PFSweb, Inc.
PFSWEB INC (Form: 10-Q, Received: 08/09/2017 16:36:48)

 

 

 

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 June 30, 2017

OR

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

For the Transition Period from              to              

Commission File Number 000-28275

 

PFSweb, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

75-2837058

(State of Incorporation)

 

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

 

505 Millennium Drive, Allen, Texas

 

75013

(Address of principal executive offices)

 

(Zip Code)

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes       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 or a non-accelerated filer.

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

At August 4, 2017 there were 18,983,505 shares of registrant’s common stock outstanding.

 

 

 

 


 

PFSWEB, INC. AND SUBSIDIARIES

Form 10-Q

June 30, 2017

INDEX

 

PART I. FINANCIAL INFORMATION

 

Page

Number

 

Item 1.

Financial Statements :

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2017 (Unaudited) and December 31, 2016

 

3

 

 

Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2017 and 2016

 

4

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016

 

5

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

6

 

Item 2.

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

 

19

 

Item 3.

Quantitative and Qualitative Disclosure about Market Risk

 

26

 

Item 4.

Controls and Procedures

 

26

 

PART II. OTHER INFORMATION

 

 

Item 1.

 

Legal Proceedings

 

27

Item 1A.

 

Risk Factors

 

27

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

28

Item 3.

 

Defaults Upon Senior Securities

 

28

Item 4.

 

Mine Safety Disclosure

 

28

Item 5.

 

Other Information

 

28

Item 6.

 

Exhibits

 

29

 

SIGNATURES

 

30

 

 

 

2


 

PART I. FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

PFSweb, Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Data)

 

 

(Unaudited)

 

 

 

 

 

 

June 30,

 

 

December 31,

 

 

2017

 

 

2016

 

ASSETS

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

Cash and cash equivalents

$

19,132

 

 

$

24,425

 

Restricted cash

 

215

 

 

 

215

 

Accounts receivable, net of allowance for doubtful accounts of $564 and $494

   at June 30, 2017 and December 31, 2016, respectively

 

61,656

 

 

 

80,223

 

Inventories, net of reserves of $496 and $568 at June 30, 2017 and

   December 31, 2016, respectively

 

7,734

 

 

 

6,632

 

Other receivables

 

5,100

 

 

 

6,750

 

Prepaid expenses and other current assets

 

5,440

 

 

 

7,299

 

Total current assets

 

99,277

 

 

 

125,544

 

PROPERTY AND EQUIPMENT, net

 

26,976

 

 

 

30,264

 

IDENTIFIABLE INTANGIBLES, net

 

5,150

 

 

 

6,864

 

GOODWILL

 

46,210

 

 

 

46,210

 

OTHER ASSETS

 

3,653

 

 

 

2,454

 

Total assets

$

181,266

 

 

$

211,336

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

Current portion of long-term debt and capital lease obligations

$

7,833

 

 

$

7,300

 

Trade accounts payable

 

44,697

 

 

 

59,752

 

Deferred revenue

 

5,345

 

 

 

7,156

 

Performance-based contingent payments

 

3,902

 

 

 

2,405

 

Accrued expenses

 

25,901

 

 

 

30,360

 

Total current liabilities

 

87,678

 

 

 

106,973

 

LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, less

   current portion

 

45,912

 

 

 

52,399

 

DEFERRED REVENUE, less current portion

 

4,702

 

 

 

4,127

 

DEFERRED RENT

 

4,869

 

 

 

4,810

 

PERFORMANCE-BASED CONTINGENT PAYMENTS, less current portion

 

 

 

 

1,678

 

OTHER LIABILITIES

 

2,234

 

 

 

1,066

 

Total liabilities

 

145,395

 

 

 

171,053

 

 

 

 

 

 

 

 

 

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; 18,946,818

  and 18,768,567 shares issued at June 30, 2017 and December 31, 2016,

  respectively; and 18,913,351 and 18,735,100 outstanding at June 30,

  2017 and December 31, 2016, respectively

 

19

 

 

 

19

 

Additional paid-in capital

 

148,519

 

 

 

146,286

 

Accumulated deficit

 

(112,769

)

 

 

(105,317

)

Accumulated other comprehensive income (loss)

 

227

 

 

 

(580

)

Treasury stock at cost, 33,467 shares

 

(125

)

 

 

(125

)

Total shareholders’ equity

 

35,871

 

 

 

40,283

 

Total liabilities and shareholders’ equity

$

181,266

 

 

$

211,336

 

 

 

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

(In Thousands, Except Per Share Data)

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service fee revenue

$

54,700

 

 

$

51,166

 

 

$

111,965

 

 

$

100,484

 

Product revenue, net

 

9,947

 

 

 

11,380

 

 

 

21,265

 

 

 

24,987

 

Pass-through revenue

 

13,419

 

 

 

14,653

 

 

 

23,604

 

 

 

26,809

 

Total revenues

 

78,066

 

 

 

77,199

 

 

 

156,834

 

