PFSweb
Annual Report 2017

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 Form 10-K☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2017or☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from toCommission file number 000-28275 PFSWEB, INC.(Exact name of registrant as specified in its charter) Delaware 75-2837058(State or other jurisdiction ofincorporation or organization) (I.R.S. EmployerIdentification Number) 505 Millennium Drive, Allen, Texas 75013(Address of principal executive offices) (Zip code)Registrant’s telephone number, including area code972-881-2900Securities registered pursuant to Section 12(b) of the Act: NoneSecurities registered pursuant to Section 12(g) of the Act:Common Stock, par value $.001 per share Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒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 thepreceding 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 submittedand 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 submitand post such files). Yes ☒ No ☐Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not becontained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to thisForm 10-K. ☐Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growthcompany. 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 ☐ (Do not check if a smaller reporting company) 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 revisedfinancial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒The aggregate market value of the voting Common Stock held by non-affiliates of the registrant as of June 30, 2017 (based on the closing price as reported by the NationalAssociation of Securities Dealers Automated Quotation System) was $122,904,777.There were 19,025,218 shares of the registrant’s Common Stock outstanding as of March 9, 2018.  DOCUMENTS INCORPORATED BY REFERENCEInformation required by Part III of this Form 10-K, to the extent not set forth herein, is incorporated herein by reference to the registrant’s definitive proxy statement for its2018 annual meeting of shareholders, which is expected to be filed with the Securities and Exchange Commission by April 30, 2018.  INDEX Page PART 1 Item 1. Business1Item 1A. Risk Factors12Item 1B. Unresolved Staff Comments21Item 2. Properties21Item 3. Legal Proceedings22Item 4. Mine Safety Disclosure22 PART II Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities23Item 6. Selected Consolidated Financial Data25Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations26Item 7A. Quantitative and Qualitative Disclosure About Market Risk38Item 8. Financial Statements and Supplementary Data39Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure71Item 9A. Controls and Procedures71Item 9B. Other Information73 PART III Item 10. Directors and Executive Officers and Corporate Governance73Item 11. Executive Compensation73Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters73Item 13. Certain Relationships and Related Transactions and Director Independence73Item 14. Principal Accountant Fees and Services73 PART IV Item 15. Exhibits, Financial Statement Schedules74Item 16. Form 10-K Summary83Signatures84Unless otherwise indicated, all references to “PFSweb,” “the Company,” “we,” “us” and “our” refer to PFSweb, Inc., a Delaware corporation, andits subsidiaries; references to “PFS” refer collectively to our wholly-owned subsidiaries, Priority Fulfillment Services, Inc., Priority Fulfillment Services ofCanada, Inc., PFSweb BV (Belgium)(and its subsidiaries), REV Solutions, Inc., REVTECH Solutions India Private Limited, PFSweb Global Services PrivateLimited, LiveAreaLabs, Inc., Moda Superbe Limited, CrossView, Inc. and Conexus Limited; references to “Supplies Distributors” refer collectively to ourwholly-owned subsidiary Supplies Distributors, Inc. and its subsidiaries; and references to “Retail Connect” refers to our wholly-owned subsidiary PFSwebRetail Connect, Inc.  PART I Item 1.BusinessGeneralPFSweb is a Global Commerce Solutions Company using integrated technologies, professional services, and a worldwide network of systems andlogistics to deliver global commerce solutions. We provide our clients with best-of-breed service capabilities offered as a complete end-to-end solution or onan à la carte basis. The services we offer are organized into the following categories: •Strategic Commerce Consulting •Strategy, Design and Digital Marketing Services •Technology Services •Order Management •Order Fulfillment •Customer Care •Financial ServicesOur solutions support direct-to-consumer (“DTC”), business-to-business (“B2B”), and retail sales channels. The majority of our clients are themerchants of record for the orders we process through our infrastructure on their behalf. For these clients, we do not own the inventory or the resultingaccounts receivable, but provide eCommerce solutions and other services for these client-owned assets.For some of our clients, we are the merchant of record for the orders we process through our infrastructure. Depending on the terms under thesearrangements, we record either product revenue or service fee revenue, may own the accounts receivable and inventory and we may be compensated for all ora portion of our services through the resulting profit margin. In some of these client relationships, we purchase the inventory as the product is delivered to ourfacility. In other of these client relationships, the client retains ownership of inventory in our facility and we purchase the inventory immediately prior toeach individual customer sales transaction. In all of these cases, we seek inventory financing from our clients in the form of extended terms, working capitalprograms or marketing funds to help offset the working capital requirements that follow accounts receivable and inventory ownership.We are headquartered in Allen, Texas where our executive and administrative offices and our primary technology operations and facilities are located,and certain professional services including digital agency and technology services are performed. We operate state-of-the-art call centers from our U.S.facility located in Dallas, Texas and from our international facilities located in Richmond Hill, Ontario, Canada, Liège, Belgium, and Basingstoke, U.K. Welease or manage warehouse facilities of approximately 1.7 million square feet in Memphis, Tennessee, Southaven, Mississippi, Richmond Hill, Ontario,Canada and Liège, Belgium, allowing us to provide global distribution solutions. Additionally, we engage in business development activities and provideadditional digital agency services and/or technology services from our offices in Minnesota, New York, Washington, United Kingdom (“U.K.”), Bulgaria andIndia.GLOBAL COMMERCE SOLUTIONSPFSweb serves as the “brand behind the brand” for companies seeking to increase efficiencies, enter new markets or launch optimized sales channels.As an eCommerce development firm, digital agency and business process outsourcer, we offer scalable and cost-effective solutions for brand manufacturers,online retailers, and distributors across a wide range of industry segments. We provide our clients with seamless and transparent solutions to support theirbusiness strategies, allowing them to focus on their core competencies. Leveraging our technology, expertise and proven methodologies, we enable clients todevelop and deploy new products and implement new business strategies or address new distribution channels rapidly and efficiently through our optimizedsolutions. Our clients engage us both as a consulting partner to assist them in the design of a business solution as well as a virtual and physical infrastructurepartner to provide the mission critical operations required to build and manage their business solution. Together, we not only help our clients define newways of doing business, but also provide them the technology, physical infrastructure and professional resources necessary to quickly implement theirbusiness model. We allow our clients to quickly and dramatically change how they “go-to-market.”Each client has a unique business model and unique strategic objectives that often require highly customized solutions. We support clients in a widearray of industries, including fashion apparel and accessories, fragrance and beauty products, consumer packaged goods (“CPG”), home furnishings andhousewares, coins and collectibles, and technology products. These clients turn to PFSweb for help in addressing a variety of business needs that includestrategic consulting, commerce creative design and development, customer satisfaction and retention, time-definite logistics, vendor managed inventory andintegration, supply chain1 compression, cost model realignments, transportation management and international expansion, among others. We also act as a constructive agent of change,providing clients the ability to alter their current distribution model, establish direct relationships with end-customers, and reduce the overall time and costsassociated with existing distribution channel strategies. Our clients are seeking solutions that will provide them with dynamic supply chain and multi-channel marketing efficiencies, while ultimately delivering a world-class, branded customer service experience.Our value proposition is to become a seamless, well integrated extension of our clients’ enterprises by delivering superior solutions that drive optimalcustomer experiences. On behalf of the brands we serve, we strive to increase and enhance sales and market growth, bolster customer satisfaction andcustomer retention, and drive costs out of the business through operations and technology related efficiencies. As both a virtual and a physical infrastructurefor our clients’ businesses, we embrace their brand values and strategic objectives. By utilizing our services, our clients are able to:Quickly Capitalize on Market Opportunities. Our solutions empower clients to rapidly implement their supply chain and eCommerce strategies andtake advantage of opportunities without lengthy integration and implementation efforts. We have readily available advanced technology and physicalinfrastructure that is flexible in its design, which facilitates quick integration and implementation. The solution is designed to allow our clients to deliverconsistent quality service as transaction volumes grow and also to handle daily and seasonal peak periods. Through our international locations, our clientscan sell their products throughout the world.Improve the Customer Experience. We enable our clients to provide their customers with a high-touch, positive buying experience therebymaintaining and promoting brand loyalty. Through our use of advanced technology, we can respond directly to customer inquiries by e-mail, voice or datacommunication and assist them with online ordering and product information. We believe we offer our clients a “world-class” level of service, includingWeb-enabled customer care service centers, detailed Customer Relationship Management (“CRM”) reporting and exceptional order accuracy. We havesignificant experience in the development of eCommerce storefronts that allows us to recommend features and functions easily navigated and understood byour clients’ customers. Our technology platform is designed to ensure high levels of reliability and fast response times for our clients’ customers. Because ofour technology, our clients benefit from being able to offer the latest in customer communication and response conveniences to their customers.Minimize Investment and Improve Operating Efficiencies. One of the most significant benefits outsourcing provides is the ability to transform fixedcosts into variable costs. By eliminating the need to invest in a fixed capital infrastructure, our clients’ costs typically become more directly correlated withvolume increases or declines. Further, as volume increases drive the demand for greater infrastructure or capacity, we are able to quickly deploy additionalresources. We provide services to multiple clients, which enables us to offer our clients economies of scale and resulting cost efficiency that they may nothave been able to obtain on their own. Additionally, because of the large number of daily transactions we process, we have been able to justify investments inlevels of automation, security surveillance, quality control processes and transportation carrier interfaces that are typically outside the scale of investmentthat our clients might be able to cost justify on their own. These additional capabilities can provide our clients the benefits of enhanced operatingperformance and efficiency and expanded customer service options.Access a Sophisticated Technology Ecosystem. We provide our clients with access to a Technology Ecosystem featuring best-of-breed eCommercetechnologies together in a single, integrated, Payment Card Industry (“PCI”) certified offering. Powered by leading enterprise-class software solutions, ourplatform is seamlessly integrated into our back-end operations to provide an end-to-end eCommerce solution. Built to accelerate the implementation process,the Technology Ecosystem allows for flexible integrations with other technology providers and client systems.Our Technology Ecosystem also extends beyond the digital world and into physical commerce channels. Brands and retailers today require flexibletechnology to control customer shopping experiences regardless of where they shop. Deploying ship from store, in-store pick up, or mobile point of salecapabilities are just a few examples of how we can enable brands to create a dynamic and unique omni-channel shopping experience.Direct-to-Consumer eCommerce. Established in 2008, our End2End eCommerce® solution for the DTC technology practice was dedicated toSalesforce Commerce Cloud (formerly Demandware). Through this partnership, we have deployed one of the largest international Salesforce CommerceCloud development teams in the world and maintain a talented team of certified developers who create world-class user experiences for some of the world'sleading brands. Since 2014, we have expanded the number of platforms we support to include SAP Hybris, Oracle Commerce, IBM Watson Commerce,Magento, and Shopify Plus. We have integrated these platforms with the rest of our world-class technology platform, including other best-of-breedtechnology partners, to create reference applications and platform frameworks that provide our clients with very high-function, platform-specific onlinestores. We use reference applications and platform frameworks as a starting point to quickly create a completely customized online store for our clients.Our comprehensive offering redefines end-to-end commerce by enabling retailers and branded consumer goods manufacturers with the ability toemploy a total outsourcing solution customized to their particular Commerce strategy, without the loss of site or brand control associated with earlier end-to-end outsourcing solutions.2 We believe our highest value proposition is achieved when our clients engage our full suite of services from all of the categories included inPFSweb’s End2End eCommerce® solutions. However, we provide our clients with the opportunity to customize their solution by selecting only certainservices from our offering in à la carte fashion if they prefer. We believe this flexibility and willingness to create a customized solution for each client is oneof the ways we believe we can differentiate ourselves from our competition.Strategic Commerce Consulting ServicesOur strategic commerce consulting practice leverages our commerce business and operational capabilities along with extensive vertical expertise toassist our clients in identifying new opportunities for channel revenue/margin growth, omni-channel alignment, digital transformation, newcustomer/segment acquisition, market expansion, and cost savings. We also monitor emerging technologies and trends, with an eye to measuring businessimpact and alignment with our clients’ end goals. With