PFSweb, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
|
(Unaudited)
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
2018
|
|
|
2017
|
|
ASSETS
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
13,622
|
|
|
$
|
19,078
|
|
Restricted cash
|
|
214
|
|
|
|
214
|
|
Accounts receivable, net of allowance for doubtful accounts of $393 and $373
at June 30, 2018 and December 31, 2017, respectively
|
|
53,387
|
|
|
|
72,062
|
|
Inventories, net of reserves of $296 and $342 at June 30, 2018 and
December 31, 2017, respectively
|
|
5,677
|
|
|
|
5,326
|
|
Other receivables
|
|
4,460
|
|
|
|
5,366
|
|
Prepaid expenses and other current assets
|
|
6,470
|
|
|
|
6,633
|
|
Total current assets
|
|
83,830
|
|
|
|
108,679
|
|
PROPERTY AND EQUIPMENT:
|
|
|
|
|
|
|
|
Cost
|
|
116,690
|
|
|
|
120,403
|
|
Less: accumulated depreciation
|
|
(94,932
|
)
|
|
|
(96,225
|
)
|
|
|
21,758
|
|
|
|
24,178
|
|
IDENTIFIABLE INTANGIBLES, net
|
|
2,535
|
|
|
|
3,371
|
|
GOODWILL
|
|
45,424
|
|
|
|
45,698
|
|
OTHER ASSETS
|
|
3,636
|
|
|
|
3,861
|
|
Total assets
|
$
|
157,183
|
|
|
$
|
185,787
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
Trade accounts payable
|
$
|
30,910
|
|
|
$
|
45,070
|
|
Accrued expenses
|
|
22,532
|
|
|
|
29,074
|
|
Current portion of long-term debt and capital lease obligations
|
|
5,537
|
|
|
|
9,460
|
|
Deferred revenues
|
|
5,397
|
|
|
|
7,405
|
|
Performance-based contingent payments
|
|
—
|
|
|
|
3,967
|
|
Total current liabilities
|
|
64,376
|
|
|
|
94,976
|
|
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, less current portion
|
|
40,329
|
|
|
|
37,866
|
|
DEFERRED REVENUES, less current portion
|
|
2,869
|
|
|
|
4,034
|
|
DEFERRED RENT
|
|
5,129
|
|
|
|
5,464
|
|
OTHER LIABILITIES
|
|
2,245
|
|
|
|
2,150
|
|
Total liabilities
|
|
114,948
|
|
|
|
144,490
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
Preferred stock, $1.00 par value; 1,000,000 shares authorized; none issued or outstanding
|
|
—
|
|
|
|
—
|
|
Common stock, $0.001 par value; 35,000,000 shares authorized; 19,291,559 and 19,058,685 shares
issued at June 30, 2018 and December 31, 2017, respectively; and 19,258,092 and 19,025,218
outstanding at June 30, 2018 and December 31, 2017, respectively
|
|
19
|
|
|
|
19
|
|
Additional paid-in capital
|
|
153,429
|
|
|
|
150,614
|
|
Accumulated deficit
|
|
(110,376
|
)
|
|
|
(109,281
|
)
|
Accumulated other comprehensive income
|
|
(712
|
)
|
|
|
70
|
|
Treasury stock at cost, 33,467 shares
|
|
(125
|
)
|
|
|
(125
|
)
|
Total shareholders’ equity
|
|
42,235
|
|
|
|
41,297
|
|
Total liabilities and shareholders’ equity
|
$
|
157,183
|
|
|
$
|
185,787
|
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
PFSWEB, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In Thousands, Except Per Share Data)
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
June 30,
|
|
|
June 30,
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service fee revenue
|
$
|
53,141
|
|
|
$
|
54,700
|
|
|
$
|
109,628
|
|
|
$
|
111,965
|
|
Product revenue, net
|
|
8,847
|
|
|
|
9,947
|
|
|
|
18,612
|
|
|
|
21,265
|
|
Pass-through revenue
|
|
15,063
|
|
|
|
13,419
|
|
|
|
27,232
|
|
|
|
23,604
|
|
Total revenues
|
|
77,051
|
|
|
|
78,066
|
|
|
|
155,472
|
|
|
|
156,834
|
|
COSTS OF REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service fee revenue
|
|
33,294
|
|
|
|
35,977
|
|
|
|
68,902
|
|
|
|
75,561
|
|
Cost of product revenue
|
|
8,403
|
|
|
|
9,505
|
|
|
|
17,719
|
|
|
|
20,230
|
|
Cost of pass-through revenue
|
|
15,063
|
|
|
|
13,419
|
|
|
|
27,232
|
|
|
|
23,604
|
|
Total costs of revenues
|
|
56,760
|
|
|
|
58,901
|
|
|
|
113,853
|
|
|
|
119,395
|
|
Gross profit
|
|
20,291
|
|
|
|
19,165
|
|
|
|
41,619
|
|
|
|
37,439
|
|
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
|
|
19,756
|
|
|
|
20,735
|
|
|
|
40,415
|
|
|
|
42,453
|
|
Income (loss) from operations
|
|
535
|
|
|
|
(1,570
|
)
|
|
|
1,204
|
|
|
|
(5,014
|
)
|
INTEREST EXPENSE, net
|
|
585
|
|
|
|
710
|
|
|
|
1,190
|
|
|
|
1,347
|
|
Income (loss) before income taxes
|
|
(50
|
)
|
|
|
(2,280
|
)
|
|
|
14
|
|
|
|
(6,361
|
)
|
INCOME TAX EXPENSE, net
|
|
576
|
|
|
|
316
|
|
|
|
1,389
|
|
|
|
1,091
|
|
NET LOSS
|
$
|
(626
|
)
|
|
$
|
(2,596
|
)
|
|
$
|
(1,375
|
)
|
|
$
|
(7,452
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.03