 

 

152,280

 

COSTS OF REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of service fee revenue

 

35,977

 

 

 

34,381

 

 

 

75,561

 

 

 

66,655

 

Cost of product revenue

 

9,505

 

 

 

10,742

 

 

 

20,230

 

 

 

23,644

 

Cost of pass-through revenue

 

13,419

 

 

 

14,653

 

 

 

23,604

 

 

 

26,809

 

Total costs of revenues

 

58,901

 

 

 

59,776

 

 

 

119,395

 

 

 

117,108

 

Gross profit

 

19,165

 

 

 

17,423

 

 

 

37,439

 

 

 

35,172

 

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES,

    including stock based compensation of $1,237 and $629 for

    the three months ended  June 30, 2017 and 2016, respectively

    and $1,761 and $1,396 for the six months ended  June 30, 2017

    and 2016, respectively

 

20,735

 

 

 

18,808

 

 

 

42,453

 

 

 

36,358

 

Loss from operations

 

(1,570

)

 

 

(1,385

)

 

 

(5,014

)

 

 

(1,186

)

INTEREST EXPENSE, net

 

710

 

 

 

609

 

 

 

1,347

 

 

 

1,094

 

Loss from operations before income taxes

 

(2,280

)

 

 

(1,994

)

 

 

(6,361

)

 

 

(2,280

)

INCOME TAX EXPENSE, net

 

316

 

 

 

188

 

 

 

1,091

 

 

 

654

 

NET LOSS

$

(2,596

)

 

$

(2,182

)

 

$

(7,452

)

 

$

(2,934

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET LOSS PER SHARE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

(0.14

)

 

$

(0.12

)

 

$

(0.40

)

 

$

(0.16

)

Diluted

$

(0.14

)

 

$

(0.12

)

 

$

(0.40

)

 

$

(0.16

)

WEIGHTED AVERAGE NUMBER OF SHARES

   OUTSTANDING:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

18,870

 

 

 

18,627

 

 

 

18,804

 

 

 

18,477

 

Diluted

 

18,870

 

 

 

18,627

 

 

 

18,804

 

 

 

18,477

 

COMPREHENSIVE LOSS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

$

(2,596

)

 

$

(2,182

)

 

$

(7,452

)

 

$

(2,934

)

Foreign currency translation adjustment

 

511

 

 

 

669

 

 

 

807

 

 

 

965

 

TOTAL COMPREHENSIVE LOSS

$

(2,085

)

 

$

(1,513

)

 

$

(6,645

)

 

$

(1,969

)

 

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)

 

 

Six Months Ended

 

 

June 30,

 

 

2017

 

 

2016

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net loss

$

(7,452

)

 

$

(2,934

)

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

 

 

 

 

 

 

 

Depreciation and amortization

 

7,565

 

 

 

7,403

 

Amortization of debt issuance costs

 

76

 

 

 

73

 

Provision for doubtful accounts

 

89

 

 

 

18

 

Provision for excess and obsolete inventory

 

31

 

 

 

27

 

Deferred income taxes

 

240

 

 

 

(9

)

Stock-based compensation expense

 

1,761

 

 

 

1,396

 

Change in performance-based contingent payments

 

2,177

 

 

 

(1,768

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

19,725

 

 

 

11,930

 

Inventories

 

(1,125

)

 

 

1,205

 

Prepaid expenses, other receivables and other assets

 

3,396

 

 

 

4,867

 

Deferred rent

 

78

 

 

 

921

 

Accounts payable, deferred revenue, accrued expenses and other liabilities

 

(23,139

)

 

 

(20,012

)

Net cash provided by operating activities

 

3,422

 

 

 

3,117

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Purchases of property and equipment

 

(1,975

)

 

 

(6,553

)

Acquisitions, net of cash acquired

 

 

 

 

(8,320

)

Net cash used in investing activities

 

(1,975

)

 

 

(14,873

)

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Net proceeds from issuance of common stock

 

402

 

 

 

1,037

 

Taxes paid on behalf of employees for withheld shares

 

(256

)

 

 

(1,307

)

Decrease in restricted cash

 

 

 

 

56

 

Payments on performance-based contingent payments

 

(2,004

)

 

 

(9,454

)

Payments on capital lease obligations

 

(1,678

)

 

 

(1,415

)

Proceeds from (payments on) debt, net

 

405

 

 

 

(2,492

)

Borrowings (payments) on term loan

 

(1,125

)

 

 

12,000

 

Borrowings on revolver

 

45,619

 

 

 

42,839

 

Payments on revolver

 

(49,880

)

 

 

(35,095

)

Net cash provided by (used in) financing activities

 

(8,517

)

 

 

6,169

 

 

 

 

 

 

 

 

 

EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS

 

1,777

 

 

 

498

 

 

 

 

 

 

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

 

(5,293

)

 

 

(5,089

)

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, beginning of period

 

24,425

 

 

 

21,781

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, end of period

$

19,132

 

 

