PFSweb, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
|
(Unaudited)
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
2018
|
|
|
2017
|
|
ASSETS
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
14,258
|
|
|
$
|
19,078
|
|
Restricted cash
|
|
214
|
|
|
|
214
|
|
Accounts receivable, net of allowance for doubtful accounts of $414 and $373
at September 30, 2018 and December 31, 2017, respectively
|
|
52,909
|
|
|
|
72,062
|
|
Inventories, net of reserves of $311 and $342 at September 30, 2018 and
December 31, 2017, respectively
|
|
5,238
|
|
|
|
5,326
|
|
Other receivables
|
|
3,435
|
|
|
|
5,366
|
|
Prepaid expenses and other current assets
|
|
4,945
|
|
|
|
6,633
|
|
Total current assets
|
|
80,999
|
|
|
|
108,679
|
|
PROPERTY AND EQUIPMENT:
|
|
|
|
|
|
|
|
Cost
|
|
118,202
|
|
|
|
120,403
|
|
Less: accumulated depreciation
|
|
(96,272
|
)
|
|
|
(96,225
|
)
|
|
|
21,930
|
|
|
|
24,178
|
|
IDENTIFIABLE INTANGIBLES, net
|
|
2,163
|
|
|
|
3,371
|
|
GOODWILL
|
|
45,304
|
|
|
|
45,698
|
|
OTHER ASSETS
|
|
3,500
|
|
|
|
3,861
|
|
Total assets
|
$
|
153,896
|
|
|
$
|
185,787
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
Trade accounts payable
|
$
|
29,313
|
|
|
$
|
45,070
|
|
Accrued expenses
|
|
24,395
|
|
|
|
29,074
|
|
Current portion of long-term debt and capital lease obligations
|
|
3,069
|
|
|
|
9,460
|
|
Deferred revenues
|
|
5,058
|
|
|
|
7,405
|
|
Performance-based contingent payments
|
|
—
|
|
|
|
3,967
|
|
Total current liabilities
|
|
61,835
|
|
|
|
94,976
|
|
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, less current portion
|
|
40,112
|
|
|
|
37,866
|
|
DEFERRED REVENUES, less current portion
|
|
2,513
|
|
|
|
4,034
|
|
DEFERRED RENT
|
|
4,882
|
|
|
|
5,464
|
|
OTHER LIABILITIES
|
|
2,339
|
|
|
|
2,150
|
|
Total liabilities
|
|
111,681
|
|
|
|
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 September 30, 2018 and December 31, 2017, respectively; and 19,258,092 and 19,025,218
outstanding at September 30, 2018 and December 31, 2017, respectively
|
|
19
|
|
|
|
19
|
|
Additional paid-in capital
|
|
154,495
|
|
|
|
150,614
|
|
Accumulated deficit
|
|
(111,063
|
)
|
|
|
(109,281
|
)
|
Accumulated other comprehensive income
|
|
(1,111
|
)
|
|
|
70
|
|
Treasury stock at cost, 33,467 shares
|
|
(125
|
)
|
|
|
(125
|
)
|
Total shareholders’ equity
|
|
42,215
|
|
|
|
41,297
|
|
Total liabilities and shareholders’ equity
|
$
|
153,896
|
|
|
$
|
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 INCOME (LOSS)
(In Thousands, Except Per Share Data)
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
September 30,
|
|
|
September 30,
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service fee revenue
|
$
|
52,890
|
|
|
$
|
54,490
|
|
|
$
|
162,519
|
|
|
$
|
166,455
|
|
Product revenue, net
|
|
8,469
|
|
|
|
9,616
|
|
|
|
27,081
|
|
|
|
30,881
|
|
Pass-through revenue
|
|
16,342
|
|
|
|
13,212
|
|
|
|
43,573
|
|
|
|
36,816
|
|
Total revenues
|
|
77,701
|
|
|
|
77,318
|
|
|
|
233,173
|
|
|
|
234,152
|
|
COSTS OF REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service fee revenue
|
|
33,344
|
|
|
|
35,719
|
|
|
|
102,246
|
|
|
|
111,280
|
|
Cost of product revenue
|
|
8,099
|
|
|
|
8,991
|
|
|
|
25,819
|
|
|
|
29,221
|
|
Cost of pass-through revenue
|
|
16,342
|
|
|
|
13,212
|
|
|
|
43,573
|
|
|
|
36,816
|
|
Total costs of revenues
|
|
57,785
|
|
|
|
57,922
|
|
|
|
171,638
|
|
|
|
177,317
|
|
Gross profit
|
|
19,916
|
|
|
|
19,396
|
|
|
|
61,535
|
|
|
|
56,835
|
|
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES
|
|
19,239
|
|
|
|
18,229
|
|
|
|
59,655
|
|
|
|
60,682
|
|
Income (loss) from operations
|
|
677
|
|
|
|
1,167
|
|
|
|
1,880
|
|
|
|
(3,847
|
)
|
INTEREST EXPENSE, net
|
|
612
|
|
|
|
778
|
|
|
|
1,802
|
|
|
|
2,125
|
|
Income (loss) before income taxes
|
|
65
|
|
|
|
389
|
|
|
|
78
|
|
|
|
(5,972
|
)
|
INCOME TAX EXPENSE, net
|
|
751
|
|
|
|
487
|
|
|
|
2,140
|
|
|
|
1,578
|
|
NET LOSS
|
$
|
(686
|
)
|
|
$
|
(98
|
)
|
|
$
|