a focus on actionable strategy, we seek to optimize clients’ commerce investments while anticipatingcompetitive opportunities and threats.Our clients seek help navigating an increasingly complex digital landscape, lowering barriers to market for new players and an array of options forcompanies looking to innovate. We work closely with client stakeholders to develop strategic and prioritization frameworks that drive change whileproviding the ability to pivot as threats or opportunities are identified. In particular, our consultants focus on three key areas that enable clients to remaincompetitive while taking a leadership position: commerce ecosystem management (including omni-channel alignment), digital opportunity analysis, and a“continuous beta” operational model to roll out new capabilities and tactics in a measurable yet timely fashion.Commerce Strategy. From identifying new markets and methods to drive higher revenue to delivering competitive and market analysis, we helpclients formulate strategies and tactics that work. Our consultants look to leverage existing assets, personnel, and processes wherever possible whileidentifying where investment is needed. We also offer roadmaps and initiative “backlogs” prioritized for impact, including guidance on taking a phasedapproach. Our recommendations balance the need for achieving timely ROI against sometimes competing needs for scalability and aggressive growth.Omni-Channel Consulting. Retail clients are concerned with increased consumer expectations for a holistic, seamless experience regardless of whereor when they shop, in store or online. We offer an array of services that help retailers meet consumer expectations across the commerce lifecycle, fromcustomer acquisition through the transaction, order fulfillment, customer service, and loyalty. In particular, we implement tools and processes to support“endless aisle” inventory access, ship-to-store and ship-from- store capabilities, buy online and return in-store, and similar delivery scenarios. Likewise, weconsult with retailers on leveraging digital tools within the store environment, whether enabling sales associates to “save the sale” in-store or enhancingconsumers’ overall experience.Digital Opportunity Audits. Our consultants help clients identify where new digital platforms, tools, and technologies can provide competitiveadvantage or bridge gaps in their current operations and capabilities. Audits can take into account the competitive landscape, industry trends, digital bestpractices across verticals, and cost models, providing helpful benchmarks and flagging areas of opportunity. Audits may be conducted periodically to trackchanges and emerging technologies and measure effectiveness.Organizational/Operational Readiness. Many clients require organizational readiness consulting to ensure they can effectively utilize the platformsand tools we provide. Providing readiness consulting is crucial to driving client satisfaction and confidence when adopting commerce platforms, particularlywhen business users are given new capabilities and may need to adapt existing business processes. We also provide organizational design consulting, whichis often implemented in a phased approach as the client’s commerce channel grows; this may include recommendations regarding which functions tooutsource and which to maintain in house.Platform Evaluation/Selection. Our strategists take the lead in helping clients evaluate and select the right commerce platforms, leveraging ourexpertise implementing all market-leading solutions. We assist clients through a process matching their requirements to platform capabilities, measure theiroperational ability to utilize the platforms under consideration, and provide total cost of ownership (TCO) analysis comparing initial and ongoing costs foreverything from software licensing models to ongoing maintenance and upgrades.Strategy, Design, and Digital Marketing ServicesDigital Strategy. We build digital strategies to target the intersection of our client’s goals, brand and customers. Informed by in-depth and ongoingcollaboration with the client, data-driven insight and practiced expertise, we craft actionable plans that deliver results. We specialize in adapting to thechanging market, emerging technologies, and evolving customer behavior. Our strategy capabilities focus on brand development, digital commerce, content,and digital analytics and optimization.Design. We conceive and design client solutions with a deliberate focus on balancing creativity and usability. We create flagship digital experiencesfor global brands, offering full-service creative design and production services for a range of digital applications. Breathing creativity, insight, and expertiseinto design-centered initiatives we ignite growth and drive digital transformation. Our3 advanced customer experience design offerings include concept development, visual design, user experience design, copywriting, interactive development,and content creation.User Experience. We architect fully responsive branded commerce sites and tools that eliminate transactional friction, reduce cognitive load, and adddelight throughout the shopping experience. We specialize in taking advantage of platform functionality to add one-of-a-kind interactions and designingguided selling apps that use brand expertise to walk customers through complicated purchase decisions.Interactive Development. We believe front-end development is as much about artfully enhancing a user interaction as it is engineering pixelperfection. We turn digital designs into beautiful, functioning experiences that look and behave the way they were intended to across screens and devices ofall types, sizes, and systems. We also take every opportunity to use motion and interactive accents to provide users with guidance and delight throughout anexperience.SEO & Paid Search. We drive traffic by maintaining an in-depth knowledge of the ever-changing best practices for search engine optimization. Weprovide insight and advice on algorithm changes, content gaps, multi-language global expansion, and competitors’ search efforts. From implementation toongoing management, we can help brands reach customers who are actively looking for what they offer.Affiliate Marketing. Our approach to affiliate partner marketing focuses on building relationships with reputable, appropriate online influencers. Wecan help clients reach customers they may not through other channels, improving brand awareness and increasing sales quickly and efficiently. Then,through proactive program management, we can ensure ongoing optimization and continued growth. From publisher research and competitive analysis topayments, we can implement and manage the entire affiliate and partner ecosystem.Conversion Optimization. Our conversion optimization team applies an in-depth analysis of product and behavioral data on the storefront tocontinually optimize our client’s site. By combining analytics with the capabilities of the platform, we plan and execute A/B tests, optimize onsite search,and create personalized experiences to maximize the impact of the marketing and merchandising efforts. From an audit of an existing site to building aconversion optimization roadmap, we help our clients generate more revenue and provide an ever-improving customer experience that turns shoppers intobuyers.Storefront Management. Through proven strategic merchandising methodologies, we create personalized shopping experiences that drive conversionand increase revenue. With specialized expertise in dynamic merchandising, we can draw on each customer’s history and intent to connect these buyers withthe right products and content at the right time. Our day-to-day storefront operations include product and category setup, sorting rules definition, promotionconfiguration, and price adjustment. Working within predetermined guidelines, we incorporate best practices and make strategic decisions to achieve eachclient’s goals.Email Marketing. Combining technology with proven strategies, we elevate and optimize email programs to develop personalized customerrelationships. We create custom customer journeys through dynamic email, automated remarketing, automations, and subscriber segmentation. Our datafocused approach reduces the costs of customer acquisition, inspires brand loyalty, and increases ROI through both larger basket sizes and higher customerlifetime value.Digital Analytics. We provide more than snapshots of user activity through the usual charts and dashboards. We mine all available data and useadvanced analysis to identify opportunities within the customer journey that will allow brands to improve the overall user experience and generate increasedbusiness. With a focus on never-ending improvement, we use the data to continuously pinpoint actions that will strengthen customer relationships and driveresults across marketing channels.Technology ServicesPFSweb's Technology Services builds world-class commerce websites that are designed to maximize revenue opportunities. Built by a seasoned groupof professionals, we combine strategy and technology to create innovative user experiences. From high-fashion apparel to CPG, our portfolio consists ofbrands that accept only the highest quality shopping websites.We use a proven methodology to deliver quality implementations to meet some of the strictest brand requirements in the industry. Our project teamsare comprised of industry-leading professionals that bring eCommerce and web development best practices to our clients’ custom solutions. Once live, ourteam applies the same level of excellence to ongoing development, site maintenance, and solutions support.As a platform-agnostic provider, we manage dedicated commerce technology practices specializing in all of the leading enterprise platforms to enableour clients’ growth. Our expertise spans across the five major eCommerce platforms, including: Salesforce Commerce Cloud, SAP Hybris, Oracle Commerce,IBM Watson Commerce, Magento, and Shopify Plus. Our staff is ready to build custom commerce solutions on any of these platforms for our clients on aglobal basis. We employ a proven development methodology, led by a highly-qualified team of solutions architects, web developers, project managers, andquality assurance (“QA”) testers. When paired with our Strategic Commerce Consulting Services and our design / user experience (“UX”) and digitalmarketing4 services, we can provide an entire suite of services that spans strategy, creative, project management, web development, and quality assurance.Commerce Development. Our technology services practice partners and actively works with each commerce platform provider to ensure we aredelivering quality services for our joint clients. We also work to achieve higher-level partner status with each provider to demonstrate our expertise andexperience for each practice.Managed Services. The right people, processes, and tools are essential to maintaining a high-performance commerce environment. PFSweb’s ManagedServices delivers all three elements integrated into an array of services to optimize, manage, and protect commerce technology. Our work doesn't stop whenwe launch a commerce site. Our Managed Services team provides real-time management and monitoring to ensure our clients’ sites are always operating atpeak performance. We provide Level 1/2/3 technical, business, and solutions support for optimal issue management. Our team of technologists manage day-to-day commerce operations and monitor technology continuously with best-in-class tools and practices. The result is a high performing, stable commerceinfrastructure always available, always operating at peak performance. Our automation tools facilitate fast, accurate code deployment – whether applying asoftware patch or launching new code. We have the expertise and automation to identify and remediate issues even before events occur.Quality Assurance. Whether it's a new site build or ongoing development, our team of QA experts employ a full-service test suite that includes qualityassurance scripting and testing, regression, load testing, and automation.Training. We provide on-site, personalized platform training from experienced subject-matter experts. Our training team empowers our clients’business and merchandising staff with the knowledge they need to operate and optimize their eCommerce sites. Core training includes platform essentials,advanced merchandising, front-end design, and developer training.Order ManagementOur Oracle-based, custom, Order Management System (“OMS”), is a scalable solution built for DTC and B2B and order processing. We also offer adistributed order management solution utilizing the Kibo software that is tightly integrated with our internal OMS. This solution provides retailers with acomplete technology solution for integrating both online and offline channels. Our order management technology solutions provide interfaces that allow forreal-time information retrieval, including information on inventory, sales orders, shipments, delivery, purchase orders, warehouse receipts, customer history,accounts receivable and credit lines. These solutions are seamlessly integrated with our web-enabled customer contact centers, allowing for the processing oforders through shopping cart, phone, fax, mail, email, web chat, and other order receipt methods. As the information backbone for our total supply chainsolution, order management services can be used on a stand-alone basis or in conjunction with our other business infrastructure offerings, including customercontact, financial or distribution services. In addition, for the B2B market, our technology platform provides a variety of order receipt methods that facilitatecommerce within various stages of the supply chain. Our systems provide the ability for both our clients and their customers to track the status of orders atany time. Our services are transparent to our clients’ customers and are seamlessly integrated with our clients’ internal system platforms and web sites. Bysynchronizing these activities, we can capture and provide critical customer information, including: •Statistical measurements critical to creating a quality customer experience, containing real-time order status, order exceptions, back ordertracking, allocation of product based on timing of online purchase and business rules, the ratio of customer inquiries to purchases, averageorder sizes and order response time; •B2B supply chain management information critical to evaluating inventory positioning, for the purpose of improving inventory turns, andassessing product flow-through and end-user demand; •Reverse logistics information, including customer response and reason for the return or rotation of product and desired customer action; •Detailed marketing information about what was sold and to whom it was sold, by location and preference; and •Web traffic reporting showing the number of visits (“hits”) received, areas visited, and products and information requested.Technology Collaboration. We have created a suite of technology services that enable buyers and suppliers to fully automate their businesstransactions within their supply chain using the order management interfaces. Our collaboration technologies operate in an open systems environment andfeature the use of industry-standard Extensible Markup Language (“XML”) and Service-Oriented Architecture (“SOA”) web services, enabling customizedeCommerce solutions with minimal changes to a client’s systems or our systems. The result is a faster implementation process. We also support informationexchange methods, such as Applicability Statement 2 (“AS2”), Secure File Transfer Protocol (“SFTP”), Electronic Data Interchange (“EDI”), Message QueueSeries (“MQ Series”), Application Link Enabling (“ALE”), and Representational State Transfer / Simple Object Access Protocol (“REST/SOAP”) over HyperText Transfer Protocol Secure (“HTTPS”).5 Information