Document


 
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, 2019
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
x
Non-accelerated filer
 
Smaller Reporting Company
x
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   x
As of August 5, 2019, there were 19,432,410 shares of registrant’s common stock outstanding.
 




PFSWEB, INC. AND SUBSIDIARIES
Form 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Page
Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements

3



PFSWEB, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
 
(Unaudited)
June 30,
2019
 
December 31,
2018
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
11,812

 
$
15,419

Restricted cash
207

 
207

Accounts receivable, net of allowance for doubtful accounts of $1,282 and $585 at June 30, 2019 and December 31, 2018, respectively
52,916

 
72,415

Inventories, net of reserves of $295 and $298 at June 30, 2019 and December 31, 2018, respectively
6,536

 
6,090

Other receivables
3,531

 
4,014

Prepaid expenses and other current assets
6,355

 
6,943

Total current assets
81,357

 
105,088

PROPERTY AND EQUIPMENT:
 
 
 
Cost
100,240

 
97,744

Less: accumulated depreciation
(80,522
)
 
(76,248
)

19,718

 
21,496

OPERATING LEASE RIGHT-OF-USE ASSETS
38,269

 

IDENTIFIABLE INTANGIBLES, net
1,469

 
1,803

GOODWILL
45,167

 
45,185

OTHER ASSETS
3,684

 
3,501

Total assets
$
189,664

 
$
177,073

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Trade accounts payable
$
35,009

 
$
47,580

Accrued expenses
19,946

 
24,623

Current portion of operating lease liabilities
8,164

 

Current portion of long-term debt and finance lease obligations
2,824

 
2,610

Deferred revenues
5,843

 
7,328

Total current liabilities
71,786

 
82,141

LONG-TERM DEBT AND FINANCE LEASE OBLIGATIONS, less current portion
31,831

 
39,348

DEFERRED REVENUES, less current portion
1,648

 
1,927

DEFERRED RENT

 
4,625

OPERATING LEASE LIABILITIES
35,921

 

OTHER LIABILITIES
2,869

 
2,449

Total liabilities
144,055

 
130,490


 
 
 
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; 19,465,877 and 19,294,296 issued at June 30, 2019 and December 31, 2018, respectively; and 19,432,410 and 19,260,829 outstanding at June 30, 2019 and December 31, 2018, respectively
19

 
19

Additional paid-in capital
156,494

 
155,455

Accumulated deficit
(109,912
)
 
(107,773
)
Accumulated other comprehensive income (loss)
(867
)
 
(993
)
Treasury stock at cost, 33,467 shares
(125
)
 
(125
)
Total shareholders’ equity
45,609

 
46,583

Total liabilities and shareholders’ equity
$
189,664

 
$
177,073

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

4



PFSWEB, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS
(In Thousands, Except Per Share Data)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
REVENUES:
 
 
 
 
 
 
 
Service fee revenue
$
50,331

 
$
53,141

 
$
101,769

 
$
109,628

Product revenue, net
6,138

 
8,847

 
13,638

 
18,612

Pass-through revenue
12,041

 
15,063

 
25,253

 
27,232

Total revenues
68,510

 
77,051

 
140,660

 
155,472

COSTS OF REVENUES:
 
 
 
 
 
 
 
Cost of service fee revenue
32,809

 
33,294

 
66,767

 
68,902

Cost of product revenue
5,791

 
8,403

 
12,868

 
17,719

Cost of pass-through revenue
12,041

 
15,063

 
25,253

 
27,232

Total costs of revenues
50,641

 
56,760

 
104,888

 
113,853

Gross profit
17,869

 
20,291

 
35,772

 
41,619

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
18,096

 
19,756

 
36,443

 
40,415

Income (loss) from operations
(227
)
 
535

 
(671
)
 
1,204

INTEREST EXPENSE, net
448

 
585

 
959

 
1,190

Income (loss) before income taxes
(675
)
 
(50
)
 
(1,630
)
 
14

INCOME TAX EXPENSE, net
300

 
576

 
509

 
1,389

NET LOSS
$
(975
)
 
$
(626
)
 
$
(2,139
)
 
$
(1,375
)
 
 
 
 
 
 
 
 
NET LOSS PER SHARE:
 
 
 
 
 
 
 
Basic
$
(0.05
)
 
$
(0.03
)
 
$
(0.11
)
 
$
(0.07
)
Diluted
$
(0.05
)
 
$
(0.03
)
 
$
(0.11
)
 
$
(0.07
)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
 
 
 
 
 
 
 
Basic
19,444

 
19,174

 
19,465

 
19,160

Diluted
19,444

 
19,174

 
19,465

 
19,160

COMPREHENSIVE LOSS:
 
 
 
 
 
 
 
Net loss
$
(975
)
 
$
(626
)
 
$
(2,139
)
 
$
(1,375
)
Foreign currency translation adjustment
95

 
(1,239
)
 
126

 
(782
)
TOTAL COMPREHENSIVE LOSS
$
(880
)
 
$
(1,865
)
 
$
(2,013
)
 
