pfsw-10q_20180331.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the Quarterly Period Ended March 31, 2018

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 or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification Number)

 

505 Millennium Drive, Allen, Texas

 

75013

(Address of principal executive offices)

 

(Zip Code)

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

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

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      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      No  

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

 

Large accelerated filer

 

 

Accelerated filer

 

 

Non-accelerated filer

 

 

Smaller Reporting Company

 

 

Emerging growth company

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

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

As of May 7, 2018, there were 19,147,369 shares of registrant’s common stock outstanding.

 

 

 


 

PFSWEB, INC. AND SUBSIDIARIES

Form 10-Q

 

INDEX

 

PART I. FINANCIAL INFORMATION

 

Page

Number

 

Item 1.

Financial Statements:

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2018 (Unaudited) and December 31, 2017

 

3

 

 

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2018 and 2017

 

4

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017

 

5

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

6

 

Item 2.

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

 

13

 

Item 3.

Quantitative and Qualitative Disclosure about Market Risk

 

20

 

Item 4.

Controls and Procedures

 

20

 

PART II. OTHER INFORMATION

 

 

Item 1.

 

Legal Proceedings

 

21

Item 1A.

 

Risk Factors

 

21

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

21

Item 3.

 

Defaults Upon Senior Securities

 

21

Item 4.

 

Mine Safety Disclosure

 

21

Item 5.

 

Other Information

 

21

Item 6.

 

Exhibits

 

22

 

SIGNATURES

 

23

 

 

 

2


 

PART I. FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

PFSweb, Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Data)

 

 

(Unaudited)

 

 

 

 

 

 

March 31,

 

 

December 31,

 

 

2018

 

 

2017

 

ASSETS

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

Cash and cash equivalents

$

16,646

 

 

$

19,078

 

Restricted cash

 

214

 

 

 

214

 

Accounts receivable, net of allowance for doubtful accounts of $375 and $373

   at March 31, 2018 and December 31, 2017, respectively

 

50,004

 

 

 

72,062

 

Inventories, net of reserves of $250 and $342 at March 31, 2018 and

   December 31, 2017, respectively

 

6,660

 

 

 

5,326

 

Other receivables

 

4,754

 

 

 

5,366

 

Prepaid expenses and other current assets

 

6,893

 

 

 

6,633

 

Total current assets

 

85,171

 

 

 

108,679

 

PROPERTY AND EQUIPMENT:

 

 

 

 

 

 

 

Cost

 

116,953

 

 

 

120,403

 

Less: accumulated depreciation

 

(93,833

)

 

 

(96,225

)

 

 

23,120

 

 

 

24,178

 

IDENTIFIABLE INTANGIBLES, net

 

2,956

 

 

 

3,371

 

GOODWILL

 

45,961

 

 

 

45,698

 

OTHER ASSETS

 

3,742

 

 

 

3,861

 

Total assets

$

160,950

 

 

$

185,787

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

Trade accounts payable

$

32,038

 

 

$

45,070

 

Accrued expenses

 

24,388

 

 

 

29,074

 

Current portion of long-term debt and capital lease obligations

 

6,017

 

 

 

9,460

 

Deferred revenues

 

5,969

 

 

 

7,405

 

Performance-based contingent payments

 

4,000

 

 

 

3,967

 

Total current liabilities

 

72,412

 

 

 

94,976

 

LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, less

   current portion

 

36,685

 

 

 

37,866

 

DEFERRED REVENUES, less current portion

 

2,846

 

 

 

4,034

 

DEFERRED RENT

 

5,263

 

 

 

5,464

 

OTHER LIABILITIES

 

2,045

 

 

 

2,150

 

Total liabilities

 

119,251

 

 

 

144,490

 

 

 

 

 

 

 

 

 

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; 19,154,332 and 19,058,685 shares issued at March 31, 2018 and December 31, 2017, respectively; and 19,120,865 and 19,025,218 outstanding at March 31, 2018 and December 31, 2017, respectively

 

19

 

 

 

19

 

Additional paid-in capital

 

151,032

 

 

 

150,614

 

Accumulated deficit

 

(109,754

)

 

 

(109,281

)

Accumulated other comprehensive income

 

527

 

 

 

70

 

Treasury stock at cost, 33,467 shares

 

(125

)

 

 

(125

)

Total shareholders’ equity

 

41,699

 

 

 

41,297

 

Total liabilities and shareholders’ equity

$

160,950

 

 

$

185,787

 

 

 

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

 

3


 

PFSWEB, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In Thousands, Except Per Share Data)

 

 

Three Months Ended

 

 

March 31,

 

 

2018

 

 

2017

 

REVENUES:

 

 

 

 

 

 

 

Service fee revenue

$

56,487

 

 

$

57,265

 

Product revenue, net

 

9,765

 

 

 

11,318

 

Pass-through revenue

 

12,169

 

 

 

10,185

 

Total revenues

 

78,421

 

 

 

78,768

 

COSTS OF REVENUES:

 

 

 

 

 

 

 

Cost of service fee revenue

 

35,608

 

 

 

39,584

 

Cost of product revenue

 

9,316

 

 

 

10,725

 

Cost of pass-through revenue

 

12,169

 