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.40
|
)
|
Diluted
|
$
|
(0.03
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.40
|
)
|
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
19,174
|
|
|
|
18,870
|
|
|
|
19,160
|
|
|
|
18,804
|
|
Diluted
|
|
19,174
|
|
|
|
18,870
|
|
|
|
19,160
|
|
|
|
18,804
|
|
COMPREHENSIVE LOSS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
$
|
(626
|
)
|
|
$
|
(2,596
|
)
|
|
$
|
(1,375
|
)
|
|
$
|
(7,452
|
)
|
Foreign currency translation adjustment
|
|
(1,239
|
)
|
|
|
511
|
|
|
|
(782
|
)
|
|
|
807
|
|
TOTAL COMPREHENSIVE LOSS
|
$
|
(1,865
|
)
|
|
$
|
(2,085
|
)
|
|
$
|
(2,157
|
)
|
|
$
|
(6,645
|
)
|
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,
|
|
|
2018
|
|
|
2017
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net loss
|
$
|
(1,375
|
)
|
|
$
|
(7,452
|
)
|
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
5,957
|
|
|
|
7,565
|
|
Amortization of debt issuance costs
|
|
71
|
|
|
|
76
|
|
Provision for doubtful accounts
|
|
22
|
|
|
|
89
|
|
Provision for excess and obsolete inventory
|
|
108
|
|
|
|
31
|
|
Loss on disposal of fixed assets
|
|
42
|
|
|
|
—
|
|
Deferred income taxes
|
|
8
|
|
|
|
240
|
|
Stock-based compensation expense
|
|
2,006
|
|
|
|
1,761
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts receivable
|
|
18,326
|
|
|
|
19,725
|
|
Inventories
|
|
(459
|
)
|
|
|
(1,125
|
)
|
Prepaid expenses, other receivables and other assets
|
|
1,193
|
|
|
|
3,396
|
|
Deferred rent
|
|
(300
|
)
|
|
|
78
|
|
Accounts payable, deferred revenues, accrued expenses and other liabilities
|
|
(22,887
|
)
|
|
|
(20,962
|
)
|
Net cash provided by operating activities
|
|
2,712
|
|
|
|
3,422
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
(1,941
|
)
|
|
|
(1,975
|
)
|
Proceeds from sale of property and equipment
|
|
59
|
|
|
|
—
|
|
Net cash used in investing activities
|
|
(1,882
|
)
|
|
|
(1,975
|
)
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Net proceeds from issuance of common stock
|
|
350
|
|
|
|
402
|
|
Taxes paid on behalf of employees for withheld shares
|
|
(363
|
)
|
|
|
(256
|
)
|
Payments on performance-based contingent payments
|
|
(3,268
|
)
|
|
|
(2,004
|
)
|
Payments on capital lease obligations
|
|
(1,359
|
)
|
|
|
(1,678
|
)
|
Payments on term loan
|
|
(1,500
|
)
|
|
|
(1,125
|
)
|
Payments on revolving loan
|
|
(59,183
|
)
|
|
|
(49,880
|
)
|
Borrowings on revolving loan
|
|
59,949
|
|
|
|
45,619
|
|
Payments on other debt
|
|
(494
|
)
|
|
|
(490
|
)
|
Borrowings on other debt
|
|
309
|
|
|
|
895
|
|
Net cash used in financing activities
|
|
(5,559
|
)
|
|
|
(8,517
|
)
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATES ON CASH, CASH EQUIVALENTS AND RESTRICTED CASH
|
|
(727
|
)
|
|
|
1,777
|
|
NET DECREASE IN CASH AND CASH EQUIVALENTS
|
|
(5,456
|
)
|
|
|
(5,293
|
)
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period
|
|
19,078
|
|
|
|
24,425
|
|
Restricted cash, beginning of period
|
|
214
|
|
|
|
215
|
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period
|
|
19,292
|
|
|
|
24,640
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
13,622
|
|
|
|
19,132
|
|
Restricted cash, end of period
|
|
214
|
|
|
|
215
|
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period
|
$
|
13,836
|
|
|
$
|
19,347
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
$
|
973
|
|
|
$
|
844
|
|
Cash paid for interest
|
$
|
1,080
|
|
|
$
|
1,152
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
Property and equipment acquired under long-term debt and capital leases
|
$
|
1,033
|
|
|
$
|
1,072
|
|
Performance-based contingent payments through stock issuance
|
$
|
822
|
|
|
$
|
354
|
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
1.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of PFSweb, Inc. and its subsidiaries (the “Company”) have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”),
and include all normal and recurring adjustments necessary to present fairly the unaudited condensed consolidated balance sheets, statements of operations and comprehensive loss, and statements of cash flows for the periods indicated
. Certain information and note disclosures normally included in annual financial statements prepared in accordance with
accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted pursuant to the rules and regulations of the SEC. This report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. Results of the Company’s operations for interim periods may not be indicative of results for the full fiscal year. The Company reclassifies certain prior year amounts, as applicable, to conform to the current year presentation.
2.
Significant Accounting Policies
For a complete set of the Company’s significant accounting policies, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
During the three and six-month periods ending June 30, 2018, there were no significant changes to our significant accounting policies, other than those policies impacted by the new revenue recognition guidance as described below in the Impact of Recently Issued Accounting Standards.
Revenue and Cost Recognition
We derive revenue primarily from services provided under contractual arrangements with our clients or from the sale of products under our distributor agreements. The majority of our revenue is derived from contracts and projects that can span from a few months to three to five years.
Revenue is recognized when (or as) we satisfy performance obligations by transferring a promised good or service, an asset, to a client or customer. An asset is transferred to a client or customer when, or as, the client or customer obtains control over that asset. The transaction price includes fixed and, in certain contracts, variable consideration.
Variable consideration contained within our contracts includes discounts, rebates, incentives, penalties and other similar items. When a contract includes variable consideration, we estimate the variable consideration to determine whether any of it needs to be constrained. We include the variable consideration in the transaction price only to the extent that it is probable that a significant reversal of the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. We estimate variable consideration and constraints based on our review of the contract terms and conditions. Variable consideration and constraint amounts are the most likely amounts based on our history with the customer. If no history is available, then we will book the most likely amount based on the range of possible consideration amounts. Variable consideration and constraints are updated at each reporting date.
Incremental contract costs (such as sales commissions) are expensed when incurred when the amortization period of the asset that would have been recognized is one year or less; otherwise, incremental contract costs are recognized as an asset and amortized over time as promised goods and services are transferred to a customer.
We evaluate our contractual arrangements to determine whether or not they include multiple performance obligations. Revenue recognition is determined for each distinct performance obligation of the contract in accordance with Accounting Standard Codification (“ASC”) 606 (“ASC 606”). We allocate revenue to each performance obligation based on the relative standalone sales price.
For contracts recognized over time, we recognize the estimated loss to the extent the project has been completed based on actual hours incurred compared to the total estimated hours. We recognized a $0.2 million contract loss for both the three and six months ended June 30, 2018. The loss is recognized when the current estimate of the consideration we expect to receive, modified to include any variable consideration, is less than the current estimate of total costs for the contract.
Service Fee Revenue
Our service fee revenue includes activities that relate to our PFS Operations and LiveArea Professional Services business units. PFS Operations primarily includes distribution, order management and payment services. LiveArea Professional Services primarily includes e-commerce and digital experience strategy consulting, creative website design and marketing support, and technology platform integration services. We typically charge our service fee revenue on either a time and materials, fixed price, cost-plus a margin, a percent of shipped revenue, or retainer basis for our professional services, or a per transaction basis, such as a per item basis for fulfillment services or a per labor hour basis for web-enabled customer contact center services. Additional fees are billed for other services.