$
(2,157
)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5



PFSWEB, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In Thousands, Except Share Data)
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
 
 
Additional
 
 
 
Other
 
 
 
 
 
Total
 
Common Stock
 
Paid-In
 
Accumulated
 
Comprehensive
 
Treasury Stock
 
Shareholders'
 
Shares
  
Amount
 
Capital
  
Deficit
  
Income (Loss)
  
Shares
  
Amount
  
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2018
19,294,296

 
$
19

 
$
155,455

 
$
(107,773
)
 
$
(993
)
 
33.467

 
$
(125
)
 
$
46,583

Net loss

 

 

 
(1,164
)
 

 

 

 
(1,164
)
Stock-based compensation expense

 

 
651

 

 

 

 

 
651

Exercise of stock options
1,500

 

 
2

 

 

 

 

 
2

Foreign currency translation adjustment, net of taxes

 

 

 

 
31

 

 

 
31

Balance, March 31, 2019
19,295,796

 
19

 
156,108

 
(108,937
)
 
(962
)
 
33,467

 
(125
)
 
46,103

Net loss

 

 

 
(975
)
 

 

 

 
(975
)
Stock-based compensation expense

 

 
678

 

 

 

 

 
678

Exercise of stock options
8,000

 

 
12

 

 

 

 

 
12

Issuance of restricted stock
162,081

 

 

 

 

 

 

 

Tax withholding on restricted stock

 

 
(304
)
 

 

 

 

 
(304
)
Foreign currency translation adjustment, net of taxes

 

 

 

 
95

 

 

 
95

Balance, June 30, 2019
19,465,877

 
$
19

 
$
156,494

 
$
(109,912
)
 
$
(867
)
 
33,467

 
$
(125
)
 
$
45,609

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




6



PFSWEB, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (cont.)
(In Thousands, Except Share Data)
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
 
 
Additional
 
 
 
Other
 
 
 
 
 
Total
 
Common Stock
 
Paid-In
 
Accumulated
 
Comprehensive
 
Treasury Stock
 
Shareholders'
 
Shares
  
Amount
 
Capital
  
Deficit
  
Income (Loss)
  
Shares
  
Amount
  
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2017
19,058,685

 
$
19

 
$
150,614

 
$
(109,281
)
 
$
70

 
33.467

 
$
(125
)
 
$
41,297

Net loss

 

 

 
(749
)
 

 

 

 
(749
)
Impact of the adoption of new accounting pronouncement

 

 

 
276

 

 

 

 
276

Stock-based compensation expense

 

 
646

 

 

 

 

 
646

Exercise of stock options
11,930

 

 
59

 

 

 

 

 
59

Issuance of restricted stock
83,717

 

 

 

 

 

 

 

Tax withholding on restricted stock

 

 
(287
)
 

 

 

 

 
(287
)
Foreign currency translation adjustment, net of taxes

 

 

 

 
457

 

 

 
457

Balance, March 31, 2018
19,154,332

 
19

 
151,032

 
(109,754
)
 
527

 
33.467

 
(125
)
 
41,699

Net loss

 

 

 
(626
)
 

 

 

 
(626
)
Impact of the adoption of new accounting pronouncement

 

 

 
4

 

 

 

 
4

Stock-based compensation expense

 

 
1,360

 

 

 

 

 
1,360

Exercise of stock options
56,768

 

 
291

 

 

 

 

 
291

Shares issued related to acquisitions
76,998

 

 
822

 

 

 

 

 
822

Issuance of restricted stock
3,461

 

 

 

 

 

 

 

Tax withholding on restricted stock

 

 
(76
)
 

 

 

 

 
(76
)
Foreign currency translation adjustment, net of taxes

 

 

 

 
(1,239
)
 

 

 
(1,239
)
Balance, June 30, 2018
19,291,559

 
$
19

 
$
153,429

 
$
(110,376
)
 
$
(712
)
 
33,467

 
$
(125
)
 
$
42,235

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


7



PFSWEB, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
 
Six Months Ended June 30,
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net loss
$
(2,139
)
 
$
(1,375
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
5,267

 
5,957

Amortization of debt issuance costs
39

 
71

Provision for doubtful accounts
716

 
22

Provision for excess and obsolete inventory
(3
)
 
108

Loss on disposal of fixed assets
129

 
42

Deferred income taxes
338

 
8

Stock-based compensation expense
1,329

 
2,006

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
18,644

 
18,326

Inventories
(444
)
 
(459
)
Prepaid expenses, other receivables and other assets
4,665

 
1,193

Trade accounts payable, deferred revenues, accrued expenses and other liabilities
(23,653
)
 
(23,187
)
Net cash provided by operating activities
4,888

 
2,712


 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment
(1,927
)
 
(1,941
)
Proceeds from sale of property and equipment

 
59

Net cash used in investing activities
(1,927
)
 
(1,882
)

 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net proceeds from issuance of common stock
14

 
350

Taxes paid on behalf of employees for withheld shares
(304
)
 
(363
)
Payments on performance-based contingent payments

 
(3,268
)
Payments on finance lease obligations
(929
)
 