Management. We have the ability to communicate with and transfer information to and from our clients through a wide variety oftechnology services, including real-time web service enabled data interfaces, file transfer methods and electronic data interchange. Our systems are designedto capture, store and electronically forward to our clients critical information regarding customer inquiries and orders, product shipments, inventory status(for example, levels of inventory on hand, on backorder, on purchase order and inventory due dates to our warehouse), product returns and other information.Our systems are capable of providing our clients with customer inventory and order information for use in analyzing sales and marketing trends andintroducing new products. We also offer customized reports and data analyses based upon specific client needs to assist them in their budgeting.Order FulfillmentWe design advanced pick-pack-ship operations that streamline our clients’ supply chain process and offer a flexible fulfillment distribution model.Our fulfillment team understands the value of the delivery experience by specializing in creating branded solutions with gift wrap, product personalization,and other branded services. Our distribution centers are located in the Memphis, Tennessee area, Toronto, Canada and Liege, Belgium to provide centrallylocated fulfillment throughout North America and Europe.Advanced Distribution Facilities and Infrastructure. An integral part of our solution is the warehousing and distribution of our clients’ inventory. Wereceive inventory in our distribution centers, verify shipment accuracy, unpack and audit packages (a process that includes spot-checking a percentage of theinventory to validate piece counts and check for damages that may have occurred during shipping, loading and unloading). Upon request, we inspect forother damages or defects, which may include checking fabric, stitching and zippers for soft goods, or ‘testing’ power-up capabilities for electronic items aswell as product specifications. We generally stock for sale within one business day of unloading. We pick, pack and ship customer orders and can providecustomized packaging, customized monogramming, personalized laser engraving, high volume shrink packaging, inserts and promotional literature fordistribution with customer orders. For many clients, we provide gift-wrapping services including line level gifting, customized gift-wrapping paper, ribbon,gift-box and gift-messaging.Our distribution facilities contain computerized sortation equipment, flexible mobile pick-to-light carts, powered material handling equipment,scanning and bar-coding systems. Our distribution facilities include several advanced technology enhancements, such as radio frequency technology inproduct receiving processing to ensure accuracy, as well as an automated package routing and a pick-to-light paperless order fulfillment system. Ouradvanced distribution systems provide us with the capability to warehouse an extensive number of stock keeping units (“SKUs”), ranging from large high-end electronics to small cosmetic compacts. Our facilities are flexibly configured to process B2B and DTC orders from the same central location.In addition to our advanced distribution systems, our pick-to-light carts, stationary pick-to-light areas and conveyor system controls provide real timeproductivity reporting, thereby providing our management team with the tools to implement productivity standards. This combination of computer-controlled equipment provides the seamless integration of our pick-to-light systems and mass sortation capabilities. This unique combination oftechnologies ensures high order accuracy for each and every customer order.We are able to take advantage of a variety of shipping and delivery options, which range from next day service to zone skipping, to optimizetransportation costs. Our facilities and systems are equipped with multi-carrier functionality, allowing us to integrate with all leading package carriers andprovide a comprehensive freight and transportation management offering.We offer reverse logistics management services, including issuing return authorizations, return carrier shipping labels, receipt of product, creditingcustomer accounts and disposition of returned product. We also leverage strategic partnerships to provide our clients with access to distributed returns centersthat collect, consolidate, report on and forward to our central facilities returned product allowing us to accelerate credits to our clients’ customers, reducefreight costs for our client, improve customer service and reduce complexity and cost in our facilities from handling inbound returns.Our domestic facilities provide trained security professionals from our security headquarters in Memphis, Tennessee and Southaven, Mississippi.Continual validation and the use of current and retired law enforcement professionals ensures that we employ the latest in security processes and proceduresto further enhance our surveillance and detection capabilities.Facility Operations and Management. Our facilities management service offering includes distribution facility design and optimization, businessprocess reengineering and ongoing staffing and management. Along with our multi-brand operations in Mississippi and Tennessee, we also manage adedicated DTC client facility on behalf of a major retailer. Our expertise in supply chain management, logistics and customer-centric fulfillment operationscan provide our clients with cost reductions, process improvements and technology-driven efficiencies.Kitting and Assembly Services. Our expanded kitting and assembly services enable our clients to reduce the time and costs associated with managingmultiple suppliers, warehousing hubs, and light manufacturing partners. As a single source provider, we provide the advantage of convenience,accountability and speed. Our kitting and assembly services include light assembly, specialized kitting and supplier-consigned inventory hub either in ourdistribution facilities or co-located elsewhere. We also offer customized light manufacturing and supplier relationship management.6 We work with clients to re-sequence certain supply chain activities to aid in an inventory postponement strategy. We can provide kitting andassembly services and build-to-stock thousands of units daily to stock in a Just-in-Time (“JIT”) environment. This service, for example, can entail theprocurement of packaging materials including retail boxes, foam inserts and anti-static bags. These raw material components may be shipped to us fromdomestic or overseas manufacturers, and we will build the finished SKUs to stock for the client. Also included is the custom configuration of high-endprinters and servers. This strategy allows manufacturers to make a smaller investment in base unit inventory while meeting changing customer demand forhighly customizable products.Our standard capabilities include: build-to-order, build-to-stock, expedited orders, passive and active electrostatic discharge (“ESD”) controls, productlabeling, serial number generation, marking and/or capture, lot number generation, asset tagging, bill of materials (“BOM”) or computer automated design(“CAD”) engineering change processing, SKU-level pricing and billing, manufacturing and metrics reporting, first article approval processes, andcomprehensive quality controls.Kitting and inventory hub services enable clients to collapse supply chains into the minimal steps necessary to prepare product for distribution to anychannel, including wholesale, mass merchant retail, or direct to consumer. Clients no longer have to employ multiple providers or require suppliers toconsign multiple inventory caches for each channel. We offer our clients the opportunity to consolidate operations from a channel standpoint, as well as froma geographic perspective. Our integrated, global information systems and international locations support business needs worldwide.Customer CareOur internal contact center operations are focused on providing essential services such as order entry, returns authorization, product inquiry, and ordertracking. These operations also include our iCommerce Agent (“iCA”), a customizable web-based application featuring powerful customer service tools foraccessing all required customer information. Our unique multi-lingual capabilities are possible through our strategically placed locations in Texas, Belgium,U.K., and Canada.Customer Service Application. Through our web enabled Customer Service Application, iCA, our unique technology leverages the client’s websiteinvestment by wrapping the Customer Service Application around the existing website. Through iCA, agents provide customer service functions, such asplacing orders, checking order status, facilitating returns, initiating upsell and cross sell, managing escalations, and gathering “voice of the customer”information to help our clients evolve with their customers’ changing needs. iCA is fully integrated into the client’s website, our data analytics platform, andour order processing system, allowing full visibility into customer history and customer trends. Through each of our customer touch-points, information canbe analyzed and processed for current or future use in business evaluation product effectiveness and positioning, and supply chain planning. Through thisfully integrated system, we are able to provide a complete customer care solution in a PFS customer care center or on a license basis to our clients’ owned oroutsourced customer care centers.Customer Assistance. An important feature of evolving commerce is the ability for the customer to communicate with a live customer servicerepresentative. Our experience has been that many consumers tell us they visited a web location for information, but not all of those consumers chose to placetheir order online. Our customer care services utilize features that integrate voice, e-mail, standard mail, and live chat communications to respond to andhandle customer inquiries. Our customer care representatives answer various questions, acting as virtual representatives of our clients’ organization, regardingorder status, shipping, billing, returns and product information and availability as well as a variety of other questions. We utilize technology that allows us toroute each customer contact automatically to the appropriate customer care representative who is individually trained in the clients’ business and products.Our web-enabled customer care centers are flexibly designed so that our customer care representatives can handle either several different clients andproducts in a shared agent environment, thereby creating economy of scale benefits for our clients, or through a highly customized dedicated agent supportmodel that provides the ultimate customer experience and brand reinforcement.Quality Monitoring. Quality is essential in our client solutions. As representatives of our clients, our customer care representatives must adhere to theunique quality standards of each client for each contact type. We continually monitor the quality of our customer care representatives against each clientquality standard and use the results to provide agent-level feedback to continually improve the customer care experience. Clients may participate in thequality process by remotely listening to calls, assisting in the grading of recorded calls, and providing ongoing direction to improve quality standardsthrough our calibration process.Customer Self-Help. With the need for efficiency and cost optimization for many of our clients, we have integrated interactive voice response (“IVR”)as another option for customer contacts. IVR creates an “electronic workforce” with virtual agents that can assist customers with vital information at any timeof the day or night. IVR allows for our clients’ customers to deal interactively with our system to handle basic customer inquiries, such as account balance,order status, shipment status and customer satisfaction surveys. The inclusion of IVR in our service offering allows us to offer a cost effective way to handlehigh volume, low complexity calls.7 Financial ServicesProtecting our clients’ brand with secure payment processing and fraud management services is critical to a successful operation. We also provideflexible global payment options as well as gift cards, B2B invoicing, and VAT services.Our financial services are divided into two major areas: 1) billing, credit, collection and cash application services for B2B clients and 2) fraud review,chargeback management and processing and settlement of credit card services for DTC clients.Business-to-Business Financial Management. For B2B clients, we offer full-service accounts receivable management and collection capabilities,including the ability to generate customized invoices in our clients’ names. We assist clients in reducing accounts receivable and days sales outstanding,while minimizing costs associated with maintaining an in-house collections staff. We offer electronic credit services in the format of EDI and XMLcommunications direct from our clients to their vendors, suppliers and retailers.Direct-to-Consumer Financial Management. For DTC clients, we offer secure credit card processing related services for orders made via a client website or through our customer contact center. We offer manual credit card order review as an additional level of fraud protection. We also calculate sales taxes,goods and services taxes or value added taxes, if applicable, for numerous taxing authorities and on a variety of products. Using third-party leading-edgefraud protection services and risk management systems, we can offer high levels of security and reduce the level of risk for client transactions.INDUSTRY INFORMATION AND COMPETITIVE LANDSCAPEIndustry OverviewBusiness activities in the public and private sectors continue to operate in an environment of rapid technological advancement, increasingcompetition and continuous pressure to improve operating and supply chain efficiency while decreasing costs. We currently see the following trends withinthe industry: •Manufacturers strive to restructure their supply chains to maximize efficiency and reduce costs in both B2B and DTC markets, and to create avariable-cost supply chain able to support the multiple, unique needs of each of their initiatives, including traditional and electroniccommerce. •Companies in a variety of industries seek outsourcing as a method to address one or more business functions that are not within their corebusiness competencies, to reduce operating costs or to improve the speed or cost of implementation. •Retailers, both traditional and e-commerce only, partner with end to end providers to provide a turnkey solution to support their e-commercechannels. Providers with a global presence provide additional value to companies pursuing an international expansion strategy.Supply Chain Management TrendAs companies maintain focus on improving their businesses and balance sheet financial ratios, significant efforts and investments continue to be madeidentifying ways to maximize supply chain efficiency and extend supply chain processes. Working capital financing, vendor managed inventory, supplychain visibility software solutions, distribution channel skipping, direct to consumer eCommerce sales initiatives, and complex upstream supply chaincollaborative technology are products that manufacturers seek to help them achieve greater supply chain efficiency.A key business challenge facing many manufacturers and retailers as they evaluate their supply chain efficiency is determining how the trend towardincreased DTC business activity will impact their traditional B2B and DTC commerce business models. Order management and small package fulfillment anddistribution capabilities are becoming increasingly important processes as this trend evolves. We believe manufacturers will look to outsource their