Distribution services relate primarily to inventory management, product receiving, warehousing and fulfillment (i.e., picking, packing and shipping product on our clients’ behalf). Order management and contact center services relate primarily to taking customer orders for our clients’ products via various channels such as telephone call-center, electronic or facsimile. These services
6
also entail addressing customer qu
estions related to orders, as well as merchandising activities.
These performance obligations typically include related set-up and integration services in preparation of performing such activities
.
Professional services relate primarily to design, implementation and support of eCommerce platforms, website solutions and quality control for our clients. Additionally, the Company provides digital agency services that enable client marketing programs to attract new customers, convert buyers and increase website value. We recognize this revenue over time as services are rendered.
Most of our fixed price, professional services contracts require the customer to pay us for all costs plus a margin for work performed up until termination date, regardless of which party terminates. For these contracts, revenue is recognized based on input methods, generally hours expended. The input method measures progress toward the satisfaction of the performance obligation by multiplying the transaction price of the performance obligation by the percentage of hours incurred to total estimated hours as of the balance sheet date after giving effect to the most current estimates. When we are not able to reasonably measure the outcome of a performance obligation but expect to recover costs incurred, we recognize revenue to the extent of the costs incurred until such time that we can reasonably measure the outcome of the performance obligation.
Our billings for reimbursement of out-of-pocket expenses, including travel and certain third-party vendor expenses such as shipping and handling costs and telecommunication charges, are included in pass-through revenue, as incurred. The related reimbursable costs are reflected as cost of pass-through revenue.
Product Revenue
Depending on the terms of the customer arrangement, product revenue and product cost is recognized at the point the customer gains control of the asset. The specific point in time when control transfers depends on the contract with the customer. Typically, our terms are Freight on Board (“FOB”) Shipping point. We permit our customers to return product. Product revenue is reported net of estimated returns and allowances, which are estimated based upon historical return information. Management also considers any other current information and trends in making estimates.
Gross versus Net Revenue
In instances where revenue is derived from product sales from a third-party, we record revenue on a gross basis when we are a principal to the transaction and net of costs when we are acting as an agent between the customer or client and the vendor. We are the principal and therefore record revenue on a gross basis if we control a promised good or service before transferring that good or service to the customer. We are an agent and record revenue on a net basis for what we retain for agency services if our role is to arrange for another entity to control the promised goods or services.
The allocated transaction price when we are the principle will be based on the stand alone selling price of the good or service, which is supported by the invoice. Transaction prices for products are typically based off list prices, plus a margin. The transaction prices for services are primarily based off of labor rate tables, job level categories, material and infrastructure costs, plus a margin.
Indicators that we control the specified good or service before it is transferred to the customer (and are therefore a principal) include: 1) we are primarily responsible for fulfilling the promise to provide the specified good or service, 2) we have inventory risk before the specified good or service has been transferred to a customer or after transfer of control to the customer (for example, if the customer has a right of return), and 3) we have discretion in establishing the price for the specified good or service. We must first identify the specified good or service and determine whether we control that specified good or service before evaluating the indicators. The indicators serve as support for the entity’s control determination and are not a replacement of it.
Practical expedients
The standard allows entities to use several practical expedients, including determining whether a significant financing component exists, treatment of sales and usage-based taxes, and the recognition of certain incremental costs of obtaining a contract with a client or customer.
Contracts of less than a year with a financing component will be expensed in that period as a practical expedient. Our current contracts do not have a financing component. Commissions on contracts of less than one year will be expensed as a practical expedient. Commissions will be capitalized on contracts over one year. As of June 30, 2018, we did not have any material commissions on contracts in excess of one year. We also present our revenues net of sales and usage-based tax as a practical expedient.
Impact of Recently Issued Accounting Standards
Pronouncements Recently Adopted
In May 2014, the FASB issued ASC 606, “Revenue from Contracts with Customers”, which replaces numerous requirements in U.S. GAAP, including industry-specific requirements, provides companies with a single revenue recognition model for recognizing revenue from contracts with clients and customers and significantly expands the disclosure requirements for revenue arrangements. The new standard, as amended, became effective for the Company for interim and annual reporting periods beginning on January 1, 2018.
7
On January 1, 2018, the Company adopted ASC 606 using the modified retrospective method applied to the contracts that were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while
prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC 605, “Revenue Recognition”.
We recorded a net increase to opening retained earnings of $0.3 million as of January 1, 2018 due to the cumulative impact of adopting ASC 606, with the impact primarily related to our adjustments to deferred revenues and costs. We recorded a reduction of $0.7 million to deferred revenue, a reduction of $0.4 million to deferred costs, and a contract liability of $0.1 million.