(1,359
)
Payments on term loan

 
(1,500
)
Payments on revolving loan
(71,640
)
 
(59,183
)
Borrowings on revolving loan
64,007

 
59,949

Payments on other debt
(581
)
 
(494
)
Borrowings on other debt
2,776

 
309

Net cash used in financing activities
(6,657
)
 
(5,559
)

 
 
 
EFFECT OF EXCHANGE RATES ON CASH, CASH EQUIVALENTS AND RESTRICTED CASH
89

 
(727
)
NET DECREASE IN CASH AND CASH EQUIVALENTS
(3,607
)
 
(5,456
)

 
 
 
Cash and cash equivalents, beginning of period
15,419

 
19,078

Restricted cash, beginning of period
207

 
214

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period
15,626

 
19,292


 
 
 
Cash and cash equivalents, end of period
11,812

 
13,622

Restricted cash, end of period
207

 
214

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period
$
12,019

 
$
13,836


 
 
 
SUPPLEMENTAL CASH FLOW INFORMATION
 
 
 
Cash paid for income taxes
$
603

 
$
973

Cash paid for interest
$
1,008

 
$
1,080

Non-cash investing and financing activities:
 
 
 
Property and equipment acquired under long-term debt and finance leases
$
398

 
$
1,033

Performance-based contingent payments through stock issuance
$

 
$
822

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

8



PFSWEB, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of PFSweb, Inc. and its subsidiaries 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 our Annual Report on Form 10-K for the year ended December 31, 2018.   We refer to PFSweb, Inc. and its subsidiaries collectively as “PFSweb,” the “Company,” us,” “we” and “our” in these condensed consolidated financial statements.
Results of our operations for interim periods may not be indicative of results for the full fiscal year. We reclassify certain prior year amounts, as applicable, to conform to the current year presentation.
2. Significant Accounting Policies
For a complete set of our significant accounting policies, refer to our Annual Report on Form 10-K for the year ended December 31, 2018. During the three and six-month periods ended June 30, 2019, there were no significant changes to our significant accounting policies, other than those policies impacted by the new leasing guidance as described below in this Note 2 and Note 9.  
Leases
We account for leases in accordance with Accounting Standard Codification (“ASC”) No. 842 ("ASC 842"), Leases. Lease assets and liabilities are recognized at the commencement date of an arrangement where it is determined at inception that a lease exists. Lease assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. These assets and liabilities are initially recognized based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use an incremental borrowing rate based on the information available at the lease commencement date to discount payments to the present value. Some of these leases contain rent escalation clauses either fixed or adjusted periodically for inflation or market rates that are factored into our determination of lease payments. We also have variable lease payments that do not depend on a rate or index, primarily for items such as common area maintenance and real estate taxes, which are recorded as variable cost when incurred. The lease asset excludes incentives and initial direct costs incurred. Lease terms include options to extend or terminate the lease when it is reasonably certain that we will exercise that option.
Our operating leases are included in operating lease right-of-use assets, current portion of operating lease liabilities and operating lease liabilities on the condensed consolidated balance sheets. Our finance leases are included in property and equipment, long-term debt and finance lease obligations and current portion of long-term debt and finance lease obligations on the condensed consolidated balance sheets. Leases with an initial term of 12 months or less are not recorded on the condensed consolidated balance sheets. The expense for these short-term leases and operating leases is recognized on a straight-line basis over the lease term. We have lease agreements with lease and non-lease components and have elected to combine as a single lease component. In addition, we utilized the portfolio approach to group leases with similar characteristics and did not use hindsight to determine lease term. See Note 9 for additional information.

9



Impact of Recently Issued Accounting Standards
Pronouncements Recently Adopted
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, Leases ("ASU 2016-02"), which requires lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months. In July 2018, the FASB issued additional authoritative guidance providing companies with an optional transition method to use the effective date of ASU 2016-02 as the date of initial application of transition and not restate comparative periods. We adopted the standard on January 1, 2019 using this optional transition method. As such, prior periods have not been recast under the new standard. We elected the package of practical expedients, which allows us to carry forward historical lease classification, the practical expedient to not separate non-lease components from lease components, and the short-term lease accounting policy election as defined in ASU 2016-02. We implemented internal controls and a lease accounting software to enable the preparation of financial information on adoption. The standard had a material impact on our condensed consolidated balance sheets, but did not have an impact on the condensed consolidated statements of operations and comprehensive income (loss) and had no impact on cash provided by or used in operating, investing or financing activities on our condensed consolidated statements of cash flows. The most significant impact was the recognition of right-of-use assets of $40.8 million and operating lease liabilities of $46.5 million for operating leases. The difference between the right-of-use assets and operating lease liabilities was recorded as an adjustment to deferred rent (lease incentives). The adoption of ASU 2016-02 had substantially no impact on our finance leases.
Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. ASU 2016-13 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2019, and requires a cumulative effect adjustment to the balance sheet as of the beginning of the first reporting period in which the guidance is effective. We are currently in the process of evaluating the impact of the adoption of ASU 2016-13 on our condensed consolidated financial statements in order to adopt the new standard in the first quarter of fiscal 2020.
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. We do not expect the adoption of ASU 2017-04 to have a material impact on our condensed consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15 "Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract; Disclosures for Implementation Costs Incurred for Internal-Use Software and Cloud Computing Arrangements" (“ASU 2018-15”), which aligns the accounting for implementation costs incurred in a hosting arrangement that is a service contract with the accounting for implementation costs incurred to develop or obtain internal-use software under ASC Subtopic 350-40, in order to determine which costs to capitalize and recognize as an asset. ASU 2018-15 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2019, and can be applied either prospectively to implementation costs incurred after the date of adoption or retrospectively to all arrangements. We are currently in the process of evaluating the impact of the adoption of ASU 2018-15 on our condensed consolidated financial statements.