non-corecompetency functions to support this modified business model. We believe companies will continue to strategically plan for the impact that eCommerce andother new technology advancements will have on their traditional commerce business models and their existing technology and infrastructure capabilities.Additionally, B2B opportunities exist as companies look to leverage the technology and enhanced customer experience that currently exists withineCommerce channels.Manufacturers, as buyers of materials, are also imposing new business practices and policies on their supplier partners to shift the normal supply chaincosts and risks associated with inventory ownership away from their own balance sheets. Through techniques like Vendor Managed Inventory or ConsignedInventory Programs, manufacturers are asking their suppliers, as a part of the supplier selection process, to provide capabilities where the manufacturer neednot own, or even possess, inventory prior to the exact moment that unit of inventory is required as a raw material component or for shipping to a customer. Tobe successful for all parties, business models such as these often require a sophisticated collection of technological capabilities that allow for completeintegration and collaboration of the information technology environments of both the buyer and supplier. For example, for an inventory unit to arrive at theprecise required moment in the manufacturing facility, it is necessary for the Manufacturing Resource Planning systems of the8 manufacturer to integrate with the CRM systems of the supplier. When hundreds of supplier partners are involved, this process can become quite complexand technologically challenging. Buyers and suppliers are seeking solutions that utilize XML based protocols and traditional EDI standards to ensure anopen systems platform that promote easier technology integration in these collaborative solutions.Outsourcing TrendIn response to growing competitive pressures and technological innovations, we believe many companies, both large and small, are focusing theircritical resources on the core competencies of their business and utilizing eCommerce service providers to accelerate their business plans in a cost-effectivemanner and perform non-core business functions. Outsourcing can provide many key benefits, including the ability to: •Enter new business markets or geographic areas rapidly; •Increase flexibility to meet changing business conditions and demand for products and services; •Enhance customer satisfaction and gain competitive advantage; •Reduce capital and personnel investments and convert fixed investments to variable costs; •Improve operating performance and efficiency; and •Capitalize on skills, expertise and technology infrastructure that would otherwise be unavailable or expensive given the scale of the business.Typically, many outsourcing service providers are focused on a single function, such as information technology, call center management, credit cardprocessing, warehousing or package delivery. This focus creates several challenges for companies looking to outsource more than one of these functions,including the need to manage multiple outsourcing service providers, to share information with service providers and to integrate that information into theirinternal systems. Additionally, the delivery of these multiple services must be transparent to the customer and enable the client to maintain brand recognitionand customer loyalty. Furthermore, traditional commerce outsourcers are frequently providers of domestic-only services versus international solutions. As aresult, companies requiring global solutions must establish additional relationships with other outsourcing parties.Another vital point for major brand name companies seeking to outsource is the protection of their brand. When looking for an outsourcing partner toprovide infrastructure solutions, brand name companies must find a company that can provide the same quality performance and superior experience theircustomers expect from their brands. Working with an outsourcing partner requires finding a partner that can maintain the consistency of their brand image,which is one of the most valuable intangible assets that recognized brand name companies possess.CompetitionWe face competition from many different sources depending upon the type and range of services requested by a potential client. Many othercompanies offer one or more of the same services we provide on an individual basis. For operations services, our competitors include vertical outsourcers,which are companies that offer a single function solution. We compete with transportation logistics providers, known in the industry as 3PL’s and 4PL’s(third or fourth party logistics providers), who offer product management functions as an ancillary service to their primary transportation services. Forprofessional services, we compete against Global Commerce Service Providers, who perform various services similar to our solution offerings. Additionally,we see competition from digital agencies providing creative, commerce strategy and system integration services. In many instances, PFSweb competes withthe in-house operations of our potential clients. Occasionally, the operations departments of potential clients believe they can perform the same services wedo, at similar quality levels and costs, while others are reluctant to outsource business functions that involve direct customer contact. We cannot be certainwe will be able to compete successfully against these or other competitors in the future.Although many of our competitors offer one or more of our services, we believe our primary competitive advantage is our ability to offer a full array ofcustomized services, thereby eliminating any need for our clients to coordinate these services from many different providers. We believe we can differentiateourselves by offering our clients a very broad range of eCommerce and business process services that address, in many cases, the entire value chain, fromdemand to delivery.We also compete on the basis of many other important additional factors, including: •experience supporting a specific product vertically; •operating performance and reliability; •ease of implementation and integration;9 •experience of the people required to successfully and efficiently design and implement solutions; •experience operating similar solutions dynamically; •leading edge technology capabilities; •global reach; and •price.We believe we can compete favorably with respect to many of these factors. However, the market for our services is competitive and continuallyevolving, and we may not be able to compete successfully against current and future competitors.Competitive LandscapeGlobal Commerce Service Providers. We compete with companies that provide a global solution for digital strategy services and commerceimplementation such as Accenture Digital, Deloitte Digital, Capgemini and SapientRazorfish.End-to-end Commerce. In North America, we compete with full service commerce providers such as Trade Global and OneStop, as well as otherproviders such as BrandShop and Newgistics. In the European market, we compete with companies such as Arvato, Yoox and other geographically focusedproviders in Western Europe.Design and Digital Marketing Services. We compete with a wide range of digital agency firms, including Fluid, Huge, AKQA, and Digitas LBI.Technology Services. Globally, we compete with a wide range of technology services providers or systems integrators, including providers such asAstound Commerce, OSF, Optaros, Gorilla Group, Object Edge, and Lyons CG.Operations. We compete with eCommerce focused order fulfillment providers such as Radial and GEODIS (formerly OHL), as well as, depending onthe client’s retail and/or supply chain strategy, Excel Logistics, UPS Logistics, and other “pure-play” fulfillment or call center providers.COMPANY INFORMATIONClients and MarketingOur target clients include traditional retailers, online retailers and leading technology and consumer goods brands looking to quickly and efficientlyimplement or enhance business initiatives, adapt their go-to-market strategies, or introduce new products, programs or geographies, without the burden ofmodifying or expanding their technology, customer care, supply chain and logistics infrastructure. Our solutions are applicable to a multitude of industriesand company types and we have provided solutions for such companies as:Procter & Gamble (consumer packaged goods), L’Oréal (health & beauty), T.J. Maxx (apparel and home fashion), Canada Goose (outdoor apparel),Roots Canada Ltd. (apparel), Ricoh (printer supplies), Xerox (printers and printer supplies), Pandora (jewelry), Charlotte Russe (fashion), among many others.We target potential clients through an extensive integrated marketing program comprised of a variety of direct marketing techniques, email marketinginitiatives, trade event participation, search engine marketing, public relations, social media and a sophisticated outbound tele-sales lead generation model.We have also developed a global business development methodology which allows us to effectively showcase our various eCommerce service solutions andproducts. We also pursue strategic marketing alliances with consulting firms, software manufacturers and other logistics providers to increase marketawareness and generate referrals and customer leads.Because of the highly complex nature of the solutions we provide, our clients demand significant competence and experience from a variety ofdifferent business disciplines during the sales cycle. As such, we often utilize a member of our executive team to lead the design and proposal development ofeach potential new client we choose to pursue. The executive is supported by a select group of highly experienced individuals from our professional servicesgroup with specific industry knowledge of, or experience with, the solutions development process. We employ a team of highly trained implementationmanagers whose responsibilities include the oversight and supervision of client projects and maintaining high levels of client satisfaction during thetransition process between the various stages of the sales cycle and steady state operations.TechnologyWe maintain advanced management information systems and have automated key business functions using online, real-time or batch systems. Thesesystems enable us to provide information concerning sales, inventory status, customer payments and other10 operations essential for us and our clients to efficiently manage electronic commerce and supply chain business programs. Our systems are designed to scalerapidly to handle the transaction processing demands of our clients and our growth.Many internal infrastructures are not sufficient to support the explosive growth in e-business, e-marketplaces, supply chain compression, distributionchannel realignment and the corresponding demand for real-time information necessary for strategic decision-making and product fulfillment. To address thisneed, we have created PFSweb’s End2End eCommerce® platform to enable companies with little or no eCommerce infrastructure to speed their time tomarket and minimize resource investment and risk, and to allow all companies involved to improve the efficiency of their supply chain.Using the various components of our collaboration technology suite, we can assist our clients in easily integrating their web sites or ERP systems toour systems for real-time web service enabled transaction processing without regard for their hardware platform or operating system. This high-level ofsystems integration allows our clients to automatically process orders, customer data and other eCommerce information. We also can track information sent tous by the client as it moves through our systems in the same manner a carrier would track a package throughout the delivery process. Our systems enable us totrack, at a detailed level, information received, transmission timing, any errors or special processing required and information sent back to the client.We have invested in advanced telecommunications, computer telephony, electronic mail and messaging, automated fax technology, IVR technology,barcode scanning, wireless technology, fiber optic network communications and automated inventory management systems. We have also developed andutilize telecommunications technology that provides for automatic customer call recognition and customer profile recall for inbound customer servicerepresentatives.The primary responsibility of our systems development team of IT professionals is directed at implementing custom solutions for new clients andmaintaining existing client relationships. Our development team can also produce proprietary systems infrastructure to expand our capabilities incircumstances where we cannot purchase standard solutions from commercial providers. We also utilize temporary and/or contract resources when needed foradditional capacity.Our information technology operations and infrastructure are built on the premise of reliability and scalability. We maintain diesel generators and un-interruptible power supply equipment to provide constant availability to computer rooms, call centers and warehouses. Multiple internet service providersand redundant web servers provide for a high degree of availability to web sites that interface with our systems. Capacity planning and upgrading isperformed regularly to allow for quick implementation of new clients and avoid time-consuming infrastructure upgrades that could slow growth rates. In theevent of a disastrous situation, we also have a disaster recovery plan that provides geographically separated and comparably equipped data centers that areable to recover stored data in a reasonable and effective manner.EmployeesAs of December 31, 2017, we had approximately 2,550 employees, of which approximately 1,600 were located in the United States. We have neversuffered an interruption of business as a result of a labor dispute. We consider our relationship with our employees to be good. In the U.S., Canada and India,we are not a party to any collective bargaining agreements and while our European subsidiaries are not a party to a collective-bargaining agreement, certainof them are required to comply with certain rules agreed upon by their employee Works Councils.Our success in recruiting, hiring and training large numbers of skilled employees and obtaining large numbers of hourly employees and temporarystaff during peak periods for distribution and call center operations is critical to our ability to provide high quality distribution and support services. Callcenter representatives and distribution personnel receive feedback on their performance on a regular basis and, as appropriate, are recognized for superiorperformance or given additional training. Generally, our clients provide specific product training for our customer service representatives and, in certaininstances, on-site client personnel to provide specific technical support. To maintain good employee relations and to minimize employee turnover, we striveto offer competitive pay, hire primarily full-time employees who are eligible to receive a full range of employee benefits, and provide employees with clear,visible career paths.Internet Access to ReportsWe maintain a website, www.corporate.pfsweb.com, for Investor Relations. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, andcurrent reports on Form 8-K (and amendments, if any, to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of1934) are made available, free of charge, through the investor relations section of this website as soon as reasonably practicable after we electronically filesuch material with, or furnish it to, the Securities and Exchange Commission. The information on this website is not incorporated in this report.11 Government RegulationWe are subject to federal, state, local and foreign consumer protection laws, including laws protecting the privacy of our customers’ personallyidentifiable information and other non-public information and regulations prohibiting unfair and deceptive trade practices. Furthermore, the growth anddemand for online commerce has and may continue to result in more stringent consumer protection laws that impose additional compliance burdens andgreater penalties on online companies. Moreover, there is a trend toward regulations requiring companies to provide consumers with greater informationregarding, and greater control over, how their personal data is used, and requiring notification when unauthorized access to such data occurs. For example,many states currently require us to notify each of our customers who are affected by any data security breach in which an unauthorized person, such as acomputer hacker, obtains such customer’s name and one or more of the customer’s social security number, driver’s license number, credit or debit cardnumber or other similar personal information. In addition, several jurisdictions, including foreign countries, have adopted privacy-related laws that restrict orprohibit unsolicited email promotions, commonly known as “spam,” and that impose significant monetary and other penalties for violations.In an effort to comply with these laws, internet service providers may increasingly block legitimate marketing emails. These consumer protection lawsmay become more stringent in the future and could result in substantial compliance costs and could interfere with the conduct of our business. Also, anincreasing number of countries have introduced and/or increased enforcement of comprehensive privacy laws, or are expected to do so. In Europe, a new dataprotection regulation will likely come into effect in 2018 and will supersede Directive 95/46/EC, which has governed the processing of personal data since1995. The new regulation will enhance the security and privacy obligations of entities that process data of residents of members of the European EconomicArea and substantially increase penalties for violations. In addition, the European Court of Justice has invalidated a decision of the European Commissionthat permitted our European affiliates and our European customers to transfer personal data to us and other entities in the United States that are certified underthe EU-US safe harbor framework. This decision, a failure of the European Union and the United States to implement a new safe-harbor framework, and newregulations and laws in other countries that restrict the export of personal data may require us to increase our IT infrastructure, maintenance and support costs. Item 1A.Risk FactorsOur business, financial condition and operating results could be adversely affected by any or all of the following factors, in which event the tradingprice of our common stock could decline, and you could lose part or all of your investment.Risks Related to Our BusinessWe operate with significant levels of indebtedness and are required to comply with certain financial and non-financial covenants; and we have guaranteedcertain indebtedness and obligations of our subsidiaries.As of December 31, 2017, our total credit facilities outstanding, including debt, capital lease obligations and our vendor accounts payable related tofinancing of Ricoh product inventory for a client, was approximately $54.4 million. We cannot provide assurance that our credit facilities will be renewed bythe lending parties. Additionally, these credit facilities include both financial and non-financial covenants, many of which also include cross-defaultprovisions applicable to other agreements. Certain of these covenants also restrict our ability to transfer funds among our various subsidiaries, which mayadversely affect the ability of our subsidiaries to operate their businesses or comply with their respective loan covenants. We cannot provide assurance thatwe will be able to maintain compliance with these covenants. A non-renewal, default under or acceleration of any of our credit facilities may have a materialadverse impact upon our business and financial condition. We have guaranteed most of the indebtedness of our subsidiary Supplies Distributors.Furthermore, we are obligated to repay any over-advance made to Supplies Distributors by its lenders to the extent Supplies Distributors is unable to do so.Our business and future growth depend on our continued access to bank and commercial financing.Our business and future growth currently depend on our ability to access bank, vendor and commercial lines of credit. We currently depend on line ofcredit facilities provided by various banks and commercial lenders that provided for an aggregate of up to approximately $77.5 million in availablefinancing as of December 31, 2017. These lines of credit currently mature at dates through August 2020 and are secured by substantially all our assets. Ourability to renew our lines of credit depends upon various factors, including the availability of bank loans and commercial credit in general, as well as ourfinancial condition and prospects. Therefore, we cannot guarantee that these credit facilities will continue to be available beyond their current maturities onreasonable terms or at all. Our inability to renew or replace our credit facilities or find alternative financing would have a material adverse affect on ourbusiness, financial condition, operating results and cash flow.We are uncertain about the availability of additional capital.We may require additional capital to take advantage of opportunities, including strategic alliances and acquisitions, and to fund capital expenditures,or to respond to changing business conditions and unanticipated competitive pressures. We may also require additional funds to finance operating losses.Should these circumstances arise, our existing cash balance and credit facilities may be12 insufficient and we may need to raise additional funds either by borrowing money or issuing additional equity or both. We cannot assure you that suchresources will be adequate or available for all of our future financing needs. Our inability to finance our growth, either internally or externally, may limit ourgrowth potential and our ability to execute our business strategy. If we are successful in completing an additional equity financing, this could result in furtherdilution to our shareholders’ ownership or reduce the market value of our common stock.We anticipate incurring significant expenses in the foreseeable future, which may reduce our ability to achieve or maintain profitability.To reach our business growth objectives, we currently expect to increase our operating, sales, and marketing expenses, as well as capital expenditures.To offset these expenses, we will need to generate additional profitable business. If our revenue declines or grows slower than either we anticipate or ourclients’ projections indicate, or if our operating, sales and marketing expenses exceed our expectations or cannot be reduced to an appropriate level, we maynot generate sufficient revenue to be profitable or be able to sustain or increase profitability on a quarterly or annual basis in the future. Additionally, if ourrevenue grows slower than either we anticipate or our clients’ projections indicate, we may incur unnecessary or redundant costs and our operating resultscould be adversely affected.Our service fee revenue and gross margin are dependent upon our clients’ business and transaction volumes and our costs. A reduction in our clients’ecommerce business or our inability to grow our business or increase service fee revenue from new or existing clients could negatively impact ouroperating results.Our service fee revenue is primarily transaction and project based and fluctuates with the volume of transactions or level of sales of the products byour clients for whom we provide omni-channel services and the size and scope of projects for clients for whom we perform technology and agency services. Ifwe are unable to retain existing clients or attract new clients, or if we dedicate significant resources to clients whose business does not generate revenues atprojected levels or sufficient revenues, or whose products do not generate substantial customer sales, our business may be materially adversely affected in anumber of ways.For example, we seek to maintain sufficient capacity in our fulfillment, call center and professional services operations and computer technologysystems to support our projected existing and new client business activity, including seasonal volumes and we currently plan on increasing capacity tosupport future projected growth. The fixed cost structure of many of these investments limits our flexibility to reduce our costs when excess capacity occurs.A reduction in our clients’ business or our inability to grow our business or increase service fee revenue from new or existing clients could result in anunderutilization in our invested assets. While certain of our building leases permit early termination in advance of their regular scheduled maturity date,these early terminations would require incremental termination related payments which reduce the potential benefit of this flexibility.Similarly, salaries and payroll-related expenses are a significant component of our costs. Balancing our workforce levels against the demands for ourservices is difficult. We generally cannot reduce our labor costs as quickly as negative changes in revenue may occur. We may retain underutilizedemployees to maintain scalability to meet client demand. We must maintain our utilization at an appropriate rate to achieve our desired level of profitability.If we are unable to achieve and maintain our target utilization rates, our profitability could be adversely impacted. Further, if labor costs increase, this couldput upward pressure on our costs and adversely affect our profitability if we are unable to recover these increased costs by increasing the prices for ourservices.Moreover, our ability to estimate service fee revenue for future periods is substantially dependent upon our clients’ and our own projections, theaccuracy of which has been, and will continue to be, unpredictable. Therefore, our planning for client activity and targeted goals for service fee revenue andgross margin may be materially adversely affected by incomplete, delayed or inaccurate projections. In addition, most of our service agreements with ourclients are non-exclusive and we cannot assure you any of our clients will continue to use our services for any period of time. The loss of a significant amountof service fee revenue due to client terminations or material reductions in the services provided to one or more clients could have a material adverse effect onour ability to cover our costs and thus on our profitability.We may incur financial penalties if we fail to meet contractual service levels under client service agreements.Many of our client service agreements contain minimum service level requirements and impose financial penalties if we fail to meet suchrequirements. The imposition of a substantial amount of such penalties could have a material adverse effect on our business and operations. In the event weare unable to meet the service levels expected by the client, our relationship with the client will suffer and may result in financial penalties and/or thetermination of the client contract.We are dependent on our key personnel, and if we are unable to keep our supply of skills and resources in balance with client demand and attract andretain skilled professionals, our business, the utilization rate of our professionals and our results of operations may be materially adversely affected.Our performance is highly dependent on the continued services of our executive officers and other key personnel, the loss of any of whom couldmaterially adversely affect our business. In addition, we need to attract and retain other highly-skilled, technical and managerial personnel for whom there isintense competition. For example, if we are unable to hire or continually train our employees13 to keep pace with the rapid and continuing changes in technology and the markets we serve or changes in the types of services our clients are demanding, wemay not be able to develop and deliver new services and solutions to fulfill client demand. As we expand our services and solutions, we must also hire andretain an increasing number of professionals with different skills and expectations than those of the professionals we have historically hired and retained. Wecannot assure you we will be able to attract and retain the personnel necessary for the continuing growth of our business. Our inability to attract and retainqualified technical and managerial personnel could materially adversely affect our ability to maintain and grow our business significantly.Our business may suffer if we are unable to hire and retain sufficient temporary workers or if labor costs increase.We regularly hire a large number of part-time and seasonal workers, particularly during the fourth quarter holiday season and to meet temporaryincreases in client activity volume related to “flash sales” and other short-term marketing programs. Any difficulty we may encounter in hiring such workerscould result in significant increases in labor costs, or inability to support our clients’ business, which could have a material adverse effect on our business,financial condition and results of operations. We may also hire more full-time and part-time employees to mitigate the risk of the unavailability of temporaryworkers, and our failure to maintain an appropriate mix of labor personnel may result in higher costs. Competition for labor could also substantially increaseour labor costs. Although we seek to preserve the contractual ability to pass through increases in labor costs to our clients, not all of our current contractsprovide us with this protection, and we may enter into contracts in the future, which limit or prohibit our ability to pass through increases in labor costs to ourclients.Our expenses could be adversely impacted by increases in healthcare costs.We provide healthcare benefits to our employees. Increased costs of providing such benefits, including potential impact from modifications tohealthcare legislation and related regulations, could materially impact our future healthcare costs, which would adversely affect our results and cash flow.Our business is susceptible to risks associated with international operations.Outside of the United States, we currently maintain distribution facilities, call centers, technology centers, administrative offices and/or have salespersonnel in Belgium, Canada, India, Bulgaria and U.K., and we currently intend to expand our international operations. We cannot assure you we will besuccessful in expanding in these or any additional international markets. In addition, we may face competition from companies that may have moreexperience with operations in these countries or with international operations generally. We may also face difficulties integrating new facilities in differentcountries into our existing operations, as well as integrating employees that we hire in different countries into our existing corporate culture. In addition tothe uncertainty regarding our ability to generate revenue or profits from foreign operations and expand our international presence, there are risks inherent indoing business internationally that we have not generally faced in our U.S. operations, including: •lack of familiarity with, and resulting risk of breach of, and/or unanticipated additional cost of compliance with, foreign laws and regulationsgoverning privacy, data security, data transfer, employment, taxes, tariffs, trade restrictions, transfer pricing and other matters; •changes in regulatory environments; •difficulties and expenses associated with localizing our services and operations to local markets, including