 

 

10,185

 

Total costs of revenues

 

57,093

 

 

 

60,494

 

Gross profit

 

21,328

 

 

 

18,274

 

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

 

20,659

 

 

 

21,718

 

Income (loss) from operations

 

669

 

 

 

(3,444

)

INTEREST EXPENSE, net

 

605

 

 

 

637

 

Income (loss) before income taxes

 

64

 

 

 

(4,081

)

INCOME TAX EXPENSE, net

 

813

 

 

 

775

 

NET LOSS

$

(749

)

 

$

(4,856

)

 

 

 

 

 

 

 

 

NET LOSS PER SHARE:

 

 

 

 

 

 

 

Basic

$

(0.04

)

 

$

(0.26

)

Diluted

$

(0.04

)

 

$

(0.26

)

WEIGHTED AVERAGE NUMBER OF SHARES

   OUTSTANDING:

 

 

 

 

 

 

 

Basic

 

19,145

 

 

 

18,736

 

Diluted

 

19,145

 

 

 

18,736

 

COMPREHENSIVE LOSS:

 

 

 

 

 

 

 

Net loss

$

(749

)

 

$

(4,856

)

Foreign currency translation adjustment

 

457

 

 

 

296

 

TOTAL COMPREHENSIVE LOSS

$

(292

)

 

$

(4,560

)

 

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

 

 

 

4


 

PFSweb, Inc. and Subsidiaries

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

 

 

Three Months Ended

 

 

March 31,

 

 

2018

 

 

2017

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net loss

$

(749

)

 

$

(4,856

)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

2,978

 

 

 

3,907

 

Amortization of debt issuance costs

 

37

 

 

 

37

 

Provision for doubtful accounts

 

-

 

 

 

(9

)

Provision for excess and obsolete inventory

 

59

 

 

 

20

 

Loss on disposal of fixed assets

 

27

 

 

 

-

 

Deferred income taxes

 

(33

)

 

 

175

 

Stock-based compensation expense

 

646

 

 

 

524

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

22,480

 

 

 

19,739

 

Inventories

 

(1,390

)

 

 

(1,433

)

Prepaid expenses, other receivables and other assets

 

490

 

 

 

1,779

 

Deferred rent

 

(198

)

 

 

(162

)

Accounts payable, deferred revenues, accrued expenses and other liabilities

 

(18,335

)

 

 

(19,812

)

Net cash provided by (used in) operating activities

 

6,012

 

 

 

(91

)

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Purchases of property and equipment

 

(927

)

 

 

(666

)

Proceeds from sale of property and equipment

 

54

 

 

 

-

 

Net cash used in investing activities

 

(873

)

 

 

(666

)

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Net proceeds from issuance of common stock

 

59

 

 

 

2

 

Taxes paid on behalf of employees for withheld shares

 

(287

)

 

 

 

Payments on capital lease obligations, net

 

(531

)

 

 

(892

)

Payments on term loan

 

(750

)

 

 

(563

)

Payments on revolving loan

 

(32,133

)

 

 

(28,346

)

Borrowings on revolving loan

 

28,099

 

 

 

22,021

 

Payments on other debt

 

(2,205

)

 

 

(589

)

Net cash used in financing activities

 

(7,748

)

 

 

(8,367

)

 

 

 

 

 

 

 

 

EFFECT OF EXCHANGE RATES ON CASH, CASH EQUIVALENTS AND RESTRICTED CASH

 

177

 

 

 

339

 

 

 

 

 

 

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

 

(2,432

)

 

 

(8,785

)

 

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

19,078

 

 

 

24,425

 

Restricted cash, beginning of period

 

214

 

 

 

215

 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period

 

19,292

 

 

 

24,640

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

16,646

 

 

 

15,640

 

Restricted cash, end of period

 

214

 

 

 

215

 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period

$

16,860

 

 

$

15,855

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION

 

 

 

 

 

 

 

Cash paid for income taxes

 

157

 

 

 

47

 

Cash paid for interest

 

491

 

 

 

561

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

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

$

894

 

 

$

769

 

 

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

5


PFSweb, Inc. and Subsidiaries

Notes to Unaudited Condensed Financial Statements

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of PFSweb, Inc. and its subsidiaries (the “Company”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), and include all normal and recurring adjustments necessary to present fairly the unaudited condensed consolidated balance sheets, statements of operations and comprehensive loss, and statements of cash flows for the periods indicated. Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted pursuant to the rules and regulations of the SEC. This report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. Results of the Company’s operations for interim periods may not be indicative of results for the full fiscal year. The Company reclassifies certain prior year amounts, as applicable, to conform to the current year presentation.  

2. Significant Accounting Policies

For a complete set of the Company’s significant accounting policies, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. Changes in significant accounting policies during the three months ended March 31, 2018 are described below.

Revenue and Cost Recognition

We derive revenue primarily from services provided under contractual arrangements with our clients or from the sale of products under our distributor agreements. The majority of our revenue is derived from contracts and projects that can span from a few months to three to five years.

Revenue is recognized when (or as) we satisfy performance obligations by transferring a promised good or service, an asset, to a client or customer. An asset is transferred to a client or customer when, or as, the client or customer obtains control over that asset. The transaction price includes fixed and, in certain contracts, variable consideration.