10



3. Revenue from Contracts with Clients and Customers
The following tables present our revenues, excluding sales and usage-based taxes, disaggregated by revenue source (in thousands):
 
Three Months Ended
June 30, 2019
 
Six Months Ended
June 30, 2019
 
PFS Operations
 
LiveArea Professional Services
 
Total
 
PFS Operations
 
LiveArea Professional Services
 
Total
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Service fee revenue
$
31,700

 
$
18,631

 
$
50,331

 
$
64,754

 
$
37,015

 
$
101,769

Product revenue, net
6,138

 

 
6,138

 
13,638

 

 
13,638

Pass-through revenue
11,412

 
629

 
12,041

 
24,289

 
964

 
25,253

Total revenues
$
49,250

 
$
19,260

 
$
68,510

 
$
102,681

 
$
37,979

 
$
140,660

 
Three Months Ended
June 30, 2018
 
Six Months Ended
June 30, 2018
 
PFS Operations
 
LiveArea Professional Services
 
Total
 
PFS Operations
 
LiveArea Professional Services
 
Total
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Service fee revenue
$
33,193

 
$
19,948

 
$
53,141

 
$
68,115

 
$
41,513

 
$
109,628

Product revenue, net
8,847

 

 
8,847

 
18,612

 

 
18,612

Pass-through revenue
14,575

 
488

 
15,063

 
26,375

 
857

 
27,232

Total revenues
$
56,615

 
$
20,436

 
$
77,051

 
$
113,102

 
$
42,370

 
$
155,472

The following tables present our revenues, excluding sales and usage-based taxes, disaggregated by timing of revenue recognition (in thousands):
 
Three Months Ended
June 30, 2019
 
Six Months Ended
June 30, 2019
 
PFS Operations
 
LiveArea Professional Services
 
Total
 
PFS Operations
 
LiveArea Professional Services
 
Total
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Over time
$
43,112

 
$
18,282

 
$
61,394

 
$
89,043

 
$
37,001

 
$
126,044

Point-in-time
6,138

 
978

 
7,116

 
13,638

 
978

 
14,616

Total revenues
$
49,250

 
$
19,260

 
$
68,510

 
$
102,681

 
$
37,979

 
$
140,660

 
Three Months Ended
June 30, 2018
 
Six Months Ended
June 30, 2018
 
PFS Operations
 
LiveArea Professional Services
 
Total
 
PFS Operations
 
LiveArea Professional Services
 
Total
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Over time
$
47,768

 
$
20,436

 
$
68,204

 
$
94,490

 
$
42,220

 
$
136,710

Point-in-time
8,847

 

 
8,847

 
18,612

 
150

 
18,762

Total revenues
$
56,615

 
$
20,436

 
$
77,051

 
$
113,102

 
$
42,370

 
$
155,472


11



The following tables present our revenues, excluding sales and usage-based taxes, disaggregated by region (in thousands):
 
Three Months Ended
June 30, 2019
 
Six Months Ended
June 30, 2019
 
PFS Operations
 
LiveArea Professional Services
 
Total
 
PFS Operations
 
LiveArea Professional Services
 
Total
Revenues by region:
 
 
 
 
 
 
 
 
 
 
 
North America
$
41,297

 
$
16,825

 
$
58,122

 
$
84,900

 
$
33,543

 
$
118,443

Europe
7,953

 
2,435

 
10,388

 
17,781

 
4,436

 
22,217

Total revenues
$
49,250

 
$
19,260

 
$
68,510

 
$
102,681

 
$
37,979

 
$
140,660

 
Three Months Ended
June 30, 2018
 
Six Months Ended
June 30, 2018
 
PFS Operations
 
LiveArea Professional Services
 
Total
 
PFS Operations
 
LiveArea Professional Services
 
Total
Revenues by region:
 
 
 
 
 
 
 
 
 
 
 