$

16,692

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION

 

 

 

 

 

 

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

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

$

1,072

 

 

$

1,654

 

 

 

 

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. OVERVIEW AND BASIS OF PRESENTATION

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

PFSweb Overview

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

Supplies Distributors Overview

Supplies Distributors and PFSweb operate under distributor agreements with Ricoh Company Limited and Ricoh USA Inc., a strategic business unit within the Ricoh Family Group of Companies (collectively hereafter referred to as “Ricoh”), under which Supplies Distributors acts as a distributor of various Ricoh products. The majority of Supplies Distributors’ revenue is generated by its sale of product purchased from Ricoh. Supplies Distributors has obtained financing (see Note 7) to fund certain working capital requirements for the sale of primarily Ricoh products. Supplies Distributors sells its products in the United States, Canada and Europe.

Supplies Distributors also maintains agreements with certain additional clients where it operates as an agent for the resale of product between the client and the customer, and records product revenue net of cost of product revenue as a component of service fee revenue. Pursuant to agreements between PFSweb and Supplies Distributors, PFSweb provides transaction management and fulfillment services to Supplies Distributors.

Basis of Presentation

The interim condensed consolidated financial statements as of June 30, 2017, and for the three and six months ended June 30, 2017 and 2016, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and are unaudited. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to the rules and regulations promulgated by the SEC. In the opinion of management and subject to the foregoing, the unaudited interim condensed consolidated financial statements of the Company include all adjustments necessary for a fair presentation of the Company’s financial position as of June 30, 2017, its results of operations for the three and six months ended June 30, 2017 and 2016 and its cash flows for the six months ended June 30, 2017 and 2016. Results of the Company’s operations for interim periods may not be indicative of results for the full fiscal year.  

 

 

2. SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

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

Estimates and assumptions about future events and their effects cannot be determined with certainty. The Company bases its estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances.

6


PFSweb, Inc. and Subsidiaries

Notes to Unaudited Condensed Financial Statements

These estimates may change as new events occur, as additional information is obtained and as the operating environment changes. These changes have b een included in the condensed consolidated financial statements as soon as they became known. In addition, management is periodically faced with uncertainties, the outcomes of which are not within its control and will not be known for prolonged periods of time. These uncertainties are discussed in this report and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 in the section entitled “Risk Factors.” Based on a critical assessment of accounting policies and the underlying jud gments and uncertainties affecting the application of those policies, management believes the Company’s condensed consolidated financial statements are fairly stated in accordance with U.S. GAAP, and provide a fair presentation of the Company’s financial p osition and results of operations.

Revenue and Cost Recognition

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

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

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

Service Fee Revenue Activity

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

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

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

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

Professional consulting and technology service revenues primarily relate to design, implementation, service and support of eCommerce platforms, website design and solutions and quality control for the Company’s clients. Additionally, the Company

7


PFSweb, Inc. and Subsidiaries

Notes to Unaudited Condensed Financial Statements

provides digital agency services that enable client marketing programs to attract new customers, convert buyers and increase website value. These fees are typically charged on either a per labor hour basis, or transaction basis, a dedicated resource model, a fixed price arrangement, or a percent of merchandise shipped basis. Service fee re venue for this activity is generally recognized as the services are rendered.

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

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

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

Product Revenue Activity

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

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

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

Accounts Receivable

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

Deferred Revenues and Deferred Costs

The Company primarily performs its services under multiple-year contracts, certain of which include early termination provisions, and clients are obligated to pay for services performed. In conjunction with these long-term contracts, the Company

8


PFSweb, Inc. and Subsidiaries

Notes to Unaudited Condensed Financial Statements

sometimes receives start-up fees to cover its implementation costs, including certain technology infras tructure and development costs. When the Company determines that these start-up and integration activities do not meet the criteria for recognition as a separate unit of accounting, the Company defers the start-up fees received, and the related costs, and recognizes them over the expected performance period. The amortization of deferred revenue is included as a component of service fee revenue. The amortization of deferred implementation costs is included as a cost of service fee revenue. To the extent impl ementation costs for non-technology infrastructure and development exceed the corresponding fees received, the excess costs are expensed as incurred.

 

Concentration of Business and Credit Risk

No product customer nor service fee client relationship represented more than 10% of the Company’s consolidated total revenues during the six months ended June 30, 2017. One service fee client relationship represented more than 10% of the Company’s consolidated total revenues during the six months ended June 30, 2016. No client exceeded 10% of consolidated accounts receivable as of June 30, 2017. Amounts due from one client exceeded 10% of consolidated accounts receivable as of December 31, 2016.