Variable consideration contained within our contracts includes discounts, rebates, incentives, penalties and other similar items. When a contract includes variable consideration, we estimate the variable consideration to determine whether any of it needs to be constrained. We include the variable consideration in the transaction price only to the extent that it is probable that a significant reversal of the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. We estimate variable consideration and constraints based on our review of the contract terms and conditions. Variable consideration and constraint amounts are the most likely amounts based on our history with the customer. If no history is available, then we will book the most likely amount based on the range of possible consideration amounts. Variable consideration was not significant for the three-month period ended March 31, 2018 or any other reporting period presented. Variable consideration and constraints are updated at each reporting date.

We evaluate our contractual arrangements to determine whether or not they include multiple performance obligations. Revenue recognition is determined for each distinct performance obligation of the contract in accordance with Accounting Standard Codification (“ASC”) 606 (“ASC 606”). We allocate revenue to each performance obligation based on the transaction price which is the total amount of consideration to which we will be entitled to under the contract.

Incremental contract costs (such as sales commissions) are expensed when incurred when the amortization period of the asset that would have been recognized is one year or less; otherwise, incremental contract costs are recognized as an asset and amortized over time as promised goods and services are transferred to a customer. When losses are expected to be incurred on a contract, we recognize the entire anticipated loss in the accounting period when the loss becomes evident to the extent the project has been completed. The loss is recognized when the current estimate of the consideration we expect to receive, modified to include unconstrained variable consideration instead of constrained variable consideration, is less than the current estimate of total costs for the contract. We did not recognize any significant contract losses, and we did not have any significant incremental contract costs that needed to be capitalized in the three months ended March 31, 2018.

Service Fee Revenue

Our service fee revenue includes activities that relate to our PFS Operations and Live Area Professional Services business units. PFS Operations primarily includes distribution, customer care, order management and payment services. Live Area Professional Services primarily includes commerce and digital experience strategy consulting, creative website design and marketing support, and technology platform integration services. We typically charge our service fee revenue on either a time and materials, fixed price, cost-plus, a percent of shipped revenue, or retainer basis for our 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.

6


PFSweb, Inc. and Subsidiaries

Notes to Unaudited Condensed Financial Statements

Distribution services relate primarily to inventory management, product receiving, warehousing and fulfillment (i.e., picking, packing and shipping product on our clients’ behalf). Order management and customer care services relate primarily to taking customer orders for our clients’ products via various channels such as telephone call-center, electronic or facsimile. These services also entail addressing customer questions related to orders, as well as merchandising activities. These performance obligations typically include related set-up and integration services in preparation of performing such activities.

Professional services relate primarily to design, implementation and support of eCommerce platforms, website solutions and quality control for our clients. Additionally, the Company provides digital agency services that enable client marketing programs to attract new customers, convert buyers and increase website value. We recognize revenue as services are rendered and costs as they are incurred.

We perform front-end set-up and integration services to support client eCommerce platforms and websites. These front-end set-up and integration services do not meet the criteria for recognition as a separate performance obligation, and as such, we recognize them with other design work, typically through time and material arrangements. We recognize revenue as services are rendered and costs as they are incurred.

Most of our fixed price, professional services contracts require the customer to pay us for all costs plus a margin for work performed up until termination date, regardless of which party terminates.   For these contracts, revenue is recognized based on input methods, generally hours expended. The input method measures progress toward the satisfaction of the performance obligation by multiplying the transaction price of the performance obligation by the percentage of hours incurred to total estimated hours as of the balance sheet date after giving effect to the most current estimates. If reasonable and reliable costs estimates cannot be made, we recognize revenue when the uncertainty is resolved or at completion of the project.

Our 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.  

Product Revenue

Depending on the terms of the customer arrangement, product revenue and product cost is recognized at the point the customer gains control of the asset. The specific point in time when control transfers depends on the contract with the customer. We permit our customers to return product.  Product revenue is reported net of estimated returns and allowances, which are estimated based upon historical return information. Management also considers any other current information and trends in making estimates.

In instances where revenue is derived from product sales from a third-party, we record revenue on a gross basis when we are a principal to the transaction and net of costs when we are acting as an agent between the customer or client and the vendor. We consider several factors to determine whether we are a principal or an agent, most notably whether we are the primary obligor to the vendor or customer, have established our own pricing and have inventory and credit risks, if applicable.

Impact of Recently Issued Accounting Standards

Pronouncements Recently Adopted

In May 2014, the FASB issued ASC 606, “Revenue from Contracts with Customers”, which replaces numerous requirements in U.S. GAAP, including industry-specific requirements, provides companies with a single revenue recognition model for recognizing revenue from contracts with clients and customers and significantly expands the disclosure requirements for revenue arrangements. The new standard, as amended, became effective for the Company for interim and annual reporting periods beginning on January 1, 2018. The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application with disclosure of results under the new and old standards for the first year of adoption.

On January 1, 2018, the Company adopted ASC 606 using the modified retrospective method applied to the contracts that were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC 605, “Revenue Recognition”.