language and cultural differences; •difficulties in staffing and managing international operations, including complex and costly hiring, disciplinary, and termination requirements; •the complexities of foreign value-added taxes and restrictions on the repatriation of earnings; •reduced or varied protection for intellectual property rights in some countries; •political, social and economic instability abroad, terrorist attacks and security concerns; •fluctuations in currency exchange rates; and •increased accounting and reporting burdens and complexities.Additionally, operating in international market requires significant management attention and financial resources. We cannot be certain that theinvestments and additional resources required to establish and maintain operations in other countries will hold their value or produce desired levels ofrevenues or profitability. Any negative impact from our international business efforts could negatively impact our business, results of operations andfinancial condition as a whole.Our financial results may be adversely affected by fluctuations in the foreign currency exchange markets.The revenues and expenses of our international operations generally are denominated in local currencies. Accordingly, we are subject to exchange ratefluctuations between such local currencies and the U.S. dollar. These exchange rate fluctuations subject us to currency translation risk with respect to thereported results of our international operations. Significant strengthening or weakening of14 the U.S. dollar against currencies like the Canadian Dollar, British Pound and the Euro may materially impact our revenue and profits. As we continue toexpand our presence in India, we will have increased exposure to fluctuations between the Indian Rupee and the U.S. dollar. In addition, we have transactionswith clients, as well as inter-company transactions between our subsidiaries, that cross currencies and expose us to foreign currency gains and losses. Thesetypes of events are difficult to predict and may recur. There can be no assurance that we will be able to reduce the currency risks associated with ourinternational operations. We seek to manage our exposure to changes in foreign currency exchange rates through our normal operating and financingactivities and, if deemed appropriate, we may use derivative financial instruments. There is no assurance that we will be successful in managing or controllingforeign currency risks.We may engage in future strategic alliances or acquisitions that could dilute our existing shareholders’ ownership, cause us to incur significant expensesor harm our business. Acquisitions can result in an increase in our operating costs, divert management's attention away from other operational mattersand expose us to other risks associated with acquisitions.We have pursued an acquisition strategy designed to enhance or add to our offerings of services and solutions, or to enable us to expand in certaingeographic and other markets, and we may continue to seek appropriate acquisition candidates. We may not succeed in completing targeted transactions, orachieve desired results of operations. Furthermore, we face risks in successfully integrating any businesses we acquire. Ongoing business may be disruptedand our management's attention may be diverted by acquisitions, transition or integration activities. In addition, we might need to dedicate additionalmanagement and other resources, and our organizational structure could make it difficult for us to efficiently integrate acquired businesses into our ongoingoperations and assimilate and retain employees of those businesses into our culture and operations.We might fail to realize the expected benefits or strategic objectives of any acquisition we make. We might not achieve our expected return oninvestment, or we may lose money. We may be adversely impacted by liabilities that we assume from a company we acquire, including from that company'sknown and unknown obligations, intellectual property or other assets, terminated employees, current or former clients, or other third parties, and we may failto identify or adequately assess the magnitude of certain liabilities, shortcomings or other circumstances prior to acquisition, which could result inunexpected legal or regulatory exposure, unfavorable accounting treatment, unexpected increases in taxes, or other adverse effects on our business. If we areinefficient or unsuccessful at integrating any acquired businesses into our operations, we may not be able to achieve our planned rates of growth or improveour market share, profitability, or competitive position in specific markets or services.In addition, acquisitions involve further risks, such as: •lack of synergy, or inability to realize expected synergies, resulting from the acquisition; •the risk that the issuance of our common stock, if any, in an acquisition or merger, or the consolidation of an acquired company’s financialresults could be dilutive to our shareholders; •acquired assets becoming impaired as a result of technological advancements or worse-than-expected performance of the acquired company; •the potential impact of the announcement or consummation of a proposed transaction on the market value of our common stock orrelationships with third parties; •reductions in cash balances and/or increases in debt obligations to finance activities associated with a transaction, including future paymentsunder earn-outs and other contingent payments, which reduce the availability of cash flow for general corporate or other purposes or impact ourfinancial results; and •inadequacy or ineffectiveness of an acquired company’s internal financial controls, disclosure controls and procedures, and/or other policies orpractices; and unknown, underestimated and/or undisclosed commitments or liabilities.Our financial results may be negatively impacted by impairment in the carrying value of our goodwill.Goodwill represented approximately 25% of our total assets as of December 31, 2017. The carrying value of goodwill represents the fair value of anacquired business in excess of identifiable assets and liabilities as of the acquisition date. We are required to test goodwill for impairment annually and whenfactors or indicators become apparent that could reduce the fair value of any of our reporting units below its book value. Such factors requiring an interim testfor impairment include financial performance indicators, such as negative or declining cash flows or a decline in actual or planned revenue or earnings, and asustained decrease in share price. A significant downward revision in the fair value of one or more of our business units that causes the carrying value toexceed the fair value could cause goodwill to be considered impaired, and could result in a non-cash impairment charge in our consolidated statement ofoperations.Our business and profitability could be adversely affected if the operations of one or more of our facilities were interrupted or shut down as the result of anatural disaster.We operate a majority of our distribution facilities in the Memphis, Tennessee area and our headquarters and call center operations are centered in theDallas, Texas area. We also maintain facilities in Canada, Europe and India. A natural disaster or other15 serious disruption to our facilities due to fire, tornado, flood, severe weather or any other cause could substantially disrupt our operations and could impairour ability to adequately service our clients and customers. In addition, we could incur significantly higher costs during the time it takes for us to reopen orreplace any one or more of our facilities, which may or may not be reimbursed by insurance. As a result, disruption at one or more of our facilities couldadversely affect our business and profitability.A breach of our eCommerce security measures could reduce demand for our services. Credit card fraud and other fraud could adversely affect our business.A requirement of the continued growth of eCommerce is the secure transmission of confidential information over public networks. A party who is ableto circumvent our security measures could misappropriate proprietary information or interrupt our operations. Any compromise or elimination of our securitycould reduce demand for our services.We may be required to expend significant capital and other resources to protect against security breaches or to address any problem they may cause.Because our activities involve the storage and transmission of proprietary information, such as credit card numbers, security breaches could damage ourreputation, cause us to lose clients, impact our ability to attract new clients and we could be exposed to litigation and possible liability. Our securitymeasures may not prevent security breaches, and failure to prevent security breaches may disrupt our operations. The failure to adequately control fraudulenttransactions on either our behalf or our client’s behalf could increase our expenses and expose us to reputational damage which would adversely affect ourbusiness.We may be liable for misappropriation of our customers’ and our clients’ customers’ personal information.Data security laws are becoming more stringent in the United States and abroad. Third parties are engaging in increased cyber-attacks againstcompanies doing business on the internet and individuals are increasingly subjected to identity and credit card theft on the internet. If third parties orunauthorized employees are able to penetrate our network security or otherwise misappropriate our customers’ or our clients’ customers’ personal informationor credit card information, or if we give third parties or our employees’ improper access to customers’ personal information or credit card information, wecould be subject to liability. This liability could include claims for unauthorized purchases with credit card information, impersonation or other similar fraudclaims, as well as claims for other misuses of personal information, including unauthorized marketing purposes. Liability for misappropriation of thisinformation could decrease our profitability and adversely affect our business. In such circumstances, we also could be liable for failing to provide timelynotice of a data security breach affecting certain types of personal information. In addition, the Federal Trade Commission and state agencies have broughtnumerous enforcement actions against internet companies for alleged deficiencies in those companies’ privacy and data security practices, and they maycontinue to bring such actions. We could incur additional expenses if new regulations regarding the collection, use or storage of personal information areintroduced or if government agencies investigate our privacy or security practices.We rely on encryption and authentication technology to provide the security and authentication necessary to effect secure transmission of sensitivecustomer information such as customer credit card numbers. Advances in computer capabilities, new discoveries in the field of cryptography or other eventsor developments may result in a compromise or breach of the measures that we use to protect customer transaction data. If any such compromise of securitywere to occur, it could subject us to liability, damage our reputation and diminish the value of our brand-name. A party who is able to circumvent the securitymeasures could misappropriate proprietary information or cause interruptions in operations. We may be required to expend significant capital and otherresources to protect against such security breaches or to alleviate problems caused by such breaches. Our security measures are designed to prevent securitybreaches, but our failure to prevent such security breaches could subject us to liability, damage our reputation and diminish the value of our brand-name.Our insurance policies may not fully cover all losses we may incur.Although we attempt to limit our liability for damages arising from negligent acts, errors or omissions through contractual provisions, the limitationsof liability included in our contracts may not fully protect us from liability or damages and may not be enforceable in all instances. In addition, not all of ourcontracts may limit our exposure for certain liabilities, such as data security claims or claims of third parties for which we may be required to indemnify ourclients. Although we have general liability and errors and omissions insurance coverage, this coverage may not continue to be available on terms reasonableto us or in sufficient amounts to cover one or more large claims, and our insurers may disclaim coverage as to any future claim. The successful assertion of oneor more large claims against us that are excluded from our insurance coverage or that exceed our available insurance coverage, or changes in our insurancepolicies (including premium increases or the imposition of large deductible or co-insurance requirements), could have a material adverse effect on ourbusiness, results of operations, financial condition and cash flows.Changes in regulations, regulatory scrutiny, or user concerns regarding privacy and protection of user data could adversely affect our business.We are subject to U.S. and foreign laws relating to the collection, use, retention, security and transfer of personally identifiable information. Theinterpretation and application of user data protection laws are in a state of flux, and may vary from country to country. In many cases, these laws apply notonly to third-party transactions, but also to transfers of information between or among ourselves, our subsidiaries and other parties with which we havecommercial relations. Further, these laws continue to develop in ways16 we cannot predict and which may adversely impact our business. For example, new laws or regulations, in particular, financial or privacy laws or regulations,may be enacted in jurisdictions in which we do business that require data (including customer information, transaction data or other information) to be storedlocally on servers in that jurisdiction and/or prohibit such data from being transmitted outside of that jurisdiction, which would increase our operational costsor capital expenditures and potentially impact the performance or availability of our services and/or our ability to use or process customer data.On October 6, 2015, the Court of Justice of the European Union (“CJEU”) invalidated the long–standing U.S.