North America
$
46,073

 
$
18,036

 
$
64,109

 
$
90,690

 
$
37,202

 
$
127,892

Europe
10,542

 
2,400

 
12,942

 
22,412

 
5,168

 
27,580

Total revenues
$
56,615

 
$
20,436

 
$
77,051

 
$
113,102

 
$
42,370

 
$
155,472

Contract Assets and Contract Liabilities
Changes in costs to fulfill contract assets during the period decreased $0.7 million from December 31, 2018 to June 30, 2019, primarily due to an increase of approximately $2.6 million from new projects, offset by approximately $3.3 million of amortization and recognition of costs in the six months ended June 30, 2019. Costs to fulfill contract assets relate to deferred costs, which are included within other current assets and or other assets, and software development costs, which are included within property and equipment, in our condensed consolidated balance sheets.
Changes in contract liabilities during the period decreased $1.2 million from December 31, 2018 to June 30, 2019, primarily due to an increase of approximately $4.4 million from new projects, offset by approximately $5.6 million of amortization and recognition of revenue in the six months ended June 30, 2019.  Contract losses recognized for the six months ended June 30, 2019 were not material. Accrued contract liabilities below are included within accrued expenses in our condensed consolidated balance sheets.
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 condensed consolidated balance sheets. Changes in the contract asset and liability balances during the six months ended June 30, 2019 were not materially impacted by any other factors.
Contract balances consist of the following (in thousands):
 
June 30, 2019
 
December 31, 2018
Contract Assets
 
 
 
Trade accounts receivable, net
$
52,562

 
$
72,180

Unbilled accounts receivable
354

 
235

Costs to fulfill
4,480

 
5,214

Total contract assets
$
57,396

 
$
77,629

Contract Liabilities
 
 
 
Accrued contract liabilities
$
1,094

 
$
535

Deferred revenue
7,491

 
9,255

Total contract liabilities
$
8,585

 
$
9,790


12



Remaining performance obligations represent the transaction price of firm orders for which work has not yet been performed. This amount does not include 1) contracts that are less than one year in duration, 2) contracts for which we recognize revenue based on the right to invoice for services performed, or 3) variable consideration allocated entirely to a wholly unsatisfied performance obligation. Much of our revenue qualifies for one of these exemptions. As of June 30, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations for contracts with an original expected duration of one year or more was $19.3 million. We expect to recognize revenue on approximately 62% of the remaining performance obligations in 2019, 29% in 2020, and the remaining recognized thereafter.
4. Inventory Financing
Supplies Distributors has a short-term credit facility with IBM Credit LLC and its assignees (“IBM Credit Facility”) to finance its purchase and distribution of Ricoh products in the United States, providing financing for eligible Ricoh inventory and certain receivables up to $11.0 million, as per amended agreement. 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, we have classified the outstanding amounts under this facility, which were $6.4 million and $4.7 million as of June 30, 2019 and December 31, 2018, respectively, as trade accounts payable in the condensed consolidated balance sheets. As of June 30, 2019, Supplies Distributors had $0.9 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, PFSweb is required to maintain a minimum Subordinated Note receivable balance from Supplies Distributors of $1.0 million, as per amended agreement. 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 6.00% and 5.75% as of June 30, 2019 and December 31, 2018, respectively. The facility also includes a monthly service fee. As of June 30, 2019, the Company was in compliance with all financial covenants.
5. Debt and Finance Lease Obligations
Outstanding debt and finance lease obligations consist of the following (in thousands): 
 
June 30, 2019
 
December 31, 2018
U.S. Credit Agreement
 
 
 
Revolver
$
27,867

 
$
35,500

Equipment loan
4,244

 
3,263

Debt issuance costs
(343
)
 
(382
)
Finance Leases
2,474

 
3,495

Other
413

 
82

Total
34,655

 
41,958

Less current portion of long-term debt
2,824

 
2,610

Long-term debt, less current portion
$
31,831

 
$
39,348

U.S. Credit Agreement
On November 1, 2018, we entered into Amendment No. 1 to our Credit Agreement with Regions Bank (the “Amended Facility”). The Amended Facility provides for an increase in availability of our revolving loans to $60.0 million, with the ability for a further increase of $20.0 million to $80.0 million and the elimination of the term loan. Amounts outstanding under the term loan were reconstituted as revolving loans. The Amended Facility also extends the maturity date to November 1, 2023. The Amended Facility also provides for additional $10.0 million in equipment financing.
As of June 30, 2019, we had $32.1 million of available credit under the revolving loan facility. As of June 30, 2019 and December 31, 2018, the weighted average interest rate on the revolving loan facility was 4.46% and 4.57%, respectively.
As of June 30, 2019, we had $8.5 million of available credit in equipment financing.
As of June 30, 2019, we were in compliance with all debt covenants.