The impact of applying ASC 606 for the three and six months ended June 30, 2018 was immaterial to revenues and operating profits.
In August 2016, the FASB issued ASU No. 2016-15, “
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments - a consensus of the Emerging Issues Task Force”
(“ASU 2016-15”). ASU 2016-15 is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. Certain issues addressed in this guidance include debt payments or debt extinguishment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, distributions received from equity method investments and beneficial interests in securitization transactions. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. Adoption of ASU 2016-15 as of January 1, 2018 did not have an impact on the Company’s consolidated financial statements.
In November 2016, the FASB issued an ASU
No. 2016-18, “
Statement of Cash Flows (Topic 230): Restricted Cash”
(“ASU 2016-18”). ASU 2016-18
amends the presentation of restricted cash within the consolidated statements of cash flows, requiring that restricted cash be added to cash and cash equivalents on the consolidated statements of cash flows.
ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted.
The Company adopted ASU 2016-18 in
the three-month period ended March 31, 2018
on a retrospective basis with no impact to
the Company’s consolidated financial statements
.
In January 2017, the FASB issued ASU No. 2017-01,
“Business Combinations (Topic 805): Clarifying the Definition of a Business”
(“ASU 2017-01”). ASU 2017-01 clarifies the definition of a business when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses, ASU 2017-01 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2017. Adoption of ASU 2017-01 did not have an impact on the Company’s consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09,
“Compensation–Stock Compensation (Topic 718): Scope of Modification Accounting”
(“ASU 2017-09”), clarifying when a change to the terms or conditions of a stock-based payment award must be accounted for as a modification. ASU 2017-09 requires modification accounting if the fair value, vesting condition or the classification of the award is not the same immediately before and after a change to the terms and conditions of the award. ASU 2017-09 is effective for the Company on a prospective basis beginning on January 1, 2018. Adoption of ASU 2017-09 did not have an impact on the Company’s consolidated financial statements as it is not the Company’s general practice to change either the terms or conditions of stock-based payment awards once they are granted.
In March 2018, the FASB issued ASU 2018-05, “
Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118”
(“ASU 2018-05”)
.
The amendments in ASU 2018-05 provide guidance on when to record and disclose provisional amounts for certain income tax effects of the Tax Cuts and Jobs Act (“Tax Reform Act”). The amendments also require any provisional amounts or subsequent adjustments to be included in net income. Additionally, ASU 2018-05 discusses required disclosures that an entity must make with regard to the Tax Reform Act. ASU 2018-05 is effective immediately as new information is available to adjust provisional amounts that were previously recorded. The Company has adopted ASU 2018-05 and will continue to evaluate indicators that may give rise to a change in our tax provision as a result of the Tax Reform Act.
Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU No. 2016-02,
“Leases”
(“ASU 2016-02”). ASU 2016-02 establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently assessing the impact of ASU 2016-02 on its consolidated financial statements, including implementing changes to our systems and processes in conjunction with our review of existing lease agreements. The Company currently expects the most significant impact of this new standard will be the recognition of the right-of-use assets and operating lease liabilities on our consolidated balance sheet upon adoption as well as the related financial statement disclosures.
8
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 2017-0
4 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2019, with early adoption permitted. The Company does not expect the adoption of ASU 2017-04 to have a material impact
on the Company’s consolidated fina
ncial statements
.
3. Acquisition
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. In addition, the purchase agreement provided 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. For the six months ended June 30, 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. For the six months ended June 30, 2018 the Company paid an aggregate of $4.1 million in settlement of the 2017 CrossView Earn-out Payments, of which $0.8 million was paid by the issuance of 76,998 restricted shares of Company stock. As of December 31, 2017, the Company had recorded a liability $4.0 million applicable to the estimated CrossView Earn-out Payments, which is included in performance-based contingent payments in the consolidated balance sheet. As of June 30, 2018, the Company has no further liability for the Cross View Earn-out.
4. Revenue from Contracts with Clients and Customers
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the client or customer and is the unit of account in ASC 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied.
Our performance obligations for PFS Operations, includes distribution, contact center, order management and payment services, and for LiveArea Professional Services, include commerce strategy consulting, creative design and marketing support, and technology platform integration services. For contracts with multiple performance obligations, we allocate transaction price to each performance obligation using the stand alone selling price for the distinct good or service in the contract. The primary method used to calculate the standalone selling price is the list price, which includes margin, approach, under which we forecast our costs of satisfying a performance obligation and then add an appropriate margin for that distinct good or service. If a fixed fee is used, it is based on the underlying projected costs with a margin.