-EU Safe Harbor Framework, whichpreviously established means for legitimizing the transfer of personal data by U.S. companies from the European Economic Area (“the EEA”) to the U.S. TheEU Parliament approved General Data Protection Regulation (GDPR (Regulation (EU) 2016/679) on April 14, 2016. This regulation replaces the DataProtection Directive 95/46/EC and is designed to harmonize data privacy across EU members and protect the privacy of EU citizens. In light of the CJEUdecision, we are reviewing our business practices and may find it necessary or desirable to make changes to our handling of personal data to comply with newrequirements under applicable European law. We may be unsuccessful in establishing legitimate means for our transfer and receipt of personal data from theEEA or otherwise responding to the CJEU decision or new European requirements, and we may experience reluctance or refusal by current or prospectiveEuropean customers to use our services. We may be required to assume additional liabilities or incur additional costs, and our business, operating results andfinancial condition may be materially adversely affected. Because of the uncertainty arising from the CJEU decision, we may face a risk of enforcementactions by data protection authorities in the EEA. Any such enforcement actions could result in substantial costs and diversion of resources, distractmanagement and technical personnel and negatively affect our business, operating results and financial condition.We or our clients may be a party to litigation involving our eCommerce intellectual property rights. If third parties claim we or our clients areinfringing their intellectual property rights, we could incur significant litigation costs, be required to pay damages, or change our business or incurlicensing expenses.Third parties have asserted, and may in the future assert, that our business or the technologies we use infringe on their intellectual property rights. As aresult, we or our clients may be subject to intellectual property legal proceedings and claims in the ordinary course of business. We cannot predict whetherthird parties will assert claims of infringement in the future or whether any future claims will prevent us from offering popular products or services. If we orour clients are found to infringe, we may be required to pay monetary damages, which could include treble damages and attorneys’ fees for any infringementthat is found to be willful, and either be enjoined or required to pay ongoing royalties with respect to any technologies found to infringe. Further, as a resultof infringement claims either against us or our clients, we may be required, or deem it advisable, to develop non-infringing technology, which could be costlyand time consuming, or enter into costly royalty or licensing agreements. Such royalty or licensing agreements, if required, may be unavailable on terms thatare acceptable, or at all. If a third party successfully asserts an infringement claim against us or our clients and we are enjoined or required to pay monetarydamages or royalties or we are unable to develop suitable non-infringing alternatives or license the infringed or similar technology on reasonable terms on atimely basis, our business, results of operations and financial condition could be materially harmed.We rely on third party providers for a portion of our client services, and we are subject to various risks and liabilities if we are unable to continue ourrelationship with such providers, such providers do not provide the third party services or provide them in a manner that does not meet required servicelevels.We currently, and may in the future, rely on third party providers to provide various material portions of our solution service offering. If our businessrelationship with a third-party provider of a material portion of our solution service offering is negatively affected, or is terminated, we might not be able todeliver the corresponding service offering to our clients, which could cause us to lose clients and future business, reducing our revenues. Under the terms ofseveral of our contracts with our service clients, we remain liable to provide such third party services and may be liable for the actions and omissions of suchthird party providers. In certain instances, certain clients prepay in advance a portion of the service fees payable in respect of the third party services, and,under certain circumstances, including our breach or the breach by our third party provider of our or their respective obligations, we are liable to refund all ora portion of such prepaid fees. Consequently, in the event our third party provider fails to provide the third party services in compliance with requiredservices levels, or otherwise breaches its obligations, or discontinues its business, whether as the result of bankruptcy, insolvency or otherwise, we may berequired to provide such services at a higher cost to us and may otherwise be liable for various costs and expenses related to such event. In addition, any suchfailure may damage our reputation and otherwise result in a material adverse effect upon our business and financial condition.We may incur liability for indemnification obligations under our contracts with our clients and business partners, which may have a material adverseeffect upon our business, results of operations and financial condition.We include indemnification provisions in the contracts we enter into with our clients and business partners. Generally, the provisions require us todefend claims arising out of our infringement of third-party intellectual property rights, breach of contractual obligations and/or unlawful or otherwiseculpable conduct, including breach of data security. The indemnity obligations generally cover damages, costs and attorneys’ fees arising out of such claims.In many instances, our indemnification obligations to our clients include the actions or omissions of our third-party service providers. Although we seek tolimit our total liability under such17 provisions to either a portion of the value of the contract or a specified, agreed-upon amount, in some cases our total liability under such provisions isunlimited. Although in many cases our third party service providers indemnify us for their actions and omissions, such providers may dispute or be unable tosatisfy their indemnification obligation to us. In addition, our indemnification obligation to our clients may be broader in scope, or may be subject to largerlimitations of liability, than the indemnification obligation of our third party service providers to us. In most cases, the term of the indemnity provision isperpetual. If we are required to indemnify a claim in a material amount, or if a series of indemnification claims are in the aggregate a material amount, we maybe required to expend significant resources to defend the claims, which may have a material adverse effect upon our business, results of operations andfinancial condition.Our business is subject to the risk of customer and supplier concentration.Most of our client agreements state a contract expiration date, but many also include an early termination clause permitting the client to terminate thecontract for convenience prior to its stated expiration date or to reduce the scope of services or delay the commencement of services to be provided under thecontract. Termination, reduction, or delay of our services under a contract could result from factors unrelated to our work product or the progress of theproject, such as factors related to business or financial conditions of the client, changes in client strategies or the domestic or global economy generally. Theearly termination, reduction or substantial delay of services any significant client, or nonrenewal of any significant client contract, or the nonpayment of amaterial amount of our service fees by a significant client, could have a material adverse effect upon our business, results of operation and financialcondition.The majority of our Supplies Distributors product revenue is generated by sales of product purchased under distributor agreements with RicohCompany Limited and Ricoh USA, Inc., a strategic business unit within the Ricoh Family Group of Companies (collectively hereafter referred to as “Ricoh”).These agreements are terminable at will and no assurance can be given that Ricoh will continue the distributor agreements with Supplies Distributors.Supplies Distributors does not have its own sales force and relies upon Ricoh’s sales force and product demand generation activities for its sale of Ricohproduct. As a result of certain operational restructuring of its business and its discontinuance of certain product lines, Ricoh has implemented, and willcontinue to implement, certain changes in the sale and distribution of Ricoh products. The changes have resulted, and are expected to continue to result, inreduced revenues and profitability for Supplies Distributors. Further material reduction in the Ricoh business may have a material adverse effect on SuppliesDistributors’ business and the termination of the Ricoh business would adversely affect our overall profitability.Our operating results are materially impacted by our client mix and the seasonality of their business.Our business is materially impacted by our client mix and the seasonality of their business. Based upon our current client mix and their currentprojected business volumes, we anticipate our service fee revenue business activity will be at its highest in our fourth quarter. We are unable to predict howthe seasonality of future clients’ business may affect our quarterly revenue and whether the seasonality may change due to modifications to a client’sbusiness. As such, we believe results of operations for a quarterly period may not be indicative of the results for any other quarter or for the full year.Our systems may not accommodate significant growth in our number of clients; we may incorrectly design client solutions.Our success depends on our ability to handle a large number of transactions for many different clients in various product categories and to designclient solutions that are effective and profitable. We expect the volume of transactions will increase significantly as we expand our operations. In addition,client marketing programs, such as “secret sales”, “flash sales” or holiday related promotions often result in significant short-term spikes in transactionvolumes. When this occurs, additional stress is placed upon our network hardware and software and our ability to efficiently manage our operations, and wecannot assure you of our ability to efficiently manage a large number of transactions. In addition, if we incorrectly design a client solution, we may incuradditional costs to operate the solution, which may result in the client solution being unprofitable or otherwise not meeting our margin targets. If we are notable to maintain an appropriate level of operating performance, we may be in breach of our client contractual obligations, develop a negative reputation, andimpair existing and prospective client relationships and our business would be materially adversely affected.We may not be able to recover all or a portion of our start-up costs associated with one or more of our clients.We generally incur start-up costs in connection with the planning and implementation of business process solutions for our clients. Although wegenerally attempt to recover these costs from the client in the early stages of the client relationship, or upon contract termination if the client terminateswithout cause prior to full amortization of these costs, there is a risk that the client contract may not fully cover the start-up costs or that the client willterminate the contract for cause and withhold payment of any unamortized start-up costs. To the extent start-up costs exceed the start-up fees received, certainexcess costs will be expensed as incurred. Additionally, in connection with new client contracts, we may incur capital expenditures associated with assetswhose primary use is related to the client solution. There is a risk that the contract may end before expected and we may not recover the full amount of ourcapital costs.18 We face competition from many sources that could adversely affect our business; growth in our clients’ ecommerce business may make it more efficient forthe client to perform our services themselves.Many companies offer, on an individual basis, one or more of the same services we do, and we face competition from many different sourcesdepending upon the type and range of services requested by a potential client. Our competitors include vertical outsourcers, which are companies that offer asingle function, such as call centers, public warehouses or professional services firms such as system integrators and digital agencies. We compete againsttransportation logistics providers who offer product management functions as an ancillary service to their primary transportation services. We also competeagainst other infrastructure service providers, who perform many similar services as us. Many of these companies have greater capabilities than we do for thesingle or multiple functions they provide. In addition, we compete against other professional service firms that have substantial offshore operations withlower labor costs, which enable them to offer lower pricing to potential clients. In many instances, our competition is the in-house operations of potentialclients themselves. The in-house operations of potential clients often believe they can perform the same services we do, while others are reluctant tooutsource business functions that involve direct customer contact. We cannot be certain we will be able to compete successfully against these or othercompetitors in the future.In addition, growth in our clients’ ecommerce businesses may cause a client to consider making the necessary investments to process their ecommerceoperations in-house. In such event, unless we can provide a more cost-effective solution to the client, the client may choose to terminate our services. There isno assurance that we will be able to provide a more cost-effective solution, or that any such solution will not reduce our profitability or be accepted by theclient.Our sales and implementation cycles are highly variable and our ability to finalize pending contracts may cause our operating results to vary widely.The sales cycle for our services is variable, typically ranging between several months to up to a year or longer from initial contact with the potentialclient to the signing of a contract. Occasionally the sales cycle requires substantially more time. Delays in signing and executing client contracts may affectour revenue and cause our operating results to vary widely. A potential client’s decision to purchase our services is discretionary, involves a significantcommitment of the client’s resources and is influenced by intense internal and external pricing and operating comparisons. To successfully sell our services,we generally must educate our potential clients regarding the use and benefit of our services, which can require significant time and resources. Consequently,the period between initial contact and the purchase of our services is often long and subject to delays associated with the lengthy approval and competitiveevaluation processes that typically accompany significant operational decisions. Additionally, the time required to finalize pending contracts and toimplement our systems and integrate a new client can range from several weeks to many months. Delays in signing and integrating new clients may affect ourrevenue and cause our operating results to vary widely.Our business could be adversely affected by a systems or equipment failure, whether ours or our clients.Our operations are dependent upon our ability to protect our distribution facilities, customer service centers, computer and telecommunicationsequipment and software systems against damage and failures. Damage or failures could result from fire, power loss, equipment malfunctions, system failures,natural disasters and other causes. If our business is interrupted either from accidents or the intentional acts of others, our business could be materiallyadversely affected. In addition, in the event of widespread damage or failures at our facilities, our short-term disaster recovery and contingency plans andinsurance coverage may not be sufficient.Our clients’ businesses may also be harmed from any system or equipment failures we experience. In that event, our relationship with these clients maybe adversely affected, we may lose these clients, our ability to attract new clients may be adversely affected and we could be exposed to liability.Interruptions could also result from the intentional acts of others, like hackers. If our systems are penetrated by computer hackers, or if computerviruses infect our systems, our computers could fail or proprietary information could be misappropriated.If our clients suffer similar interruptions in their operations, for any of the reasons discussed above or for others, our business could also be adverselyaffected. Many of our clients’ computer systems interface with our systems. If our clients suffer interruptions in their systems, the link to our systems could besevered and sales of the client’s products could be slowed or stopped.We and our clients may be subject to sales tax in