13



6. Earnings (Loss) 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. In periods when we recognize a net loss, we exclude the impact of outstanding common stock equivalents from the diluted loss per share calculation as their inclusion would have an antidilutive effect. As of June 30, 2019 and June 30, 2018, we had outstanding common stock equivalents of approximately 2.6 million and 2.1 million, respectively, that have been excluded from the calculations of diluted earnings per share attributable to common stockholders because their effect would have been antidilutive.
7. Segment Information
Our 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 LiveArea Professional Services (which provides client services in relation to the digital 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 our Chief Executive Officer.
During the three and six months ended June 30, 2019, we changed the composition of the business unit direct contribution to include certain shared service costs. Prior period amounts have been reclassified to include those allocated expenses.
The following table presents information concerning operations by segment (in thousands):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
PFS Operations
$
49,250

 
$
56,615

 
$
102,681

 
$
113,102

LiveArea Professional Services
19,260

 
20,436

 
37,979

 
42,370

Total revenues
$
68,510

 
$
77,051

 
$
140,660

 
$
155,472

Business unit direct contribution:
 
 
 
 
 
 
 
PFS Operations
$
2,129

 
$
3,933

 
$
4,654

 
$
8,234

LiveArea Professional Services
2,301

 
1,886

 
4,174

 
4,001

Total business unit direct contribution
4,430

 
5,819

 
8,828

 
12,235

Unallocated corporate expenses
(4,657
)
 
(5,284
)
 
(9,499
)
 
(11,031
)
Income (loss) from operations
$
(227
)
 
$
535

 
$
(671
)
 
$
1,204

8. Commitments and Contingencies
We received municipal tax abatements in certain locations. In prior years, we received notice from a municipality that we did not satisfy certain criteria necessary to maintain the abatements and that the municipal authority planned to make an adjustment to our tax abatement. We disputed the adjustment and such dispute has been settled with the municipality. However, the amount of additional property taxes to be assessed against us and the timing of the related payments has not been finalized. As of June 30, 2019, we believe we have adequately accrued for the expected assessment.
9. Leases
The Company adopted ASU 2016-02, as of January 1, 2019, using the modified retrospective approach. Prior year financial statements were not recast under the new standard and, therefore, those amounts are not presented below.
All of our office and warehouse facilities are leased under operating leases. We also lease vehicles primarily as operating leases. Most of our equipment leases are leased under finance leases. Lease costs are included within cost of service fee revenue, selling, general and administrative expenses and interest expense, net in our condensed consolidated statements of operations and comprehensive income (loss).

14



Total lease costs consist of the following (in thousands):
 
Three Months Ended
June 30, 2019
 
Six Months Ended
June 30, 2019
Lease costs:
 
 
 
Finance lease costs:
 
 
 
    Amortization of right-of-use assets
$
448

 
$
960

    Interest on lease liabilities
41

 
91

Operating lease costs
2,276

 
4,607

Variable lease costs
558

 
1,347

Short-term lease costs
495

 
921

Sublease income

 

Total lease costs
$
3,818

 
$
7,926

We had $2.1 million of finance lease assets that are reported in property and equipment, net as of June 30, 2019. As of June 30, 2019, our weighted-average remaining lease term relating to our operating leases is 6.2 years, with a weighted-average discount of 4.98%. As of June 30, 2019, our weighted-average remaining lease term relating to our finance leases is 2.4 years, with a weighted-average discount of 6.01%. Our leases have remaining lease terms of up to 9.6 years, some of which include options to extend the leases for up to 10 years, and some of which include options to terminate the leases within 1 year.
Maturities of lease liabilities are as follows (in thousands):
 
June 30, 2019
 
Operating Leases
 
Finance Leases
 
 
 
 
2019
$
4,866

 
$
747

2020
9,800

 
1,124

2021
9,050

 
714

2022
8,240

 
54

2023
6,620

 

Thereafter
12,660

 

Total lease payments
51,235

 
2,639

Less interest
(7,150
)
 
(165
)
Total lease obligations
$
44,085

 
$
2,474

Supplemental consolidated cash flow information related to leases is as follows (in thousands):
 
Six Months Ended
June 30, 2019
 

Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows from operating leases
$
4,494

Operating cash flows from finance leases
$
91

Financing cash flows from finance leases
$
929

Right-of-use assets obtained in exchange for new operating lease liabilities
$
1,389


15



Total rental expense under operating leases approximated $11.1 million for the year ended December 31, 2018. Future minimum obligations under leases in effect as of December 31, 2018 having a non-cancelable term in excess of one year as determined prior to the adoption of ASU 2016-02 are as follows (in thousands):
 
December 31, 2018
 
Operating Leases
 
Finance Leases
 
 
 
 
2019
$
9,659

 
$
1,811

2020
10,028

 
1,169

2021
9,222

 
725

2022
8,407

 
55

2023
6,828

 

Thereafter
12,840

 

Future minimum lease obligations
$
56,980

 
3,760

Less interest
 
 
(265
)
Present value of net minimum lease obligations
 
 
$
3,495


16



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
This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements that involve expectations, plans or intentions (such as those relating to future business, future results of operations or financial condition, new or planned features or services, or management strategies). You can identify these forward-looking statements by words such as “may,” “will,” “would,” “should,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “intend,” “plan,” “potential,” “intend,” “project,” “estimate,” and other similar expressions. These forward-looking statements involve risks and uncertainties, and may include assumptions as to how we may perform in the future. 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, our actual results may differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include, among others, those discussed in “Part I, Item 1A: Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (the “Annual Report”), as well as in our consolidated financial statements, related notes, and the other information appearing elsewhere in the Annual Report and our other filings with the Securities and Exchange Commission, or the SEC. We do not intend, and undertake no obligation, to update any of our forward-looking statements after the date of this report to reflect actual results or future events or circumstances. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
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, LiveArea Professional Services and PFS Operations. The LiveArea Professional Services segment provides services to support and improve the digital experience of shopping online, such as strategic commerce consulting, strategy, design and digital marketing services and technology services. The PFS Operations segment provides services to support and improve 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 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 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 time and material basis, 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.
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 condensed consolidated statement of operations.