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

 

Six Months Ended

 

 

June 30,

 

 

2017

 

 

2016

 

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

 

 

 

 

 

 

 

Client 1

 

9

%

 

 

10

%

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

 

 

 

 

 

 

 

Customer 1

 

7

%

 

 

13

%

Customer 2

 

14

%

 

 

15

%

Customer 3

 

14

%

 

 

5

%

 

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

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

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

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

 

Operating Leases

The Company leases certain real estate for its warehouse, call center, sales, professional services and corporate offices, as well as certain equipment, under non-cancelable operating leases that expire at various dates through 2026. Management expects that, in the normal course of business, leases that expire will be renewed or replaced by other similar leases. The Company recognizes escalating lease payments on a straight-line basis over the term of each respective lease, and classifies with the difference between cash payments and rent expense recognized as deferred rent in the accompanying condensed consolidated balance sheets.

Property and Equipment

The Company’s property and equipment held under capital leases totaled approximately $4.1 million and $5.4 million, net of accumulated amortization of approximately $6.6 million and $5.1 million, at June 30, 2017 and December 31, 2016, respectively.

9


PFSweb, Inc. and Subsidiaries

Notes to Unaudited Condensed Financial Statements

Depreciation and amortization expense related to capital leases during the six months ended June 30,  2017 and 2016 was $1.6 million and $1.4 million, respectively.       

Income Taxes

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

Cash Paid for Interest and Taxes

The Company made payments for interest of approximately $1.2 million and $0.8 million in the six months ended June 30, 2017 and 2016, respectively.   Income taxes of approximately $0.8 million and $0.6 million were paid by the Company in the six months ended June 30, 2017 and 2016, respectively.  

 

Impact of Recently Issued Accounting Standards

Pronouncements Recently Adopted

In March 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU 2016-09, “ Compensation Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting .” The amendment in this ASU affects all organizations that issue share-based payment awards to employees and is intended to simplify several aspects of the accounting for these awards, including income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows, and allowing an accounting policy election to account for forfeitures as they occur. As permitted by ASU 2016-09, the Company elected to early adopt ASU 2016-09 in the quarter ended June 30, 2016 with an effective date of January 1, 2016. As a result of the adoption, the Company recognized previously unrecognized excess tax benefits of $1.9 million, which was offset by a valuation allowance in the same amount as the Company does not believe, on a more-likely-than-not basis, the net operating losses will be realized. The adoption of ASU 2016-09 resulted in a cumulative adjustment to equity, subject to a full valuation allowance, as of January 1, 2016.   Additionally, as a result of the adoption, the Company reclassified previous years taxes paid on behalf of employees for withheld shares in the condensed consolidated cash flow statements.

In July 2015, the FASB issued ASU No. 2015-11, “ Simplifying the Measurement of Inventory,” which modifies existing requirements regarding measuring inventory at the lower of cost or market. Under existing standards, the market amount requires consideration of replacement cost, net realizable value (NRV), and NRV less an approximately normal profit margin. The new ASU replaces market with NRV, defined as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This eliminates the need to determine and consider replacement cost or NRV less an approximately normal profit margin when measuring inventory. The Company adopted this standard prospectively effective January 1, 2017, which did not have a material impact on the Company’s unaudited condensed consolidated financial statements.

In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes,” which simplifies the presentation of deferred income taxes by requiring deferred tax assets and liabilities be classified as noncurrent on the balance sheet.  The Company adopted this standard effective January 1, 2017, which did not have a material impact on the unaudited condensed consolidated financial statements.  

Pronouncements Not Yet Adopted

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” The new guidance outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry specific guidance. The core principle behind ASU No. 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for delivering those goods and services. The standard creates a model that requires companies to exercise judgment when considering the terms of a contract and all relevant facts and circumstances. The new standard requires significantly expanded disclosures about revenue contract assets and liabilities and includes new accounting principles related to the deferral and amortization of contract acquisition and fulfillment costs. The ASU allows two

10


PFSweb, Inc. and Subsidiaries

Notes to Unaudited Condensed Financial Statements

methods of adoption: (a) a fu ll retrospective approach in which the standard is applied to all periods presented, or (b) a modified retrospective approach in which the standard is applied only to the most current period presented in the financial statements. In August 2015, the FASB d eferred the effective date of this standards update to fiscal years beginning after December 15, 2017, with early adoption permitted on the original effective date of fiscal years beginning after December 15, 2016. The Company currently anticipates adoptin g the standard using the modified retrospective method. The Company is assessing the new standard and analyzing the standard’s impact on the Company’s internal controls, accounting policies and financial statements and disclosures. As the Company is in the process of evaluating the impact of the standard, it has not yet quantified the impact of the adoption. However, based on the initial phase of its evaluation process, the Company has identified certain potential areas of impact. Application of the new sta ndard requires that incremental costs of obtaining a contract (including sales commissions plus any associated fringe benefits) be recognized as an asset and expensed over the expected life of the arrangement, unless that life is less than one year. Curren tly the Company expenses certain of these contract acquisition costs as incurred. Additionally, the Company is assessing the expanded disclosure requirements of the new standard and whether the principal versus agent considerations would change how it pres ents certain revenues, primarily pass-through revenues. During 2017, the Company expects to continue its evaluation and implementation processes, which will include the quantification of impact and development of policies, to facilitate adoption during the quarter ended March 31, 2018. 