(2,062
|
)
|
|
$
|
(7,550
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.04
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.40
|
)
|
Diluted
|
$
|
(0.04
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.40
|
)
|
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
19,258
|
|
|
|
18,995
|
|
|
|
19,193
|
|
|
|
18,868
|
|
Diluted
|
|
19,258
|
|
|
|
18,995
|
|
|
|
19,193
|
|
|
|
18,868
|
|
COMPREHENSIVE INCOME (LOSS):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
$
|
(686
|
)
|
|
$
|
(98
|
)
|
|
$
|
(2,062
|
)
|
|
$
|
(7,550
|
)
|
Foreign currency translation adjustment
|
|
(399
|
)
|
|
|
228
|
|
|
|
(1,181
|
)
|
|
|
1,035
|
|
TOTAL COMPREHENSIVE INCOME
(LOSS)
|
$
|
(1,085
|
)
|
|
$
|
130
|
|
|
$
|
(3,243
|
)
|
|
$
|
(6,515
|
)
|
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)
|
Nine Months Ended
|
|
|
September 30,
|
|
|
2018
|
|
|
2017
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net loss
|
$
|
(2,062
|
)
|
|
$
|
(7,550
|
)
|
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
8,697
|
|
|
|
11,096
|
|
Amortization of debt issuance costs
|
|
115
|
|
|
|
112
|
|
Provision for doubtful accounts
|
|
44
|
|
|
|
160
|
|
Provision for excess and obsolete inventory
|
|
123
|
|
|
|
-
|
|
Loss on disposal of fixed assets
|
|
42
|
|
|
|
-
|
|
Deferred income taxes
|
|
119
|
|
|
|
409
|
|
Stock-based compensation expense
|
|
3,073
|
|
|
|
2,544
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts receivable
|
|
18,836
|
|
|
|
25,220
|
|
Inventories
|
|
(35
|
)
|
|
|
1,463
|
|
Prepaid expenses, other receivables and other assets
|
|
3,828
|
|
|
|
3,752
|
|
Deferred rent
|
|
(516
|
)
|
|
|
187
|
|
Trade accounts payable, deferred revenues, accrued expenses and other liabilities
|
|
(21,770
|
)
|
|
|
(35,897
|
)
|
Net cash provided by operating activities
|
|
10,494
|
|
|
|
1,496
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
(4,008
|
)
|
|
|
(3,965
|
)
|
Proceeds from sale of property and equipment
|
|
59
|
|
|
|
—
|
|
Net cash used in investing activities
|
|
(3,949
|
)
|
|
|
(3,965
|
)
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Net proceeds from issuance of common stock
|
|
350
|
|
|
|
877
|
|
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
|
|
(1,969
|
)
|
|
|
(2,425
|
)
|
Payments on term loan
|
|
(2,250
|
)
|
|
|
(1,688
|
)
|
Payments on revolving loan
|
|
(87,347
|
)
|
|
|
(68,173
|
)
|
Borrowings on revolving loan
|
|
86,614
|
|
|
|
62,849
|
|
Payments on other debt
|
|
(2,332
|
)
|
|
|
(324
|
)
|
Net cash used in financing activities
|
|
(10,565
|
)
|
|
|
(11,144
|
)
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATES ON CASH, CASH EQUIVALENTS AND RESTRICTED CASH
|
|
(800
|
)
|
|
|
1,957
|
|
NET DECREASE IN CASH AND CASH EQUIVALENTS
|
|
(4,820
|
)
|
|
|
(11,656
|
)
|
|
|
|
|
|
|
|
|
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
|
|
14,258
|
|
|
|
12,769
|
|
Restricted cash, end of period
|
|
214
|
|
|
|
215
|
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period
|
$
|
14,472
|
|
|
$
|
12,984
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
$
|
1,130
|
|
|
$
|
1,005
|
|
Cash paid for interest
|
$
|
1,682
|
|
|
$
|
1,838
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
Property and equipment acquired under long-term debt and capital leases
|
$
|
1,159
|
|
|
$
|
270
|
|
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 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 income (loss), and statements of cash flows for the periods indicated
. Certain information and note disclosures normally included in annual financial statements prepared in accordance with
accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted pursuant to the rules and regulations of the SEC. This report should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2017. We refer to PFSweb, Inc. and its subsidiaries collectively as “PFSweb,” the “Company,” us,” “we” and “our” in these condensed consolidated financial statements.
