initial $10 million term loan facility. Subject to the terms of the Credit Agreement, PFS has the ability to increase the revolving loan facility to $35 million and the term loan facility to $20 million, as well as the ability to increase the total loan facilities to $75 million.  Availability under the revolving loan facility may not exceed a borrowing base of eligible accounts receivable (as defined). Advances under the Credit Agreement accrue interest at a variable rate, plus an applicable margin, and have a five year maturity, with scheduled amortization payments for term loan advances. The Credit Agreement is secured by a lien on substantially all of the assets of Company and its U.S. subsidiaries and a pledge of 65% of the shares of the Company’s foreign subsidiaries.  The Credit Agreement contains cross default provisions, various restrictions upon the Company’s ability to, among other things, merge, consolidate, sell assets, incur indebtedness, make loans and payments to subsidiaries, affiliates and related parties, make capital expenditures, make investments and loans, pledge assets, make changes to capital stock ownership structure, as well as financial covenants, as defined, of a minimum fixed charge ratio and a maximum leverage ratio.  The Credit Agreement replaces the Company’s prior financing with Comerica and Wells Fargo, which were terminated concurrent with the closing under the Credit Agreement.  

On August 3, 2015, the Company amended the short-term credit facility between Supplies Distributors and IBM Credit LLC to reduce the maximum financing amount to $13.0 million and eliminate the Company’s minimum shareholders' equity requirement of $18.0 million.

 

 

 

19


 

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our results of operations and financial condition should be read in conjunction with the unaudited interim condensed consolidated financial statements and related notes appearing elsewhere in this Form 10-Q.

Forward-Looking Information

We have made forward-looking statements in this Report on Form 10-Q. These statements are subject to risks and uncertainties, and there can be no guarantee that these statements will prove to be correct. Forward-looking statements include assumptions as to how we may perform in the future. When we use words like “seek,” “strive,” “believe,” “expect,” “anticipate,” “predict,” “potential,” “continue,” “will,” “may,” “could,” “intend,” “plan,” “target” and “estimate” or similar expressions, we are making forward-looking statements. You should understand that the following important factors, in addition to those set forth above or elsewhere in this Report on Form 10-Q and our Form 10-K for the year ended December 31, 2014, could cause our results to differ materially from those expressed in our forward-looking statements. These factors include:

·

our ability to retain and expand relationships with existing clients and attract and implement new clients;

·

our reliance on the fees generated by the transaction volume, product sales and technology and digital agency projects of our clients;

·

our reliance on our clients’ projections or transaction volume or product sales;

·

our dependence upon our agreements with International Business Machines Corporation (“IBM”) and Ricoh Company Limited and Ricoh USA, Inc., a strategic business unit within the Ricoh Family Group of Companies, (collectively hereafter referred to as “Ricoh”);

·

our dependence upon our agreements with our major clients;

·

our client mix, their business volumes and the seasonality of their business;

·

our ability to finalize pending client and customer contracts;

·

the impact of strategic alliances and acquisitions;

·

trends in e-commerce, outsourcing, government regulation, both foreign and domestic, and the market for our services;

·

whether we can continue and manage growth;

·

increased competition;

·

our ability to generate more revenue and achieve sustainable profitability;

·

effects of changes in profit margins;

·

the customer and supplier concentration of our business;

·

our reliance on third-party providers and other subcontracted services;

·

the unknown effects of possible system failures and rapid changes in technology;

·

foreign currency risks and other risks of operating in foreign countries;

·

potential litigation;

·

our dependency upon key personnel;

·

our ability to retain season and temporary workers;

·

the impact of new accounting standards and changes in existing accounting rules or the interpretations of those rules;

·

our ability to raise additional capital or obtain additional financing;

·

our ability, and the ability of our subsidiaries, to borrow under current financing arrangements and maintain compliance with debt covenants;

·

our relationship with, and our guarantees of, certain of the liabilities and indebtedness of our subsidiaries; and

·

taxation on the sale of our products and provision of our services.