17



Retail Model. Our PFS Operations business unit also provides a Retail model which allows us to purchase inventory from the client. We place the initial and replenishment purchase orders with the client and take ownership of the product either upon shipment to or 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 condensed 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 risk, although we have one client still operating under 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.
Currently, we are targeting growth within our Retail model to be through relationships with clients under which we can record service fee revenue in our condensed 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. The changes have resulted, and are expected to continue to result, in reduced product revenues and profitability under our Retail model.
Growth is a key element to achieving our future goals, including achieving and maintaining sustainable profitability. Growth in our company is driven by two main elements: new client relationships and organic growth from existing clients. Within our LiveArea Professional Services segment, we focus our sales efforts on engaging with brands, retailers and manufacturers to perform discrete projects such as website design, platform selection and platform implementation and system integration projects. We also focus our LiveArea sales efforts on engaging with brands, retailers and manufacturers to provide ongoing services such as digital marketing retainers and technology managed services engagements. Within our PFS Operations segment, 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. Consumer packaged goods require a longer duration to close but also have the potential to be higher quality and longer duration engagements. Within both segments, we focus our sales efforts on both new clients and also on existing clients where we believe opportunity exists to expand a client relationship to include additional services within the segment, across segments and/or across multiple geographies. 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.
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, restructuring and other 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 financing current operations and our targeted growth.


18



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
June 30,
 
 
 
% of Total
Revenues
 
Six Months Ended
June 30,
 
 
 
% of Total
Revenues
 
2019
 
2018
 
Change
 
2019
 
2018
 
2019
 
2018
 
Change
 
2019
 
2018
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Service fee revenue
$
50,331

 
$
53,141

 
$
(2,810
)
 
73.5
 %
 
69.0
 %
 
$
101,769

 
$
109,628

 
$
(7,859
)
 
72.4
 %
 
70.5
 %
Product revenue, net
6,138

 
8,847

 
(2,709
)
 
9.0
 %
 
11.5
 %
 
13,638

 
18,612

 
(4,974
)
 
9.7
 %
 
12.0
 %
Pass-through revenue
12,041

 
15,063

 
(3,022
)
 
17.6
 %
 
19.5
 %
 
25,253

 
27,232

 
(1,979
)
 
18.0
 %
 
17.5
 %
Total revenues
68,510

 
77,051

 
(8,541
)
 
100.0
 %
 
100.0
 %
 
140,660

 
155,472

 
(14,812
)
 
100.0
 %
 
100.0
 %
Costs of Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of service fee
   revenue
32,809

 
33,294

 
(485
)
 
65.2
 %
(1)
62.7
 %
 
66,767

 
68,902

 
(2,135
)
 
65.6
 %
(1)
62.9
 %
Cost of product revenue
5,791

 
8,403

 
(2,612
)
 
94.3
 %
(2)
95.0
 %
 
12,868

 
17,719

 
(4,851
)
 
94.4
 %
(2)
95.2
 %
Cost of pass-through
   revenue
12,041

 
15,063

 
(3,022
)
 
100.0
 %
(3)
100.0
 %
 
25,253

 
27,232

 
(1,979
)
 
100.0
 %
(3)
100.0
 %
Total costs of revenues
50,641

 
56,760

 
(6,119
)
 
73.9
 %
 
73.7
 %
 
104,888

 
113,853

 
(8,965
)
 
74.6
 %
 
73.2
 %
Service fee gross
   profit
17,522

 
19,847

 
(2,325
)
 
34.8
 %
(1)
37.3
 %
 
35,002

 
40,726

 
(5,724
)
 
34.4
 %
(1)
37.1
 %
Product revenue gross
   profit
347

 
444

 
(97
)
 
5.7
 %
(2)
5.0
 %
 
770

 
893

 
(123
)
 
5.6
 %
(2)
4.8
 %
Total gross profit
17,869

 
20,291

 
(2,422
)
 
26.1
 %
 
26.3
 %
 
35,772

 
41,619

 
(5,847
)
 
25.4
 %
 
26.8
 %
Selling, General and
   Administrative expenses
18,096

 
19,756

 
(1,660
)
 
26.4
 %
 
25.6
 %
 
36,443

 
40,415

 
(3,972
)
 
25.9
 %
 
26.0
 %
Income (loss) from
   operations
(227
)
 
535

 
(762
)
 
(0.3
)%
 
0.7
 %
 
(671
)
 
1,204

 
(1,875
)
 
(0.5
)%
 
0.8
 %
Interest expense, net
448

 
585

 
(137
)
 
0.7
 %
 
0.8
 %
 
959

 
1,190

 
(231
)
 