Results of our operations for interim periods may not be indicative of results for the full fiscal year. We reclassify certain prior year amounts, as applicable, to conform to the current year presentation.
2.
Significant Accounting Policies
For a complete set of our significant accounting policies, refer to our Annual Report on Form 10-K for the year ended December 31, 2017.
During the three and nine-month periods ended September 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, pass-through revenues, incentives, penalties and other similar items. When a contract includes variable consideration, we estimate the variable consideration based on our review of the contract terms and conditions. Variable consideration 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. 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. Variable consideration is updated at each reporting date.
Our billings for reimbursement of out-of-pocket expenses related to our Service Fee Revenues, consisting primarily of freight and shipping supplies, are included in pass-through revenues. Other items included in pass-through revenues include travel and certain third-party vendor expenses such as telecommunication charges. These other pass-through revenues are not deemed a material percentage of total revenues. In certain of our contracts, our clients elect to handle shipping related costs. Therefore, we present pass-through revenues separately, as we believe it provides better transparency to our core services.
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. A 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, contact center 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.
6
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, electroni
c or facsimile.
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. 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.
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.
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 September 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 Financial Accounting Standards Board (“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 us for interim and annual reporting periods beginning on January 1, 2018.
On January 1, 2018, we 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 nine months ended September 30, 2018 was immaterial to revenues and operating profits.
7
In August 2016, the FASB issued
Accounting Standards Update (“
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 classif
ied 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, distrib
utions 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 permitte
d. Adoption of ASU 2016-15 as of January 1, 2018 did not have an impact on
our
consolidated financial statements.
In November 2016, the FASB issued 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.
We adopted ASU 2016-18 in
the three-month period ended March 31, 2018
on a retrospective basis with no impact to
our 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 our 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 us on a prospective basis beginning on January 1, 2018. Adoption of ASU 2017-09 did not have an impact on our consolidated financial statements as it is not our 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. We have 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.
In July 2018, the FASB issued ASU No. 2018-11, which provides the option of an additional transition method that allows entities to initially apply the new lease guidance at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We expect to implement the transition method option provided by ASU No. 2018-11
,
as well as certain practical expedients permitted under the transition guidance.
We are currently assessing the impact of ASU 2016-02 on our consolidated financial statements and expect 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. Additionally, we are
in the process of implementing a leasing software application that will allow us to better account for the leases in accordance with the new guidance
.
In January 2017, the FASB issued ASU No. 2017-04,
“Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill impairment”
(“ASU 2017-04”), which removes Step 2 of the goodwill impairment test. A goodwill impairment will now be determined by the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2019, with early adoption permitted. We do not expect the adoption of ASU 2017-04 to have a material impact on our consolidated financial statements.
8
In March 2018, the FASB issued
ASU No. 2018-15
"
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a S
ervice Contract; Disclosures for Implementation Costs Incurred for Internal-Use Software and Cloud Computing Arrangements
"
(“ASU 2018-15”),
which aligns the accounting for implementation costs incurred in a hosting arrangement that is a service contract wi
th the accounting for implementation costs incurred to develop or obtain internal-use software under ASC 350-40, in order to determine which costs to capitalize and recognize as an asset. ASU 2018-15 is effective for annual reporting periods, and interim p
eriods within those years, beginning after December 15, 2019, and can be applied either prospectively to implementation costs incurred after the date of adoption or retrospectively to all arrangements. We are currently in the process of evaluating the impa
ct of the adoption of ASU 2018-15 on our consolidated financial statements.
3. Acquisition
On
August 5, 2015, we 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 us included an initial cash payment of $30.7 million and 553,223 unregistered shares of our 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. During the nine months ended September 30, 2017 we 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 our stock. During the nine months ended September 30, 2018 we 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 our stock. As of December 31, 2017, we 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 September 30, 2018, we have no further liability for the CrossView Earn-out Payments.
4. Revenue from Contracts with Clients and Customers
Performance Obligations and Revenue Recognition Timing
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 a 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 stand alone selling price is the list price approach, which includes margin, 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.