Practical expedients

The standard allows entities to use several practical expedients. The standard requires public entities to disclose their use of practical expedients — the practical expedient associated with the determination of whether a significant financing component exists and the expedient for recording an immediate expense for certain incremental costs of obtaining a contract with a client or customer. Contracts of less than a year with a financing component will be expensed in that period as a practical expedient. Our current contracts

7


PFSweb, Inc. and Subsidiaries

Notes to Unaudited Condensed Financial Statements

do not have a financing component. Commissions on contracts of less than one year will be expensed as a practical expedient.  Commissions will be capitalized on contracts over one year. As of March 31, 2018, our commission structure did not include commissions in excess of one year. We have elected the practical expedient to exclude from our disclosure contracts that involve projects with variable consideration, and contracts of one year or less.  We also present our revenues net of tax as a practical expedient.

We recorded a net increase to opening retained earnings of $0.3 million as of January 1, 2018 due to the cumulative impact of adopting ASC 606, with the impact primarily related to our adjustments to deferred revenues and costs. We recorded a reduction of $0.7 million to deferred revenue, a reduction of $0.4 million to deferred costs, and a contract liability of $0.1 million.

The impact of applying ASC 606 for the three months ended March 31, 2018 was a decrease of $0.1 million to revenues and a decrease of $0.1 million to operating profits.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments - a consensus of the Emerging Issues Task Force” (“ASU 2016-15”). ASU 2016-15 is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. Certain issues addressed in this guidance include debt payments or debt extinguishment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, distributions received from equity method investments and beneficial interests in securitization transactions. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. Adoption of ASU 2016-15 as of January 1, 2018 did not have an impact on the Company’s consolidated financial statements.

In November 2016, the FASB issued an ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”). ASU 2016-18 amends the presentation of restricted cash within the consolidated statements of cash flows, requiring that restricted cash be added to cash and cash equivalents on the consolidated statements of cash flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The Company adopted ASU 2016-18 in the three-month period ended March 31, 2018 on a retrospective basis with no impact to the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business” (“ASU 2017-01”). ASU 2017-01 clarifies the definition of a business when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses, ASU 2017-01 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2017. Adoption of ASU 2017-01 did not have an impact on the Company’s consolidated financial statements.

In May 2017, the FASB issued ASU No. 2017-09, “Compensation–Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU 2017-09”), clarifying when a change to the terms or conditions of a stock-based payment award must be accounted for as a modification. ASU 2017-09 requires modification accounting if the fair value, vesting condition or the classification of the award is not the same immediately before and after a change to the terms and conditions of the award. ASU 2017-09 is effective for the Company on a prospective basis beginning on January 1, 2018. Adoption of ASU 2017-09 did not have an impact on the Company’s consolidated financial statements as it is not the Company’s general practice to change either the terms or conditions of stock-based payment awards once they are granted.

In March 2018, the FASB issued ASU 2018-05, “Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118” (“ASU 2018-05”)The amendments in ASU 2018-05 provide guidance on when to record and disclose provisional amounts for certain income tax effects of the Tax Cuts and Jobs Act (“Tax Reform Act”). The amendments also require any provisional amounts or subsequent adjustments to be included in net income. Additionally, ASU 2018-05 discusses required disclosures that an entity must make with regard to the Tax Reform Act. ASU 2018-05 is effective immediately as new information is available to adjust provisional amounts that were previously recorded. The Company has adopted ASU 2018-05 and will continue to evaluate indicators that may give rise to a change in our tax provision as a result of the Tax Reform Act.

Pronouncements Not Yet Adopted

  In February 2016, the FASB issued ASU No. 2016-02, “Leases” (“ASU 2016-02”). ASU 2016-02 establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently assessing the impact of ASU 2016-02 on its consolidated financial statements, but does expect the adoption to have a material impact to the balance sheet through the addition of an ROU asset and corresponding lease liability.

8


PFSweb, Inc. and Subsidiaries

Notes to Unaudited Condensed Financial Statements

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill impairment” (“ASU 2017-04”), which removes Step 2 of the goodwill impairment test. A goodwill impairment will now be determined by the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.  ASU 2017-04 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2019, with early adoption permitted. The Company does not expect the adoption of ASU 2017-04 to have a material impact on the Company’s consolidated financial statements.

3. Revenue from Contracts with Customers

Performance Obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the client or customer and is the unit of account in ASC 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied.  

Our performance obligations can be separated as PFS Operations, which includes distribution, customer care, order management and payment services, and Live Area Professional Services, which includes commerce strategy consulting, creative design and marketing support, and technology platform integration services. For contracts with multiple performance obligations, we base transaction price to each performance obligation using the most likely sales amount for the distinct good or service in the contract. The primary method used to calculate the most likely sales amount is the expected cost plus a margin approach, under which we forecast our expected costs of satisfying a performance obligation and then add an appropriate margin for that distinct good or service.

Implementation services related to setup costs for PFS Operations are not distinct within the context of the contract because of the inter-dependence of the integrating services with other services promised in the contract into a bundle of services that represent the combined output for which the customer has contracted.  Therefore, these are not separate performance obligations. These implementation revenues and costs are amortized from one month after go live through the end of the contract period. Transaction based fees are generally charged monthly based on volume and contract price.