0.7
 %
 
0.8
 %
Income (loss) before
   income taxes
(675
)
 
(50
)
 
(625
)
 
(1.0
)%
 
(0.1
)%
 
(1,630
)
 
14

 
(1,644
)
 
(1.2
)%
 
 %
Income tax expense, net
300

 
576

 
(276
)
 
0.4
 %
 
0.7
 %
 
509

 
1,389

 
(880
)
 
0.4
 %
 
0.9
 %
Net loss
$
(975
)
 
$
(626
)
 
$
(349
)
 
(1.4
)%
 
(0.8
)%
 
$
(2,139
)
 
$
(1,375
)
 
$
(764
)
 
(1.5
)%
 
(0.9
)%
(1)    Represents the percent of Service fee revenue.
(2)    Represents the percent of Product revenue, net.
(3)    Represents the percent of Pass-through revenue.
Segment Operating Data
PFS Operations (in thousands, except percentages)
 
Three Months Ended
June 30,
 
 
 
 
 
Six Months Ended
June 30,
 
 
 
 
 
2019
 
2018
 
Change
 
Change %
 
2019
 
2018
 
Change
 
Change %
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Service fee revenue
$
31,700

 
$
33,193

 
$
(1,493
)
 
(4
)%
 
$
64,754

 
$
68,115

 
$
(3,361
)
 
(5
)%
Product revenue, net
6,138

 
8,847

 
(2,709
)
 
(31
)%
 
13,638

 
18,612

 
(4,974
)
 
(27
)%
Pass-through revenue
11,412

 
14,575

 
(3,163
)
 
(22
)%
 
24,289

 
26,375

 
(2,086
)
 
(8
)%
Total revenues
49,250

 
56,615

 
(7,365
)
 
(13
)%
 
102,681

 
113,102

 
(10,421
)
 
(9
)%
Costs of Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of service fee revenue
22,755

 
22,963

 
(208
)
 
(1
)%
 
46,675

 
48,302

 
(1,627
)
 
(3
)%
Cost of product revenue
5,791

 
8,403

 
(2,612
)
 
(31
)%
 
12,868

 
17,719

 
(4,851
)
 
(27
)%
Cost of pass-through revenue
11,412

 
14,575

 
(3,163
)
 
(22
)%
 
24,289

 
26,375

 
(2,086
)
 
(8
)%
Total costs of revenues
39,958

 
45,941

 
(5,983
)
 
(13
)%
 
83,832

 
92,396

 
(8,564
)
 
(9
)%
Gross Profit
9,292

 
10,674

 
(1,382
)
 
(13
)%
 
18,849

 
20,706

 
(1,857
)
 
(9
)%
Direct operating expenses
7,163

 
6,741

 
422

 
6
 %
 
14,195

 
12,472

 
1,723

 
14
 %
Direct contribution
$
2,129

 
$
3,933

 
$
(1,804
)
 
(46
)%
 
$
4,654

 
$
8,234

 
$
(3,580
)
 
(43
)%

19



PFS Operations total revenues for the three months ended June 30, 2019 decreased by $7.4 million compared with the corresponding period in 2018. Service fee revenue decreased $1.5 million primarily due to reduced revenue applicable to a client bankruptcy, which accounted for $2.3 million of the decrease, partially offset by growth from existing clients. Product revenue, net, decreased by $2.7 million due to the revenue stream being primarily dependent on one client, which restructured its operations and discontinued certain product lines which has resulted, and is expected to continue to result, in reduced product revenue activity.
PFS Operations total revenues for the six months ended June 30, 2019 decreased by $10.4 million compared with the corresponding period in 2018. Service fee revenue decreased $3.4 million primarily due to reduced revenue applicable to a client bankruptcy, which accounted for $3.6 million of the decrease, partially offset by growth from existing clients. Product revenue, net, decreased by $5.0 million due to the revenue stream being primarily dependent on one client, which restructured its operations and discontinued certain product lines which has resulted, and is expected to continue to result, in reduced product revenue activity.
Pass-through revenue decreased by $3.2 million and $2.1 million during the three and six months ended June 30, 2019, respectively, compared to the corresponding periods in 2018 primarily due to client attrition and the client bankruptcy. 
PFS Operations gross margin remained constant at 18.9% for the three months ended June 30, 2019 as compared to the same period of the prior year.
PFS Operations gross margin increased slightly to 18.4% for the six months ended June 30, 2019 as compared to 18.3% in the same period of the prior year.
Direct operating expenses increased by $0.4 million and $1.7 million for the three and six months ended June 30, 2019, respectively, compared to the corresponding periods in 2018. The increase was primarily due to increased sales and marketing costs and facility costs, as well as a higher provision for doubtful accounts due to a client bankruptcy, partially offset by certain personnel related and other cost reductions.
LiveArea Professional Services (in thousands, except percentages)
 
Three Months Ended
June 30,
 
 
 
 
 
Six Months Ended
June 30,
 
 
 
 
 
2019
 
2018
 
Change
 
Change %
 
2019
 
2018
 
Change
 
Change %
Revenues