We typically price our professional services contracts on either a time and materials, fixed-price or a cost-plus margin basis.
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 hours during the 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 margin. 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 early 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 incurred until such time that we can reasonably measure the outcome of the performance obligation.
9
Substantially all of our Live
Area 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 Se
rvice 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 not yet been performed. As of September 30, 2018, the aggregate amount of the transaction price allocated to remaining performance obligations for contracts with an original expected duration of one year or more was $41.5 million. We expect to recognize revenue on approximately 17% of the remaining performance obligations in 2018, 58% through 2019, and the remaining recognized thereafter.
Contract modifications
Contract modifications are routine in the performance of our contracts. If a 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 our 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.
Our 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)
:
|
September 30,
|
|
|
January 1,
|
|
|
2018
|
|
|
2018
|
|
Trade Accounts Receivable
|
|
|
|
|
|
|
|
Trade Accounts Receivable, net
|
$
|
52,674
|
|
|
$
|
70,923
|
|
Unbilled Accounts Receivable
|
|
235
|
|
|
|
172
|
|
Total Trade Accounts Receivable, net
|
$
|
52,909
|
|
|
$
|
71,095
|
|
Contract Liabilities
|
|
|
|
|
|
|
|
Accrued Contract Liabilities
|
$
|
506
|
|
|
$
|
583
|
|
Deferred Revenue
|
|
7,571
|
|
|
|
10,697
|
|
Total Contract Liabilities
|
$
|
8,077
|
|
|
$
|
11,280
|
|
Changes in contract liabilities during the period was a decrease of $3.2 million in our contract liabilities from January 1, 2018 to September 30, 2018, primarily due to an increase of approximately $3.6 million from new projects, offset by approximately $6.6 million of amortization and recognition of revenue in the nine months ended September 30, 2018. We recognized a $0.0 million and $0.2 million contract loss for the three and nine months ended September 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 nine months ended September 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
|
|
|
Nine Months Ended
|
|
|
September 30, 2018
|
|
|
September 30, 2018
|
|
|
PFS
Operations
|
|
|
LiveArea
Professional Services
|
|
|
Total
|
|
|
PFS
Operations
|
|
|
LiveArea
Professional Services
|
|
|
Total
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service fee revenue
|
$
|
32,106
|
|
|
$
|
20,784
|
|
|
$
|
52,890
|
|
|
$
|
100,222
|
|
|
$
|
62,297
|
|
|
$
|
162,519
|
|
Product revenue, net
|
|
8,469
|
|
|
|
—
|
|
|
|
8,469
|
|
|
|
27,081
|
|
|
|
—
|
|
|
|
27,081
|
|
Pass-through
revenue
|
|
15,702
|
|
|
|
640
|
|
|
|
16,342
|
|
|
|
42,076
|
|
|
|
1,497
|
|
|
|
43,573
|
|
Total revenues
|
$
|
56,277
|
|
|
$
|
21,424
|
|
|
$
|
77,701
|
|
|
$
|
169,379
|
|
|
$
|
63,794
|
|
|
$
|
233,173
|
|
The following table presents our revenues, excluding sales and usage-based taxes, disaggregated by region (in thousands):
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
September 30, 2018
|
|
|
September 30, 2018
|
|
|
PFS
Operations
|
|
|
LiveArea
Professional Services
|
|
|
Total
|
|
|
PFS
Operations
|
|
|
LiveArea
Professional Services
|
|
|
Total
|
|
Revenues by region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
$
|
45,563
|
|
|
$
|
18,743
|
|
|
$
|
64,306
|
|
|
$
|
136,252
|
|
|
$
|
55,945
|
|
|
$
|
192,197
|
|
Europe
|
|
10,714
|
|
|
|
2,681
|
|
|
|
13,395
|
|
|
|
33,127
|
|
|
|
7,849
|
|
|
|
40,976
|
|
Total revenues
|
$
|
56,277
|
|
|
$
|
21,424
|
|
|
$
|
77,701
|
|
|
$
|
169,379
|
|
|
$
|
63,794
|
|
|
$
|
233,173
|
|
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, we have classified the outstanding amounts under this facility, which were $5.5 million
and $7.1 million as of September 30, 2018 and December 31, 2017, respectively, as trade accounts payable in the condensed
consolidated balance sheets. As of September 30, 2018, Supplies Distributors had $0.3 million 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 5.5% and 4.75% as of September 30, 2018 and December 31, 2017, respectively.