Implementation services related to setup costs for PFS Operations are not distinct within the context of the contract because of the inter-dependence of the integrating services with other services promised in the contract. It represents a bundle of services that reflect the combined output for which the client has contracted. These implementation revenues and costs are amortized from the first full month after go live through the end of the contract period. Transaction based fees are generally charged monthly based on volume and contract price.
Substantially all of our LiveArea professional services are satisfied over time, as the clients or customers simultaneously receive and consume the benefits provided by our service as they are performed. PFS Operations primarily consists of service fee revenue, which is made up of transaction items, such as shipments, which are recognized at a point in time, and services such as storage, which are recognized over time. In addition, PFS Operations has certain product revenue where it acts as a reseller, and when we determine we are the agent, recognizes net revenue at a point in time, typically at FOB shipping point.
The transaction price for each performance obligation is based on the consideration specified in the contract with the client or customer and is reflected on the invoice. Additionally, for most of our Service Fee related revenue contracts,
we have an enforceable right to payment for performance completed up to the termination date.
Remaining performance obligations represent the transaction price of firm orders for which work has yet not been performed. As of June 30, 2018, the aggregate amount of the transaction price allocated to remaining performance obligations was $42.8 million. The Company expects to recognize revenue on approximately 23% of the remaining performance obligations in 2018, 59% through 2019, and the remaining recognized thereafter.
Revenue recognition timing and contract modifications
A number of factors relating to our business affect the recognition of contract revenue. We typically price our professional services contracts on either a time and materials, fixed-price or a cost-plus margin basis.
9
For fixed-price arrangements, we typically recognize revenue based on the input method,
as we believe that
hours expended over time proportionately, based on actual hours to budgeted ho
urs during t
he period, provides the most relevant measure of progress for these contracts.
For time and materials contracts, we recognize revenue monthly based on the actual hours worked at the labor rates by job category, and cost of materials plus margi
n. We
recognize
revenue for a performance obligation satisfied over time only if
we can
reasonably measure
our
progress toward complete satisfaction of the performance obligation. In some circumstances (for example, in the ea
rly stages of a contract), we
may not be able to reasonably measure the outcome of a performance obligation, but
we
expect to recover the costs incurred in satisfying the performance obligation. In those circumstances,
we
shall recognize revenue only to the extent of the costs incurre
d until such time that
we
can reasonably measure the outcome of the performance obligation
.
Contract modifications are routine in the performance of our contracts. Change orders that result from modification of an original contract are taken into consideration for revenue recognition when they result in a change of total contract value and are approved by our clients. In most instances, contract modifications are for services that are not distinct, and therefore, are accounted for as part of the existing contract. If the contract has significant scope changes, then it will be viewed as a separate contract and accounted for separately. Implementation/Integration service fees are considered part of an existing performance obligation, provided that they are dependent and interrelated to that existing performance obligation. On the PFS Operations side, those implementation revenues and costs are deferred and recognized over time, based on the term of the contract. If it was a significant scope change, then it would be accounted for as a separate performance obligation, deferred and amortized over the contract term.
Contract Assets and Contract Liabilities
Contract assets primarily relate to the Company’s rights to consideration for work completed but not billed at the reporting date. The contract assets are reclassified as receivables when the rights become unconditional. The contract liabilities primarily relate to the advance consideration received from clients for client contracts, including amounts received for implementation services which are not distinct performance obligations.
The Company’s payment terms vary by the type and location of our clients and the type of services offered. The term between invoicing and when payment is due is generally not significant.
Contract balances consisted of the following
(in thousands)
:
|
June 30,
|
|
|
January 1,
|
|
|
2018
|
|
|
2018
|
|
Trade Accounts Receivable
|
|
|
|
|
|
|
|
Trade Accounts Receivable, net
|
$
|
52,823
|
|
|
$
|
70,923
|
|
Unbilled Accounts Receivable
|
|
371
|
|
|
|
172
|
|
Total Trade Accounts Receivable, net
|
$
|
53,194
|
|
|
$
|
71,095
|
|
Contract Liabilities
|
|
|
|
|
|
|
|
Accrued Contract Liabilities
|
$
|
625
|
|
|
$
|
583
|
|
Deferred Revenue
|
|
8,266
|
|
|
|
10,697
|
|
Total Contract Liabilities
|
$
|
8,891
|
|
|
$
|
11,280
|
|
Changes in contract liabilities during the period was a decrease of $2.4 million in our contract liabilities from January 1, 2018 to June 30, 2018, primarily due to an increase of approximately $2.2 million from new projects, offset by approximately $4.6 million of amortization and recognition of revenue in the six months ended June 30, 2018.