Substantially all of our professional services are satisfied over time, as the clients or customers simultaneously receive and consume the benefits provided by our service as we perform.  Substantially all of our Operations Services, including Product Revenue, are recognized at a point in time, with the exception of initial integration services, which are deferred. The transaction price for each performance obligation is based on the consideration specified in the contract with the client or customer and contains fixed and/or variable consideration. Additionally, we have an enforceable right to payment for performance completed to date.  

Remaining performance obligations represent the transaction price of firm orders for which work has not been performed. As of March 31, 2018, the aggregate amount of the transaction price allocated to remaining performance obligations was $43.8 million. The Company expects to recognize revenue on approximately 35% of the remaining performance obligations in 2018, 64% through 2019, and the remaining recognized thereafter.

Contract Estimates

A number of factors relating to our business affect the recognition of contract revenue. We typically structure our professional services contract pricing as time and materials, fixed-price or a cost plus fixed fee. We believe that our operating results should be evaluated over a time period during which major contracts are in progress, and change orders, cost recoveries and other claims are negotiated and realized.

For fixed-price arrangements, we typically recognize revenue based on the input method, generally hours expended over time proportionately, based on actual hours to budgeted hours during the period, provided reliable cost estimates for a project can made. We use this method because we consider effort incurred to date to be the best available measure of progress on contract in progress. If we cannot reasonably estimate project costs or margin, we recognize revenue as costs are incurred as our contracts contain an enforceable right to payment for performance completed to date.

Provisions for estimated losses on uncompleted contracts, if any, are made in the period in which such losses are determined. The loss is recognized, to the extent the loss has been incurred, based on actual hours incurred versus budgeted hours. We did not recognize any significant contract losses for the three months ended March 31, 2018.

Contract modifications are routine in the performance of our contracts. Change orders that result from modification of an original contract are taken into consideration for revenue recognition when they result in a change of total contract value and are approved by our clients. In most instances, contract modifications are for services that are not distinct, and therefore, are accounted for as part of the existing contract.  If the contract has significant scope changes, of non-interrelated and non-interdependent products or services, then it will be viewed as a separate contract and accounted for separately.

9


PFSweb, Inc. and Subsidiaries

Notes to Unaudited Condensed Financial Statements

Contract Assets and Contract Liabilities

Contract assets primarily relate to the Company’s rights to consideration for work completed but not billed at the reporting date. The contract assets are transferred to the receivables when the rights become unconditional. The contract liabilities primarily relate to the advance consideration received from customers for customer contracts.

In certain of our arrangements, billing occurs subsequent to revenue recognition, resulting in unbilled accounts receivable. However, the Company sometimes receives advances or deposits from our customers prior to revenue being recognized which results in contract liabilities.

The Company’s payment terms vary by the type and location of our customers and the type of services offered. The term between invoicing and when payment is due is generally not significant.

Contract balances consisted of the following (in thousands):

 

March 31,

 

 

January 1,

 

 

2018

 

 

2018

 

Accounts Receivable

 

 

 

 

 

 

 

Trade Accounts Receivable, net

$

48,881

 

 

$

70,923

 

Unbilled Accounts Receivable

 

1,604

 

 

 

172

 

Total Accounts Receivable

$

50,485

 

 

$

71,095

 

Contract Liabilities

 

 

 

 

 

 

 

Accrued Contract Liabilities

$

666

 

 

$

583

 

Deferred Revenue

 

8,815

 

 

 

10,697

 

Total Contract Liabilities

$

9,481

 

 

$

11,280

 

Changes in contract liabilities during the period was a decrease of $2.5 million in our net contract liabilities from December 31, 2017 to March 31, 2018, primarily due to a decrease of $2.6 million in deferred revenue due to amortization and recognition of revenue in the three months ended March 31, 2018, as well as the impact of the cumulative effect of the adoption of ASC 606. We have no contract assets at March 31, 2018.

The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables, and customer advances and deposits (contract liabilities) on the consolidated balance sheet. These assets/liabilities are reported on the consolidated balance sheet on a contract basis at the end of each reporting period.

Changes in the contract asset and liability balances during the three-month period ended March 31, 2018 were not materially impacted by any other factors.

PFS Operations revenue is primarily recognized at a point in time, based on the transaction volumes. LiveArea Professional Services revenue is primarily recognized over time, typically based on time and materials. The following table presents our revenues, excluding sales and usage-based taxes, disaggregated by revenue source for the three months ended March 31, 2018 (in thousands):  

 

PFS Operations

 

 

LiveArea Professional Services

 

 

Total

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Service fee revenue

$

34,922

 

 

$

21,565

 

 

$

56,487

 

Product revenue, net

 

9,765

 

 

 

-

 

 

 

9,765

 

Pass-through revenue

 

11,800

 

 

 

369

 

 

 

12,169

 

Total revenues

$

56,487

 

 

$

21,934

 

 

$

78,421

 

 

4. Inventory Financing

Supplies Distributors has a short-term credit facility with IBM Credit LLC (“IBM Credit Facility”) to finance its purchase and distribution of products of Ricoh Company Limited and Ricoh USA, Inc., a strategic business unit within the Ricoh Family Group of Companies (collectively hereafter referred to as “Ricoh”), in the United States, providing financing for eligible Ricoh inventory and certain receivables.