20


 

We have based these statements on our current expectations about future events. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee these expectations will actually be achieved. In addition, some forward-looking statements are based upon assumptions as to future events that may not prove to be accurate. Therefore, actual outcomes and results may differ materially from what is expected or forecasted in such forward-looking statements. We undertake no obligation to update publicly any forward-looking statement for any reason, even if new information becomes available or other events occur in the future.

Key Transactions and Events

During 2014, we were impacted by the following key transactions and events that also affect comparability of our results to prior periods and are discussed further in our Form 10-K for the year ended December 31, 2014:

·

Implemented a significant new contract with a United States government agency.

·

Announced and began a comprehensive merger and acquisition strategy to enhance our service offering, diversify our operations and expand our global opportunities, which resulted in the acquisitions described below.

·

Acquired the outstanding capital stock of REV Solutions, Inc. and REVTECH Solutions India Private Limited (collectively “REV”) on September 3, 2014. The results of operations of REV have been included in our consolidated financial statements since the acquisition date.

·

Acquired the outstanding capital stock of LiveAreaLabs, Inc. (“LAL”) on September 22, 2014. The results of operations of LAL have been included in our consolidated financial statements since the acquisition date.

·

Completed the implementation of other new contracts with both new and existing clients.

We acquired the outstanding capital stock of Moda Superbe Limited (“Moda”) on June 11, 2015. The results of operations of Moda have been included in our consolidated financial statements since the acquisition date.

Overview

We are a global provider of omni-channel commerce solutions. Comprised of a broad range of technology, critical infrastructure and professional services, we provide our clients with best-of-breed capabilities offered as a complete end-to-end solution or on an à la carte basis. We provide these solutions and services to major brand name companies and others seeking to optimize their supply chain and to enhance their online and traditional business channels and initiatives. We derive our revenues from providing a broad range of services using three different seller services financial models: 1) the Service Fee model, 2) the Agent (or Flash) model and 3) the Retail model.

We refer to the standard PFSweb seller services financial model as the Service Fee model. In this model, our clients own the inventory and are the merchants of record and engage us to provide various infrastructure, technology and digital agency services in support of their business operations. We derive our service fee revenues from a broad range of service offerings that include digital agency and marketing, eCommerce technologies, system integration, order management, customer care, logistics and fulfillment, financial management and professional consulting. We offer our services as an integrated solution, which enables our clients to outsource their complete infrastructure needs to a single source and to focus on their core competencies though clients are also able to select individual or groupings of our various service offerings on an à la carte basis. We currently provide services to clients that operate in a range of vertical markets, including technology manufacturing, computer products, cosmetics, fragile goods, coins and collectibles, contemporary home furnishings, apparel, aviation, telecommunications, consumer electronics and consumer packaged goods, among others.

In the Service Fee model, we typically charge for our services on a cost-plus basis, a percent of shipped revenue basis, a time and materials, project or retainer basis for our professional services, or a per-transaction basis, such as a per-labor hour basis for web-enabled customer contact center services and a per-item basis for fulfillment services. Additional fees are billed for other services. We price our services based on a variety of factors, including the depth and complexity of the services provided, the amount of capital expenditures or systems customization required, the length of contract and other factors.

Many of our service fee contracts involve third-party vendors who provide additional services, such as package delivery. The costs we are charged by these third-party vendors for these services are often passed on to our clients. Our billings for reimbursements of these costs and other ‘out-of-pocket’ expenses include travel, shipping and handling costs and telecommunication charges and are included in pass-through revenue.

As an additional service, we offer the Agent, or Flash, financial model, in which our clients maintain ownership of the product inventory stored at our locations as in the Service Fee model. When a customer orders the product from our clients, a “flash” sale

21


 

transaction passes product ownership to us for each order and we in turn immediately re-sell the product to the customer. The “flash” ownership exchange establishes us as the merchant of record, which enables us to use our existing merchant infrastructure to process sales to end customers, removing the need for the clients to establish these business processes internally, but permitting them to control the sales process to end customers. In this model, based on the terms of our current client arrangements, we record product revenue net of cost of product revenue as a component of service fee revenue in our consolidated statement of operations.