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables, and customer advances and deposits (contract liabilities) on the consolidated balance sheet.
Changes in the contract asset and liability balances during the six months ended June 30, 2018 were not materially impacted by any other factors.
10
The following table presents our revenues, excluding sales and usage-based taxes, disaggregated by revenue source (in thousands):
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
June 30, 2018
|
|
|
June 30, 2018
|
|
|
PFS Operations
|
|
|
LiveArea Professional Services
|
|
|
Total
|
|
|
PFS Operations
|
|
|
LiveArea Professional Services
|
|
|
Total
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service fee revenue
|
$
|
33,194
|
|
|
$
|
19,948
|
|
|
$
|
53,141
|
|
|
$
|
68,116
|
|
|
$
|
41,513
|
|
|
$
|
109,628
|
|
Product revenue, net
|
|
8,847
|
|
|
|
—
|
|
|
|
8,847
|
|
|
|
18,612
|
|
|
|
—
|
|
|
|
18,612
|
|
Pass-through
revenue
|
|
14,574
|
|
|
|
488
|
|
|
|
15,063
|
|
|
|
26,374
|
|
|
|
857
|
|
|
|
27,232
|
|
Total revenues
|
$
|
56,615
|
|
|
$
|
20,436
|
|
|
$
|
77,051
|
|
|
$
|
113,102
|
|
|
$
|
42,370
|
|
|
$
|
155,472
|
|
The following table presents our revenues, excluding sales and usage-based taxes, disaggregated by region (in thousands):
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
June 30, 2018
|
|
|
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
|
|
5. Inventory Financing
Supplies Distributors has a short-term credit facility with IBM Credit LLC (“IBM Credit Facility”) to finance its purchase and distribution of products of Ricoh Company Limited and Ricoh USA, Inc., a strategic business unit within the Ricoh Family Group of Companies (collectively hereafter referred to as “Ricoh”), in the United States, providing financing for eligible Ricoh inventory and certain receivables.
In January 2018, Supplies Distributors entered into Amendment No. 19 to the IBM Credit Facility. The Amended IBM Credit Facility adjusted the maximum borrowing under the facility from $13.0 million to $11.0 million and reduced the minimum PFS Subordinated Note receivable PFSweb is required to maintain from $2.5 million to $1.0 million.
Given the structure of this facility and as outstanding balances, which represent inventory purchases, are repaid within twelve months, the Company has classified the outstanding amounts under this facility, which were $7.4 million
and $7.1 million as of June 30, 2018 and December 31, 2017, respectively, as trade accounts payable in the condensed
consolidated balance sheets. As of June 30, 2018, Supplies Distributors had no available credit under this facility. Borrowings under the credit facility accrue interest, after a defined free financing period, at prime rate plus 0.5%, which resulted in a weighted average interest rate of 5.25% and 4.75% as of as of June 30, 2018 and December 31, 2017, respectively.
11
6
.
Debt and Capital Lease Obligations
Outstanding debt and capital lease obligations consist of the following (in thousands):
|
June 30,
|
|
|
December 31,
|
|
|
2018
|
|
|
2017
|
|
U.S. Credit Agreement
|
|
|
|
|
|
|
|
Revolver
|
$
|
14,000
|
|
|
$
|
13,234
|
|
Term loan
|
|
25,500
|
|
|
|
27,000
|
|
Equipment loan
|
|
3,740
|
|
|
|
4,205
|
|
Debt issuance costs
|
|
(305
|
)
|
|
|
(376
|
)
|
Master lease agreements
|
|
2,830
|
|
|
|
3,135
|
|
Other
|
|
101
|
|
|
|
128
|
|
Total
|
|
45,866
|
|
|
|
47,326
|
|
Less current portion of long-term debt
|
|
5,537
|
|
|
|
9,460
|
|
Long-term debt, less current portion
|
$
|
40,329
|
|
|
$
|
37,866
|
|
U.S. Credit Agreement
As of June 30, 2018, the Company had $18.5 million of available credit under the revolving loan facility of the credit agreement of PFSweb, Inc. and its U.S. subsidiaries with Regions Bank, as agent for itself and one or more future lenders (“Credit Agreement”). As of June 30, 2018 and December 31, 2017, the weighted average interest rate on the revolving loan facility was 5.59% and 4.65%, respectively. As of June 30, 2018 and December 31, 2017, the weighted average interest rate on the term loan facility of the Credit Agreement was 4.38% and 4.05%, respectively.