In January 2018, Supplies Distributors entered into Amendment No. 19 to the IBM Credit Facility. The Amended IBM Credit Facility adjusted the maximum borrowing under the facility from $13.0 million to $11.0 million and lowered the minimum PFS Subordinated Note receivable PFSweb is required to maintain from $2.5 million to $1.0 million.

10


PFSweb, Inc. and Subsidiaries

Notes to Unaudited Condensed Financial Statements

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 $5.1 million and $7.1 million as of March 31, 2018 and December 31, 2017, respectively, as trade accounts payable in the condensed consolidated balance sheets. As of March 31, 2018, Supplies Distributors had $2.1 million of available credit under this facility. Borrowings under the credit facility accrue interest, after a defined free financing period, at prime rate plus 0.5%, which resulted in a weighted average interest rate of 5.00% and 4.75% as of as of March 31, 2018 and December 31, 2017, respectively.

 

5. Debt and Capital Lease Obligations

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

 

 

March 31,

 

 

December 31,

 

 

2018

 

 

2017

 

U.S. Credit Agreement

 

 

 

 

 

 

 

Revolver

$

9,200

 

 

$

13,234

 

Term loan

 

26,250

 

 

 

27,000

 

Equipment loan

 

3,974

 

 

 

4,205

 

Debt issuance costs

 

(342

)

 

 

(376

)

Master lease agreements

 

3,498

 

 

 

3,135

 

Other

 

122

 

 

 

128

 

Total

 

42,702

 

 

 

47,326

 

Less current portion of long-term debt

 

6,017

 

 

 

9,460

 

Long-term debt, less current portion

$

36,685

 

 

$

37,866

 

 

U.S. Credit Agreement

As of March 31, 2018, the Company had $23.3 million of available credit under the revolving loan facility of the credit agreement of PFSweb, Inc. and its U.S. subsidiaries with Regions Bank, as agent for itself and one or more future lenders (“Credit Agreement”). As of March 31, 2018 and December 31, 2017, the weighted average interest rate on the revolving loan facility was 5.07% and 4.65%, respectively. As of March 31, 2018 and December 31, 2017, the weighted average interest rate on the term loan facility of the Credit Agreement was 4.43% and 4.05%, respectively.

6. Earnings Per Share

Basic net loss per common share was computed by dividing net loss by the weighted-average number of common shares outstanding for the reporting period. The below outstanding common stock equivalents were excluded from the calculation of net loss per share because their effect would have been anti-dilutive due to our net loss for the three months ended March 31, 2018 and 2017 (shares in thousands):

 

 

As of  March 31,

 

 

2018

 

 

2017

 

Stock options

 

1,048

 

 

 

1,228

 

Performance shares and restricted stock units

 

423

 

 

 

138

 

Deferred stock units

 

199

 

 

 

133

 

Total anti-dilutive stock options, performance shares and deferred stock units

 

1,670

 

 

 

1,499

 

 

7. Segment Information

  Prior to January 1, 2018, the Company’s operations were organized into two reportable segments: PFSweb and Business and Retail Connect. In accordance with ASC 280, Segment Reporting (“ASC 280”), an operating segment is defined as a component of an enterprise for which discrete financial information is available and is reviewed regularly by the Chief Operating Decision Maker (“CODM”), or decision-making group, to evaluate performance and make operating decisions.

Effective January 1, 2018, we changed our organizational structure in an effort to create more effective and efficient operations and to improve client and service focus. In that regard, we revised the information that our chief executive officer and chief financial officer, who are also our Chief Operating Decision Makers, regularly review for purposes of allocating resources and assessing performance. As a result, beginning January 1, 2018, we now report our financial performance based on our new reportable segments.

11


PFSweb, Inc. and Subsidiaries

Notes to Unaudited Condensed Financial Statements

These segments are comprised of strategic businesses that are defined by the service offerings they provide and consist of PFS Operations (which provides client services in relation to the customer physical experience, such as order management (OMS), order fulfillment, customer care and financial services) and Professional Services LiveArea (which provides client services in relation to the digital shopping experience of shopping online, such as strategic commerce consulting, strategy, design and digital marketing services and technology services). Each segment is led by a separate Business Unit Executive who reports directly to the Company’s Chief Executive Officer.

The CODM evaluates segment performance using business unit direct contribution, which is defined as business unit revenues less costs of fees and direct selling, general and administrative expenses, including depreciation and amortization. Direct contribution does not include any allocated Corporate expenses nor does it include stock-based compensation. The CODM does not routinely review assets by segment. The balance sheet by segment is not prepared and, therefore, we do not present segment assets below.

Corporate operations is a non-operating segment that develops and implements strategic initiatives and supports the Company’s operations by centralizing certain administrative functions such as finance, treasury, information technology and human resources.

All prior period segment information has been restated to conform to the 2018 presentation. The changes in the reportable segments have no effect on the consolidated balance sheets, statements of operations or cash flows for the periods presented.