6. Debt and Capital Lease Obligations
Outstanding debt and capital lease obligations consist of the following (in thousands):
|
September 30,
|
|
|
December 31,
|
|
|
2018
|
|
|
2017
|
|
U.S. Credit Agreement
|
|
|
|
|
|
|
|
Revolver
|
$
|
12,500
|
|
|
$
|
13,234
|
|
Term loan
|
|
24,750
|
|
|
|
27,000
|
|
Equipment loan
|
|
3,503
|
|
|
|
4,205
|
|
Debt issuance costs
|
|
(268
|
)
|
|
|
(376
|
)
|
Master lease agreements
|
|
2,609
|
|
|
|
3,135
|
|
Other
|
|
87
|
|
|
|
128
|
|
Total
|
|
43,181
|
|
|
|
47,326
|
|
Less current portion of long-term debt
|
|
3,069
|
|
|
|
9,460
|
|
Long-term debt, less current portion
|
$
|
40,112
|
|
|
$
|
37,866
|
|
11
U.S. Credit Agreement
As of September 30, 2018, we had $20.0 million of available credit under the revolving loan facility. As of September 30, 2018 and December 31, 2017, the weighted average interest rate on the revolving loan facility was 5.25% and 4.65%, respectively. As of September 30, 2018 and December 31, 2017, the weighted average interest rate on the term loan facility was 4.50% and 4.05%, respectively.
On November 1, 2018, we entered into Amendment No.1 to our credit agreement with Regions Bank (the “Amended Facility”). The Amended Facility provides for an increase in availability of our revolving loans to $60.0 million, with the ability for a further increase of $20.0 million to $80.0 million and the elimination of the term loan. Amounts outstanding under the term loan were reconstituted as revolving loans. The Amended Facility also extends the maturity date to November 1, 2023.
At September 30, 2018, and prior to closing, we had $3.0 million in short-term debt on the term loan portion of our U.S. Credit Agreement. On, October 31, 2018, we repaid $0.8 million on the term loan. In accordance with ASC 470,
Debt
, we have reclassified the remaining short-term amount outstanding of $2.2 million related to the term loan to long-term debt on our Condensed Consolidated Balance Sheet.
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 September 30, 2018 and September 30, 2017, we had outstanding common stock equivalents of approximately 2.0 million and 1.8 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, our 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 LiveArea Professional Services (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 our 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 our operations by centralizing certain administrative functions such as finance, treasury, information technology and human resources.
All prior period segment information has been restated to conform to the 2018 presentation. The changes in the reportable segments have no effect on the consolidated balance sheets, statements of operations or cash flows for the periods presented.
Subsequent to the change in our operating segments, our reporting units changed. We now have
two
reporting units: PFS Operations and LiveArea Professional Services. We allocated goodwill to our new reporting units using a relative fair value approach. In addition, we completed an assessment of any potential goodwill impairment for all reporting units immediately prior to and after the reallocation and determined that no impairment existed.
12
The following table discloses segment information for the periods presented (in thousands):
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
September 30,
|
|
|
September 30,
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PFS Operations
|
$
|
56,277
|
|
|
$
|
52,810
|
|
|
$
|
169,379
|
|
|
$
|
166,706
|
|
LiveArea Professional Services
|
|
21,424
|
|
|
|
24,508
|
|
|
|
63,794
|
|
|
|
67,446
|
|
Total revenues
|
$
|
77,701
|
|
|
$
|
77,318
|
|
|
$
|
233,173
|
|
|
$
|
234,152
|
|
Business unit direct contribution:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PFS Operations
|
$
|
5,636
|
|
|
$
|
5,211
|
|
|
$
|
18,460
|
|
|
$
|
15,145
|
|
LiveArea Professional Services
|
|
4,274
|
|
|
|
4,313
|
|
|
|
10,149
|
|
|
|
8,890
|
|
Total business unit direct contribution
|
$
|
9,910
|
|
|
$
|
9,524
|
|
|
$
|
28,609
|
|
|
$
|
24,035
|
|
Unallocated corporate expenses
|
|
(9,233
|
)
|
|
|
(8,357
|
)
|
|
|
(26,729
|
)
|
|
|
(27,882
|
)
|
Income (loss) from operations
|
$
|
677
|
|
|
$
|
1,167
|
|
|
$
|
1,880
|
|
|
$
|
(3,847
|
)
|
9. Commitments and Contingencies
We received municipal tax abatements in certain locations. In prior years, we received notice from a municipality that we did not satisfy certain criteria necessary to maintain the abatements and that the municipal authority planned to make an adjustment to our tax abatement. We disputed the adjustment and such dispute has been settled with the municipality. However, the amount of additional property taxes to be assessed against us and the timing of the related payments has not been finalized. As of September 30, 2018, we believe we have adequately accrued for the expected assessment.
13