7. Earnings Per
Share
Basic
net loss per common share was computed by dividing net loss by the weighted-average number of common shares outstanding for the reporting period.
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, 2018 and June 30, 2017, we had outstanding common stock equivalents of approximately 2.1 million and 1.6 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.
8. Segment Information
Prior to January 1, 2018, the Company’s operations were organized into two reportable segments: PFSweb and Business and Retail Connect. In accordance with ASC 280,
Segment Reporting
(“ASC 280”), an operating segment is defined as a component of an enterprise for which discrete financial information is available and is reviewed regularly by the Chief Operating Decision Maker (“CODM”), or decision-making group, to evaluate performance and make operating decisions.
Effective January 1, 2018, we changed our organizational structure in an effort to create more effective and efficient operations and to improve client and service focus. In that regard, we revised the information that our chief executive officer and chief financial officer, who are also our Chief Operating Decision Makers, regularly review for purposes of allocating resources and assessing performance. As a result, beginning January 1, 2018, we now report our financial performance based on our new reportable segments. These segments are comprised of strategic businesses that are defined by the service offerings they provide and consist of PFS Operations (which
provides client services in relation to the customer physical experience, such as order management (OMS), order fulfillment, customer care and financial services)
and Professional Services LiveArea (which
provides client services in relation to the digital shopping experience of shopping online, such as strategic commerce consulting, strategy, design and digital marketing services and technology services)
. Each segment is led by a separate Business Unit Executive who reports directly to the Company’s Chief Executive Officer.
The CODM evaluates segment performance using business unit direct contribution, which is defined as business unit revenues less costs of fees and direct selling, general and administrative expenses, including depreciation and amortization. Direct contribution does not include any allocated corporate expenses nor does it include stock-based compensation. The CODM does not routinely review assets by segment. The balance sheet by segment is not prepared and, therefore, we do not present segment assets below.
Corporate operations is a non-operating segment that develops and implements strategic initiatives and supports the Company’s operations by centralizing certain administrative functions such as finance, treasury, information technology and human resources.
All prior period segment information has been restated to conform to the 2018 presentation. The changes in the reportable segments have no effect on the consolidated balance sheets, statements of operations or cash flows for the periods presented.
12
Subsequent to change in the Company’s operating segments, the
Company’s reporting units changed. We now have
two
reporting units: PFS Operations and LiveArea Professional Services. We allocated goodwill to our new reporting units using a relative fair value approach. In addition, we completed an assessment of any pot
ential goodwill impairment for all reporting units immediately prior to and after the reallocation and determined that no impairment existed.
The following table discloses segment information for the periods presented (in thousands):
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
June 30,
|
|
|
June 30,
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PFS Operations
|
$
|
56,615
|
|
|
$
|
55,660
|
|
|
$
|
113,102
|
|
|
$
|
113,896
|
|
LiveArea Professional Services
|
|
20,436
|
|
|
|
22,406
|
|
|
|
42,370
|
|
|
|
42,938
|
|
Total revenues
|
$
|
77,051
|
|
|
$
|
78,066
|
|
|
$
|
155,472
|
|
|
$
|
156,834
|
|
Business unit direct contribution:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PFS Operations
|
$
|
6,488
|
|
|
$
|
5,026
|
|
|
$
|
12,820
|
|
|
$
|
9,934
|
|
LiveArea Professional Services
|
|
2,910
|
|
|
|
2,523
|
|
|
|
5,879
|
|
|
|
4,577
|
|
Total business unit direct contribution
|
$
|
9,398
|
|
|
$
|
7,549
|
|
|
$
|
18,699
|
|
|
$
|
14,511
|
|
Unallocated corporate expenses
|
|
(8,863
|
)
|
|
|
(9,119
|
)
|
|
|
(17,493
|
)
|
|
|
(19,525
|
)
|
Income (loss) from operations
|
$
|
535
|
|
|
$
|
(1,570
|
)
|
|
$
|
1,204
|
|
|
$
|
(5,014
|
)
|
9. Commitments and Contingencies
The Company received municipal tax abatements in certain locations. In prior years, the Company received notice from a municipality that it did not satisfy certain criteria necessary to maintain the abatements and that the municipal authority planned to make an adjustment to the Company’s tax abatement. The Company disputed the adjustment and such dispute has been settled with the municipality. However, the amount of additional property taxes to be assessed against the Company and the timing of the related payments has not been finalized. As of June 30, 2018, the Company believes it has adequately accrued for the expected assessment.
13