Subsequent to change in the Company’s operating segments, the Company’s reporting units changed. We now have two reporting units: PFS Operations and LiveArea Professional Services. We allocated goodwill to our new reporting units using a relative fair value approach. In addition, we completed an assessment of any potential goodwill impairment for all reporting units immediately prior to and after the reallocation and determined that no impairment existed.

The following table discloses segment information for the periods presented (in thousands):

 

Three Months Ended

 

 

March 31,

 

 

2018

 

 

2017

 

Revenues:

 

 

 

 

 

 

 

PFS Operations

$

56,487

 

 

$

58,236

 

LiveArea Professional Services

 

21,934

 

 

 

20,532

 

Eliminations

 

-

 

 

 

-

 

Total revenues

$

78,421

 

 

$

78,768

 

Business unit direct contribution:

 

 

 

 

 

 

 

PFS Operations

$

6,333

 

 

$

5,405

 

LiveArea Professional Services

 

2,968

 

 

 

2,331

 

Total business unit direct contribution

$

9,301

 

 

$

7,736

 

Unallocated corporate expenses

 

(8,632

)

 

 

(11,180

)

Income (loss) from operations

$

669

 

 

$

(3,444

)

 

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 March 31, 2018, the Company believes it has adequately accrued for the expected assessment.

 

 


12


 

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 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,” “project” and “estimate” or similar expressions, we are making forward-looking statements. We have based these statements on our current expectations about future events. Although we believe 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 about 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.

Risk factors set forth in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017 filed with the Securities and Exchange Commission could cause our results to differ materially from those expressed in our forward-looking statements.

Key Transactions and Events

During the three months ended March 31, 2018, we were impacted by the following key transactions and events that also affect comparability of our results to prior periods.

 

Effective January 1, 2018, we changed our organizational structure in an effort to create more effective and efficient operations and to improve client and service focus. As a result, beginning January 1, 2018, we report our financial performance based on our new reportable segments PFS Operations and LiveArea Professional Services. All prior period segment information has been restated to conform with the 2018 presentation. The changes in the reportable segments have no effect on the consolidated balance sheets, statements of operations and comprehensive loss or cash flows for the periods presented.

 

We adopted Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (“ASC 606”) on January 1, 2018.  We used the modified retrospective method for the transition. Under the modified retrospective method, the cumulative effect of applying the new standard was recorded at January 1, 2018 for open contracts. Therefore, results for the three months ended March 31, 2018 and March 31, 2017 may not be comparable.

Overview

We are a global commerce solutions company. We manage the entire customer shopping experience for major branded manufacturers and retailers through two business segments, Live Area Professional Services and PFS Operations.  The Live Area Professional Services segment provides services in relation to the digital shopping experience of shopping online, such as strategic commerce consulting, strategy, design and digital marketing services and technology services. The PFS Operations segment, PFS, provides services in relation to the physical experience, such as order management, order fulfillment, customer care and payment services. We offer our services on an a la carte basis or as a complete end-to-end solution.

Service Fee Model. We refer to our standard seller services financial model for both of our business segments 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 ecommerce 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, apparel, 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.

13


 

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.

Agent (Flash) Model. In our PFS Operations business unit, 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 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.

Retail Model. Our PFS Operations business unit also provides a Retail model allows us to purchase inventory from the client. In this model, which is primarily conducted through our Supplies Distributor subsidiaries, 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.

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. Through recent acquisitions, we have expanded our service offering capabilities and added new client relationships, which we currently expect to enhance our growth opportunities.

Currently, we are targeting growth within our Retail model to be through relationships with clients under which we can record service fee revenue (product revenue net of cost of product revenue) in our consolidated statement of operations as opposed to product revenue as generated in the Agent or Flash model above. 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. The 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 service fee revenue, 2) cost of product revenue, 3) cost of pass-through revenue and 4) selling, general and administrative expenses.

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

14


 

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 Agent and the Retail model, executive, management and administrative personnel and other overhead costs, including certain occupancy and information technology costs and depreciation and amortization expenses and acquisition related costs.

Monitoring and controlling our available cash balances and our expenses continues to be a primary focus. Our cash and liquidity positions are important components of our financing of both current operations and our targeted growth.

Operating Results

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 revenues (in thousands, except percentages):

 

 

Three Months Ended

 

 

 

 

 

 

% of Total

 

 

March 31,

 

 

 

 

 

 

Revenues

 

 

2018

 

 

2017

 

 

Change

 

 

2018

 

 

2017

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service fee revenue

$

56,487

 

 

$

57,265

 

 

$

(778

)

 

 

72.0

%

 

 

72.7

%

Product revenue, net

 

9,765

 

 

 

11,318

 

 

 

(1,553

)

 

 

12.5

%

 

 

14.4

%

Pass-through revenue

 

12,169

 

 

 

10,185

 

 

 

1,984

 

 

 

15.5

%

 

 

12.9

%

Total revenues

 

78,421

 

 

 

78,768

 

 

 

(347

)

 

 

100.0

%

 

 

100.0

%

Costs of Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of service fee revenue (1)

 

35,608

 

 

 

39,584

 

 

 

(3,976

)

 

 

63.0

%

 

 

69.1

%

Cost of product revenue (2)

 

9,316

 

 

 

10,725

 

 

 

(1,409

)

 

 

95.4

%

 

 