Finally, our Retail model allows us to purchase inventory from the client. In this model, we place the initial and replenishment purchase orders with the client and take ownership of the product upon delivery to our facility. In this model, depending on the terms of our client arrangements, we may own the inventory and the accounts receivable arising from our product sales. Under the Retail model, depending upon the product category and sales characteristics, we may require the client to provide product price protection as well as product purchase payment terms, right of return, and obsolescence protection appropriate to the product sales profile. Depending on the terms of our client arrangements in the Retail model, we record in our consolidated statement of operations either: 1) product revenue as a component of product revenue, or 2) product revenue net of cost of product revenue as a component of service fee revenue. In general, we seek to structure client relationships in our Retail model under the net revenue approach to more closely align with our service fee revenue financial presentation and mitigate inventory ownership, although we have one client still utilizing the gross revenue approach.  Freight costs billed to customers are reflected as components of product revenue. This business model generally requires significant working capital, for which we have credit available either through credit terms provided by our clients or under senior credit facilities.

In general, we provide the Service Fee model through our all of our subsidiaries, the Agent (or Flash) model through our PFS and Supplies Distributors subsidiaries and the Retail model through our Supplies Distributors and PFSweb Retail Connect subsidiaries.

Growth is a key element to achieving our future goals, including achieving and maintaining sustainable profitability. Growth in our Service Fee and Agent models is driven by two main elements: new client relationships and organic growth from existing clients. We focus our sales efforts on larger contracts with brand-name companies within four primary target markets, health and beauty, home goods and collectibles, fashion and consumer packaged goods, which, by nature, require a longer duration to close but also have the potential to be higher quality and longer duration engagements. In September 2014, we acquired REV and LAL and in June 2015, we acquired Moda, each of which expand our service offering capabilities and add new client relationships which we expect to enhance our growth opportunities.

Currently, we are targeting any growth within our Retail model to be through relationships with clients under which we can record service fee revenue (product revenue net of product cost of revenue) in our consolidated statement of operations.  These relationships are often driven by the sales and marketing efforts of the manufacturers and third party sales partners. In addition, as a result of certain operational restructuring of its business, our primary client relationship operating in the Retail model, Ricoh, has implemented, and will continue to implement, certain changes in the sale and distribution of Ricoh products. These changes have resulted, and are expected to continue to result, in reduced product revenues and profitability under our Retail model.

We continue to monitor and control our costs to focus on profitability. While we are targeting our new service fee contracts to yield incremental gross profit, we also expect to incur incremental investments in technology development, operational and support management and sales and marketing expenses to help generate growth.

Our expenses comprise primarily four categories: 1) cost of product revenue, 2) cost of service fee revenue, 3) cost of pass-through revenue and 4) selling, general and administrative expenses.

Cost of product revenue - consists of the purchase price of product sold and freight costs, which are reduced by certain reimbursable expenses. These reimbursable expenses include pass-through customer marketing programs, direct costs incurred in passing on any price decreases offered by vendors to cover price protection and certain special bids, the cost of products provided to replace defective product returned by customers and certain other expenses as defined under the distributor agreements.

Cost of service fee revenue - consists primarily of compensation and related expenses for our web-enabled customer contact center services, international fulfillment and distribution services and professional, digital agency and technology services, and other fixed and variable expenses directly related to providing services under the terms of fee based contracts, including certain occupancy and information technology costs and depreciation and amortization expenses.

Cost of pass-through revenue - the related reimbursable costs for pass-through expenditures are reflected as cost of pass-through revenue.

Selling, General and Administrative expenses - consist of expenses such as compensation and related expenses for sales and marketing staff, distribution costs (excluding freight) applicable to the Supplies Distributors business and the Retail model, executive,

22


 

management and administrative personnel and other overhead costs, including certain occupancy and information technology costs and depreciation and amortization expenses.

Results of Operations For the Interim Periods Ended June 30, 2015 and 2014

The following table discloses certain financial information for the periods presented, expressed in terms of dollars, dollar change, percentage change and as a percentage of total revenue (in millions):

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

% of Net Revenues