In February 2016, the FASB issued ASU 2016-02, “Leases.” The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record an 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. The new standard 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 ASU’s impact 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.

In August 2016, the FASB issued ASU 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”). The new guidance 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. Early adoption is permitted.  The Company is currently assessing this ASU’s impact on its unaudited condensed consolidated 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 is currently evaluating the effect of ASU 2017-04.    

In May 2017, the Financial Accounting Standards Board (the “FASB”) issued ASU 2017-09, “Compensation Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”). The amendments in this ASU affect any entity that changes the terms or conditions of a share-based payment award. The new guidance is intended to provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, to a change to the terms or conditions of a share-based payment award. ASU 2017-09 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted.  The Company is currently assessing this ASU’s impact on its unaudited condensed consolidated financial statements.

 

 

 

11


PFSweb, Inc. and Subsidiaries

Notes to Unaudited Condensed Financial Statements

3. ACQUISITIONS

 

Acquisitions have been recorded using the purchase method of accounting for business combinations.    

Acquisition of Conexus

On June 8, 2016, PFSweb, Inc. acquired the outstanding capital stock of Conexus, an eCommerce system integrator that provides strategic consulting, system integration, and managed services for leading businesses and technology companies from its primary operations in Basingstoke, Hampshire (U.K.). The purchase price for the shares consisted of (i) an initial cash payment of £5,855,000 (approximately $8.5 million at June 8, 2016), subject to a post-closing adjustment based upon a May 31, 2016 balance sheet analysis, and (ii) up to an aggregate maximum of £1,445,000 (approximately $1.8 million at June 30, 2017), subject to Conexus achieving certain operational and financial targets during the post-closing period ending December 31, 2016 (the “Earn-out Payment”), subject to possible offsets for indemnification and other claims arising under the purchase agreement. Conexus did not achieve the operational and financial targets so the Company did not make any payments or record any liability as of June 30, 2017 or December 31, 2016 applicable to the Earn-out Payment .

The transaction was accounted for using the purchase method of accounting for business combinations and, accordingly, the assets acquired and liabilities assumed, including an allocation of purchase price, and the results of operations of Conexus, including the amortization of acquired intangible assets, have been included in the Company's consolidated financial statements since the date of acquisition.

The Company determined fair value using a combination of the discounted cash flow, market multiple and market capitalization valuation methods. The following table summarizes the fair value of the tangible and intangible assets acquired and liabilities assumed (in thousands):

 

Cash

 

$

156

 

Accounts receivable, net

 

 

1,451

 

Other receivables

 

 

887

 

Other assets

 

 

421

 

Identifiable intangibles

 

 

2,035

 

Total assets acquired

 

 

4,950

 

Total liabilities assumed

 

 

2,218

 

Net assets acquired

 

 

2,732

 

Goodwill

 

 

6,336

 

Total purchase price

 

$

9,068

 

 

The purchase price for Conexus was as follows (in thousands):

 

Aggregate cash payments

 

$

8,515

 

Performance-based contingent payments (based on

   fair value at acquisition date)

 

 

553

 

Total purchase price

 

$

9,068

 

 

The excess of the purchase price over the fair value of the net identifiable assets acquired and liabilities assumed was allocated to goodwill. Total goodwill of $6.3 million, none of which is deductible for tax purposes, is not being amortized but is subject to an annual impairment test using a fair-value-based approach.

 

12


PFSweb, Inc. and Subsidiaries

Notes to Unaudited Condensed Financial Statements

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

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

 

 

 

 

 

 

 

 

 

Estimated

 

 

 

 

 

 

June 30, 2017

 

 

December 31, 2016

 

 

Useful Life

 

 

Fair Value

at Acquisition

 

 

Accumulated

Amortization

 

 

Net Carrying

Value

 

 

Accumulated

Amortization

 

 

Net Carrying

Value

 

 

from Acquisition

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Developed technology

 

$

727

 

 

$

(337

)

 

$

390

 

 

$

(145

)

 

$

582

 

 

2.5 years

Customer relationships

 

 

1,308

 

 

 

(761

)

 

 

547

 

 

 

(461

)

 

 

847

 

 

4.5 years

Total definite lived identifiable

   intangible assets

 

$

2,035

 

 

$

(1,098

)

 

$

937

 

 

$

(606

)

 

$

1,429

 

 

 

 

Unaudited pro forma historical results of operations related to the Conexus acquisition have not been presented because they are not material to the Company’s condensed consolidated statements of operations.

Acquisition of CrossView

On August 5, 2015, PFSweb, Inc. acquired substantially all of the assets, and assumed substantially all of the liabilities, in each case, other than certain specified assets and liabilities, of CrossView, Inc. (“CrossView”) an ecommerce systems integrator and provider of a wide range of ecommerce services in the U.S. and Canada.  