94.8

%

Pass-through cost of revenue (3)

 

12,169

 

 

 

10,185

 

 

 

1,984

 

 

 

100.0

%

 

 

100.0

%

Total costs of revenues

 

57,093

 

 

 

60,494

 

 

 

(3,401

)

 

 

72.8

%

 

 

76.8

%

Service fee gross profit (1)

 

20,879

 

 

 

17,681

 

 

 

3,198

 

 

 

37.0

%

 

 

30.9

%

Product revenue gross profit (2)

 

449

 

 

 

593

 

 

 

(144

)

 

 

4.6

%

 

 

5.2

%

Pass-through gross profit (3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total gross profit

 

21,328

 

 

 

18,274

 

 

 

3,054

 

 

 

27.2

%

 

 

23.2

%

Selling General and Administrative expenses

 

20,659

 

 

 

21,718

 

 

 

(1,059

)

 

 

26.3

%

 

 

27.6

%

Income (loss) from operations

 

669

 

 

 

(3,444

)

 

 

4,113

 

 

 

0.9

%

 

 

(4.4

)%

Interest expense, net

 

605

 

 

 

637

 

 

 

(32

)

 

 

0.8

%

 

 

0.8

%

Income (loss) before income taxes

 

64

 

 

 

(4,081

)

 

 

4,145

 

 

 

0.1

%

 

 

(5.2

)%

Income tax expense, net

 

813

 

 

 

775

 

 

 

38

 

 

 

1.0

%

 

 

1.0

%

Net loss

$

(749

)

 

$

(4,856

)

 

$

4,107

 

 

 

(1.0

)%

 

 

(6.2

)%

 

 

(1)

Represents the percent of Service fee revenue.

 

(2)

Represents the percent of Product revenue, net.

 

(3)

Represents the percent of Pass-through revenue.

15


 

Segment Operating Data

PFS Operations (in thousands, except percentages)

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

March 31,

 

 

 

 

 

 

 

 

 

 

2018

 

 

2017

 

 

Change

 

 

Change, %

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service fee revenue

$

34,922

 

 

$

37,007

 

 

$

(2,085

)

 

 

(6

)%

Product revenue, net

 

9,765

 

 

 

11,318

 

 

 

(1,553

)

 

 

(14

)%

Pass-through revenue

 

11,800

 

 

 

9,911

 

 

 

1,889

 

 

 

19

%

Total revenues

$

56,487

 

 

$

58,236

 

 

$

(1,749

)

 

 

(3

)%

Costs of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of service fee revenue

$

25,338

 

 

$

29,369

 

 

$

(4,031

)

 

 

(14

)%

Cost of product revenue

 

9,316

 

 

 

10,725

 

 

 

(1,409

)

 

 

(13

)%

Cost of pass-through revenue

 

11,800

 

 

 

9,911

 

 

 

1,889

 

 

 

19

%

Total costs of revenues

$

46,454

 

 

$

50,005

 

 

$

(3,551

)

 

 

(7

)%

Gross profit

$

10,033

 

 

$

8,231

 

 

$

1,802

 

 

 

22

%

Direct operating expenses

 

3,700

 

 

 

2,826

 

 

 

874

 

 

 

31

%

Direct contribution

$

6,333

 

 

$

5,405

 

 

$

928

 

 

 

17

%

PFS Operations total revenues for the three months ended March 31, 2018 decreased by $1.7 million compared with the corresponding period in 2017. Service fee revenue decreased by $2.1 million due to the impact of client transitions, including certain lower-margin engagements, partially offset by new and expanded client relationships. Product revenue, net, decreased by $1.6 million due to that revenue stream being primarily dependent on one client, whose business has, and is expected to continue to decline.

PFS Operations gross margin improved to 17.8% for the three months ended March 31, 2018 as compared to 14.1% in the same period of the prior year due to an increase in service fee related gross margin, which increased to 27.4% for the three months ended March 31, 2018 as compared to 20.6% in the prior year. This service fee gross margin increase was primarily due to the transition of certain lower margin engagements, improved operational efficiency and focus on higher margin service offerings.

Direct operating expenses increased by $0.9 million for the three months ended March 31, 2018 compared to the corresponding period in 2017. The increase was primarily due to higher facility and personnel costs.

LiveArea Professional Services (in thousands, except percentages)

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

March 31,

 

 

 

 

 

 

 

 

 

 

2018

 

 

2017

 

 

Change

 

 

Change, %

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service fee revenue

$

21,565

 

 

$

20,258

 

 

$

1,307

 

 

 

6

%

Pass-through revenue

 

369

 

 

 

274

 

 

 

95

 

 

 

35

%

Total revenues

$

21,934

 

 

$

20,532

 

 

$

1,402

 

 

 

7

%

Costs of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of service fee revenue

$

10,270

 

 

$

10,215

 

 

$

55

 

 

 

1

%

Cost of pass-through revenue

 

369

 

 

 

274

 

 

 

95

 

 

 

35

%

Total costs of revenues

$

10,639

 

 

$

10,489

 

 

$

150

 

 

 

1

%

Gross profit

$

11,295

 

 

$

10,043

 

 

$

1,252

 

 

 

12

%

Direct operating expenses

 

8,327