Consideration paid by the Company included an initial cash payment of $30.7 million and 553,223 unregistered shares of Company common stock (approximately $6.3 million in value as of the acquisition date). The initial cash payment was subject to adjustment based upon a post-closing balance sheet reconciliation. In addition, the purchase agreement provides for future earn-out payments (“CrossView Earn-out Payments”) payable in 2016, 2017 and 2018 based on the achievement of certain 2015, 2016 and 2017 financial targets. The CrossView Earn-out Payments have no guaranteed minimum and an aggregate maximum of $18.0 million and are subject to possible offsets for indemnification and other claims. During 2016, the Company paid an aggregate of $7.9 million in settlement of the 2015 CrossView Earn-out Payments, of which, $1.6 million was paid by the issuance of 122,066 restricted shares of Company stock. During 2017, the Company paid an aggregate of $2.4 million in settlement of the 2016 CrossView Earn-out Payments, of which, $0.4 million was paid by the issuance of 48,173 restricted shares of Company stock. The Company will pay 15% of any 2017 Earn-outs Payments in restricted shares of Company common stock, based on its current market value at the time of issuance. As of June 30, 2017, the Company had recorded a liability of $3.9 million applicable to the estimated CrossView 2017 Earn-out Payments, which is included in performance-based contingent payment liabilities in the condensed consolidated balance sheets. The estimated performance-based contingent payment liability decreased from $4.1 million as of December 31, 2016 as a result of the payment of the 2016 Earn-out Payments partially offset by an increase in the estimated 2017 CrossView Earn-Out Payments resulting from updated CrossView financial projections for the 2017 earn-out period.    

Performance-Based Contingent Payment

The following table presents the change in the acquisition related performance-based contingent payments for the periods presented (in thousands):

 

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

 

 

As of January 1,

 

$

4,083

 

 

$

14,157

 

CrossView earn-out payments in common stock and cash

 

 

(2,358

)

 

 

(7,942

)

LAL and REV earn-out payments in common stock and cash

 

 

 

 

 

(3,750

)

Value recorded at acquisition - Conexus

 

 

 

 

 

553

 

Change in fair value aggregate balances due

 

 

2,177

 

 

 

(1,609

)

As of June 30,

 

$

3,902

 

 

$

1,409

 

13


PFSweb, Inc. and Subsidiaries

Notes to Unaudited Condensed Financial Statements

 

 

4. GOODWILL AND IDENTIFIABLE INTANGIBLES, NET

Goodwill acquired through acquisitions is recognized as part of the PFSweb segment. The Company determined fair value using a combination of the discounted cash flow, market multiple and market capitalization valuation methods.   

The following table presents the gross carrying value and accumulated amortization for identifiable intangibles (in thousands):

 

 

 

 

 

 

 

June 30, 2017

 

 

 

 

 

Fair Value

 

 

Accumulated

 

 

Net Carrying

 

 

Estimated Useful Life

 

 

at Acquisition

 

 

Amortization

 

 

Value

 

 

from Acquisition

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade names

 

$

1,250

 

 

$

(994

)

 

$

256

 

 

2.25 - 2.5 years

Non-compete agreements

 

 

575

 

 

 

(421

)

 

 

154

 

 

1- 3.5 years

Leasehold

 

 

45

 

 

 

(45

)

 

 

 

 

2.5 years

Customer relationships

 

 

10,287

 

 

 

(6,159

)

 

 

4,128

 

 

1.6 - 9 years

Developed technology

 

 

1,577

 

 

 

(982

)

 

 

595

 

 

2.5-3 years

Other intangibles

 

 

493

 

 

 

(476

)

 

 

17

 

 

9 years

Total definite lived identifiable

   intangible assets

 

$

14,227

 

 

$

(9,077

)

 

$

5,150

 

 

 

 

Definite Lived Intangible Asset Amortization

For each of the three months ended June 30, 2017 and 2016, amortization expense related to acquired definite lived intangible assets was $0.8 million and for the six months ended June 30, 2017 and 2016, amortization expense was $1.5 million and $1.7 million, respectively, which are included in selling, general and administrative expenses in the unaudited condensed consolidated statements of operations. The estimated amortization expense for each of the next five years is as follows (in thousands):  

 

Remaining 2017

$

1,520

 

2018

 

1,671

 

2019

 

750

 

2020

 

521

 

2021

 

282

 

2022

 

220

 

 

 

5. NET LOSS PER COMMON SHARE

Basic and diluted net loss per common share are computed by dividing net loss by the weighted-average number of common shares outstanding for the reporting period.

The following equity awards have been excluded from the calculation of diluted net loss per share as their effect would be anti-dilutive    (in thousands):

 

 

As of  June 30,

 

 

2017

 

 

2016

 

Stock options

 

1,177

 

 

 

1,232

 

Performance shares

 

103

 

 

 

305

 

Restricted stock units

 

186

 

 

 

28

 

Deferred stock units

 

152

 

 

 

104

 

Total

 

1,618

 

 

 

1,669

 

 

 

14


PFSweb, Inc. and Subsidiaries

Notes to Unaudited Condensed Financial Statements

6. STOCK AND STOCK OPTIONS

The Company has an Employee Stock and Incentive Plan, as amended and restated (the “Employee Plan”). The Plan provides for the granting of incentive awards to directors, executive management, key employees, and outside consultants of the Company in a variety of forms of equity-based incentive compensation, such as the award of an option, stock appreciation right, restricted stock award, restricted stock unit, deferred stock unit, among other stock-based awards. The Company uses newly issued shares of common stock to satisfy awards under the Plan.

Total stock-based compensation expense was $1.2 million and $0.6 million for the three months ended and $1.8 million and $1.4 million for the six months ended June 30, 2017 and 2016, respectively, which is included as a component of selling, general and administrative expenses in the unaudited condensed consolidated statements of operations.

O n March 23, 2015, the Company issued Performance-Based Share Awards (as such terms are defined in the Employee Plan) to the Company’s executives and senior management. Under the terms of these 2015 awards, the number of performance shares that each such individual received was subject to, and calculated by reference to, the achievement by the Company of a performance goal measured by a range of targeted financial performance, as defined, for 2015. Based on the Company’s 2015 financial results, the Company issued an aggregate of approximately 283,100 Performance Shares (“2015 Performance Shares”). The 2015 Performance Shares are subject to four year annual vesting based upon continued employment and the achievement of a defined annual financial target, and for certain of the performance shares, the comparative performance (on an annual and cumulative basis) of the Company’s common stock on NASDAQ compared to the Russell Micro Cap Index. The actual number of shares issued on each annual vesting date could range from zero to 100%, depending on the satisfaction of the vesting criteria. Shares that do not vest on a scheduled vesting date due to a failure to satisfy vesting criteria are forfeited and do not vest in future periods. Based upon achievement of the respective vesting criteria, 70,800 of the 2015 Performance Shares vested as of December 31, 2016. As of June 30, 2017, 109,900 of the 2015 Performance Shares did not vest and were forfeited.

In March 2016, pursuant to the Employee Plan, the Company issued additional Restricted Stock Units and 2016 Performance Share Awards (as such terms are defined in the Employee Plan) to the Company’s executive officers and certain senior management under which the number of performance shares to be issued was subject to, and calculated by reference to, the achievement by the Company of a performance goal measured by a range of targeted financial performance, as defined, for 2016 as well as, for certain of the Restricted Stock Units, individual performance goals, as defined. Based on the Company’s 2016 financial performance, no performance shares were awarded under the 2016 Restricted Stock Units and 2016 Performance Based Share Awards.

O n March 31, 2017, the Company issued Restricted Stock Units and Performance-Based Share Awards (as such terms are defined in the Employee Plan) to the Company’s executives and senior management pursuant to which such employees are eligible to receive future grants of shares of the Company’s stock subject to various vesting and/or performance criteria, including the achievement by the Company of certain performance goals measured by defined ranges of targeted financial performance for 2017 and/or future years, the achievement of certain defined total stockholder return targets using the companies in the Russell Micro Cap Index as a comparative group for 2017 and/or future years and/or continued employment through one to three year vesting dates. Assuming satisfaction of all vesting conditions and achievement of the highest performance targets, the aggregate maximum number of shares that could be awarded under these 2017 awards is approximately 697,000. Shares that do not vest on a scheduled vesting date due to a failure to satisfy vesting or performance criteria are forfeited and do not vest in future periods.           

 

 

7. INVENTORY FINANCING

Supplies Distributors has a short-term credit facility with IBM Credit LLC (“IBM Credit”) to finance its purchase and distribution of Ricoh products in the United States, providing financing for eligible Ricoh inventory and certain receivables up to $13.0 million. The agreement has no stated maturity date and provides either party the ability to exit the facility following a 90-day notice. Given the structure of this facility and as outstanding balances, which represent inventory purchases, are repaid within twelve months, the Company has classified the outstanding amounts under this facility, which were $8.2 million and $7.3 million as of June 30, 2017 and December 31, 2016, respectively, as accounts payable in the condensed consolidated balance sheets. As of June 30, 2017, Supplies Distributors had $0.6 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

15


PFSweb, Inc. and Subsidiaries

Notes to Unaudited Condensed Financial Statements

PFSweb. Additionally, PFS is required to maintain a minimum Subordinated Note receivable balance from Supplies Distributors of $2.5 million. Borrowings under the credit facility accrue interest, after a defined free financing p eriod, at prime rate plus 0.5% (4.75% as of June 30, 2017 and 4.25% as of December 31, 2016). The facility also includes a monthly service fee. As of and for the three and six months ended June 30, 2017, the Company was in compliance with all financial cov enants.

 

 

8. DEBT AND CAPITAL LEASE OBLIGATIONS

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

 

 

June 30,

 

 

December 31,

 

 

2017

 

 

2016

 

U.S. Credit Agreement

 

 

 

 

 

 

 

Revolver

$

16,564

 

 

$

20,825

 

Term loan

 

28,313

 

 

 

29,438

 

Equipment loan

 

4,659

 

 

 

3,596

 

Debt issuance costs

 

(451

)

 

 

(525

)

Master lease agreements

 

4,619

 

 

 

6,277

 

Other

 

41

 

 

 

88

 

Total

 

53,745

 

 

 

59,699

 

Less current portion of long-term debt

 

7,833

 

 

 

7,300

 

Long-term debt, less current portion

$

45,912

 

 

$

52,399

 

 

U.S. Credit Agreement

In August 2015, PFSweb, Inc. and its U.S. subsidiaries entered into a credit agreement (“Credit Agreement”) with Regions Bank, as agent for itself and one or more future lenders including Bank of America N.A. and HSBC Bank USA, National Association (the “Lenders”). Under the Credit Agreement, and subject to the terms set forth therein, the Lenders have agreed to provide PFS with a revolving loan facility for up to $32.5 million and a term loan facility for up to $30 million through August 5, 2020. Subject to the terms of the Credit Agreement, PFS has the ability to increase the total loan facilities to $75 million. Availability under the revolving loan facility may not exceed a borrowing base of eligible accounts receivable (as defined). As of June 30, 2017, the Company had $9.6 million   of available credit under the revolving loan facility. Advances under the revolving loan portion of the Credit Agreement are due and payable on August 5, 2020. Term loan advances amortize during the five year term of the Credit Agreement based upon scheduled percentage payments with the then remaining outstanding balance (potentially up to 65% of the amount borrowed) due on August 5, 2020. Borrowings under the Credit Agreement accrue interest at a variable rate based on prime rate or Libor, plus an applicable margin. As of June 30, 2017 and December 31, 2016 , the weighted average interest rate on the revolving loan facility was 4.56% and 3.79%, respectively. As of June 30, 2017 and December 31, 2016, the weighted average interest rate on the term loan facility was 3.91% and 2.93%, respectively. In connection with the Credit Agreement, the Company paid $0.7 million of fees, which are being amortized through the life of the Credit Agreement and are reflected as a net reduction in debt. The Credit Agreement is secured by a lien on substantially all of th e assets of Company and its U.S. subsidiaries and a pledge of 65% of the shares of certain of the Company’s foreign subsidiaries. The Credit Agreement contains cross default provisions, various restrictions upon the Company’s ability to, among other things, merge, consolidate, sell assets, incur indebtedness, make loans and payments to subsidiaries, affiliates and related parties, make capital expenditures, make investments and loans, pledge assets, make changes to capital stock ownership structure, as well as financial covenants, as defined, of a minimum consolidated fixed charge ratio and a maximum consolidated leverage ratio. In June 2016, PFSweb also entered into a Master Agreement with Regions Bank to provide equipment loans financing for certain capital expenditures.

Debt Covenants

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

16


PFSweb, Inc. and Subsidiaries

Notes to Unaudited Condensed Financial Statements

assurance can be given t hat the Company would have the financial ability to repay all of such obligations. As of and for three and six months ended June 30, 2017, the Company was in compliance with all debt covenants.  

Master Lease Agreements

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

 

 

9. SEGMENT INFORMATION

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

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenues (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PFSweb

$

68,445

 

 

$

65,484

 

 

$

135,805

 

 

$

126,474

 

Business and Retail Connect

 

14,056

 

 

 

15,130

 

 

 

30,940

 

 

 

33,074

 

Eliminations

 

(4,435

)

 

 

(3,415

)

 

 

(9,911

)

 

 

(7,268

)

 

$

78,066

 

 

$

77,199

 

 

$

156,834

 

 

$

152,280

 

Income (loss) from operations (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PFSweb

$

(1,930

)

 

$

(1,817

)

 

$

(5,907

)

 

$

(2,114

)

Business and Retail Connect

 

360

 

 

 

432

 

 

 

893

 

 

 

928

 

 

$

(1,570

)

 

$

(1,385

)

 

$

(5,014

)

 

$

(1,186

)

Depreciation and amortization (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PFSweb

$

3,657

 

 

$

3,794

 

 

$

7,556

 

 

$

7,390

 

Business and Retail Connect

 

5

 

 

 

6

 

 

 

9

 

 

 

13

 

 

$

3,662

 

 

$

3,800

 

 

$

7,565

 

 

$

7,403

 

Capital expenditures (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PFSweb

$

1,309

 

 

$

5,186

 

 

$

1,975

 

 

$

6,553

 

Business and Retail Connect

 

 

 

 

 

 

 

 

$

1,309

 

 

$

5,186

 

 

$

1,975

 

 

$

6,553

 

 

 

 

June 30,

 

 

December 31,

 

 

2017

 

 

2016

 

Assets (in thousands):

 

 

 

 

 

 

 

PFSweb

$

147,691

 

 

$

167,152

 

Business and Retail Connect

 

45,116

 

 

 

55,559

 

Eliminations