one or more jurisdictions, which could adversely affect our business.We collect sales or other similar taxes for shipments of our and our clients’ goods in certain states and jurisdictions. One or more local, state or foreignjurisdictions may seek to impose sales tax collection obligations on us and other out-of-state companies, including our clients, that engage in onlinecommerce, depending upon the nexus we or our clients may have with that jurisdiction and the product or services being performed. If unexpected sales taxobligations are successfully imposed upon us or our clients by a state or other jurisdiction, we or our clients could be exposed to substantial tax liabilities forpast sales and fines and penalties for failure to collect sales taxes and we or our clients could suffer decreased sales in that state or jurisdiction as the effectivecost of purchasing goods from or through us increases for those residing in that state or jurisdiction. In addition, new legislation or regulation, the applicationof laws and regulations from jurisdictions whose laws do not currently apply to our business or the application of existing laws and regulations to the internetand commercial online services could result in significant additional taxes or regulatory19 restrictions on our business. These taxes could have an adverse effect on our cash flows and results of operations. Furthermore, there is a possibility that we orour clients may be subject to significant fines or other payments for any past failures to comply with these requirements.Determinations under government audits could negatively affect our business.We provide services to a U.S. government agency under a contract that provides the agency with the right to audit and review our performance underthe contract, our pricing practices, our cost structure, and our compliance with applicable laws, regulations, and standards. If a government audit determinesthat we are in breach of our contractual terms, or have engaged in improper or illegal activities, we may be subject to civil and criminal penalties andadministrative sanctions, including termination of the contract, suspension of payments, or disqualification from continuing to do business, or bidding onnew business, with this agency and other federal agencies.We may recognize losses or reduced profitability if we do not accurately estimate the cost of engagements conducted on a fixed-price basis.When making a proposal for or managing a fixed-price engagement, we rely on our estimates of costs and timing for delivering our services, whichmay be based on limited data and could be inaccurate. If we do not accurately estimate our costs and the timing for completion of a fixed-price project, thecontract for such a project could prove unprofitable or yield a profit margin that is lower than expected. Losses, if any, on fixed-price contracts are recognizedwhen the loss is determined. Any increased or unexpected costs or unanticipated delays in connection with the performance of fixed-price contracts,including delays caused by factors outside of our control, could make these contracts less profitable or unprofitable and may affect the amount of revenue,profit, and profit margin reported in any period.Risks Related to Our IndustryOur market is subject to rapid technological change and to compete we must continually enhance our systems to comply with evolving standards.To remain competitive, we must continue to enhance and improve the responsiveness, functionality and features of our services and the underlyingnetwork infrastructure. If we are unable to adapt to changing market conditions, client requirements or emerging industry standards, our business could beadversely affected. The internet and eCommerce environments are characterized by rapid technological change, changes in user requirements andpreferences, frequent new product and service introductions embodying new technologies and the emergence of new industry standards and practices thatcould render our technology and systems obsolete. Our success will depend, in part, on our ability to both internally develop and license leadingtechnologies to enhance our existing services and develop new services. We must continue to address the increasingly sophisticated and varied needs of ourclients and respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. The development ofproprietary technology involves significant technical and business risks. We may fail to develop new technologies effectively or to adapt our proprietarytechnology and systems to client requirements or emerging industry standards.Risks Related to Our Stock and/or StockholdersInstitutional shareholders hold a significant amount of our common stock and these shareholders may have conflicts of interests with the interests of ourother shareholders.As of December 31, 2017, institutional investors (including transcosmos, Inc., our largest shareholder) own or control approximately 84% of thevoting power of our common stock. The interests of these shareholders may differ from our other shareholders in material respects. This concentration ofvoting power of our common stock may make it difficult for our other shareholders to approve or defeat matters that may be submitted for action by ourshareholders, including the election of directors and amendments to our Certificate of Incorporation or Bylaws. This also may have the effect of deterring,delaying, or preventing a change in control, even when such a change in control could benefit our other shareholders. These shareholders may have thepower to exert significant influence over our affairs in ways that may be adverse to the interests of our other shareholders.The market price of our common stock may be volatile. You may not be able to sell your shares at or above the price at which you purchased such shares.The trading price of our common stock may be subject to wide fluctuations in response to quarter-to-quarter fluctuations in operating results,announcements of material adverse events, general conditions in our industry or the public marketplace and other events or factors, including the thin tradingof our common stock. In addition, stock markets have experienced extreme price and trading volume volatility in recent years. This volatility has had asubstantial effect on the market prices of securities of many technology-related companies for reasons frequently unrelated to the operating performance ofthe specific companies. These broad market fluctuations may adversely affect the market price of our common stock. In addition, if our operating results differfrom our20 announced guidance or the expectations of equity research analysts or investors, the price of our common stock could decrease significantly.Our stock price could decline if a significant number of shares become available for sale.The current and future issuance and/or vesting of shares of our common stock under our outstanding and future stock options, stock awards,performance shares and deferred stock units, sales of substantial amounts of common stock in the public market following the issuance and/or vesting of suchshares, and/or the perception that future sales of these shares could occur, could reduce the market price of our common stock and make it more difficult tosell equity securities in the future.Our certificate of incorporation, our bylaws, our shareholder rights plan and Delaware law make it difficult for a third party to acquire us, despite thepossible benefit to our shareholders.Provisions of our certificate of incorporation, our bylaws, our shareholder rights plan and Delaware law could make it more difficult for a third party toacquire us, even if doing so would be beneficial to our shareholders. For example, our certificate of incorporation permits our Board of Directors to issue oneor more series of preferred stock, which may have rights and preferences superior to those of the common stock. The ability to issue preferred stock couldhave the effect of delaying or preventing a third party from acquiring us. We have also adopted a shareholder rights plan. These provisions could discouragetakeover attempts and could materially adversely affect the price of our stock. In addition, because we are incorporated in Delaware, we are governed by theprovisions of Section 203 of the Delaware General Corporation Law, which may prohibit large shareholders from consummating a merger with, or acquisitionof us. These provisions may prevent a merger or acquisition that would be attractive to shareholders and could limit the price investors would be willing topay in the future for our common stock.There are limitations on the liabilities of our directors and executive officers.Pursuant to our bylaws and under Delaware law, our directors are not liable to us or our shareholders for monetary damages for breach of fiduciaryduty, except for liability for breach of a director’s duty of loyalty, acts or omissions by a director not in good faith or which involve intentional misconductor a knowing violation of law, or any transaction in which a director has derived an improper personal benefit.Actions of activist shareholders could be disruptive and potentially costly, and the possibility that activist shareholders may seek changes that conflict withour strategic direction could cause uncertainty about the strategic direction of our business.Activist investors may attempt to effect changes in our strategic direction or our business objectives, or to acquire control or Board representation toadvocate corporate actions such as financial restructuring, stock repurchases or sales of assets or the entire company. Activist campaigns that contest orconflict with our strategic direction could have an adverse effect on our results of operations and financial conditions, as responding to proxy contests andother actions by activist shareholders can disrupt our operations, be costly and time consuming and divert the attention of our Board and senior managementfrom the pursuit of business strategies. These types of actions could cause significant fluctuations in our stock price based on temporary or speculative marketperceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business. Item 1B.Unresolved Staff CommentsNone. Item 2.PropertiesOur headquarters are located in Allen, Texas, a Dallas suburb. In the U.S., we operate a distribution facility in Memphis, Tennessee, with aggregatespace of more than 440,000 square feet. We also operate four additional distribution facilities totaling an aggregate of approximately 1,000,000 square feet inSouthaven, Mississippi. These facilities are located approximately ten miles from the Memphis International Airport.Internationally, we operate a distribution complex in Liège, Belgium with approximately 200,000 square feet, and distribution operations in Ontario,Canada with approximately 95,000 square feet. We also operate facilities in Bangalore, India, London, U.K., Basingstoke, U.K. and Sofia, Bulgaria, each ofwhich provide primarily technology development and administrative support.We lease all of our distribution and other facilities under third party leases that generally contain one or more renewal options.We operate customer service centers in our facilities in Dallas, Texas, Liège, Belgium and Ontario, Canada. Our call center technology permits theautomatic routing of calls to available customer service representatives in several of our call centers. 21 Item 3.Legal ProceedingsWe are not party to any legal proceedings other than routine claims and lawsuits arising in the ordinary course of our business. We do not believe suchclaims and lawsuits, individually or in the aggregate, will have a material adverse effect on our business. Item 4.Mine Safety DisclosuresNot applicable. 22 PART II Item 5.Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity SecuritiesFor information regarding the securities authorized for issuance under our equity compensation plans, refer to “Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters” included in Part III, Item 12 of this report.Common StockOur common stock is listed, and currently trades, on the NASDAQ Capital Market under the symbol “PFSW.” The following table sets forth for the periodsindicated the high and low sale price for the common stock as reported by NASDAQ: Price High Low Year Ended December 31, 2016 First Quarter$13.99 $9.95 Second Quarter$15.87 $9.05 Third Quarter$11.21 $8.90 Fourth Quarter$9.60 $6.71 Year Ended December 31, 2017 First Quarter$8.69 $6.28 Second Quarter$8.28 $5.83 Third Quarter$8.40 $7.21 Fourth Quarter$8.88 $5.90As of March 9, 2018, there were 109 record holders of the common stock.Dividend PolicyWe have never declared or paid cash dividends on our common stock and do not anticipate the payment of cash dividends on our common stock inthe foreseeable future. We are also restricted from paying dividends under our debt agreements without the prior approval of our lenders. The payment of anyfuture cash dividends will be at the discretion of our Board of Directors and will depend upon, among other things, future earnings, operations, capitalrequirements, the general financial condition of the Company and general business conditions and the approval of our lenders. See “Management’sDiscussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”23 Comparative Stock PerformanceThe graph below matches our cumulative 5-Year total shareholder return on common stock with the cumulative total returns of the NASDAQComposite index and the Russell 2000 index. The graph tracks the performance of a $100 investment in our common stock and in each index (with thereinvestment of all dividends) from 12/31/2012 to 12/31/2017. 12/12 12/13 12/14 12/15 12/16 12/17 PFSweb Inc. 100.00 318.25 444.21 451.58 298.25 260.70 NASDAQ Composite 100.00 141.63 162.09 173.33 187.19 242.29 Russell 2000 100.00 138.82 145.62 139.19 168.85 193.58 The stock price performance included in this graph is not necessarily indicative of future stock price performance.24 Item 6.Selected Consolidated Financial DataThe following selected financial data should be read in conjunction with Item 8, Financial Statements and Supplementary Data and related notes andItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and other financial information appearing elsewhere in thisAnnual Report on Form 10-K. We derived the following historical financial information from our consolidated audited financial statements for the fiscalyears noted (in thousands, except per share data): Years Ended December 31, 2017 2016 2015 2014 2013 REVENUES: Service fee revenue$233,580 $226,165 $182,175 $134,385 $112,977 Product revenue, net 40,663 48,695 58,659 75,284 90,982 Pass-through revenue 52,582 59,783 47,435 37,379 37,644 Total revenues 326,825 334,643 288,269 247,048 241,603 COSTS OF REVENUES: Cost of service fee revenue 155,160 155,513 123,574 94,858 77,160 Cost of product revenue 38,504 45,883 55,587 71,019 85,237 Cost of pass-through revenue 52,582 59,783 47,435 37,379 37,644 Total costs of revenues 246,246 261,179 226,596 203,256 200,041 Gross profit 80,579 73,464 61,673 43,792 41,562 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 79,981 76,304 66,280 47,658 46,235 Income (loss) from operations 598 (2,840) (4,607) (3,866) (4,673)INTEREST EXPENSE, net 2,738 2,323 1,757 813 679 Loss from operations before income taxes (2,140) (5,163) (6,364) (4,679) (5,352)INCOME TAX EXPENSE (BENEFIT) 1,824 2,367 1,497 (53) 539 NET LOSS$(3,964) $(7,530) $(7,861) $(4,626) $(5,891) NET LOSS PER SHARE: Basic and diluted$(0.21) $(0.41) $(0.45) $(0.28) $(0.39) Weighted average shares outstanding: Basic and diluted 18,933 18,542 17,608 16,737 14,957 Balance Sheet Data: Total assets$185,787 $211,336 $191,290 $140,746 $132,036 Short-term debt 9,460 7,300 3,153 6,850 8,231 Long-term debt 37,866 52,399 32,238 4,062 2,876 Shareholders' equity 41,297 40,283 43,758 40,105 40,925 The selected financial statements presented above are not comparable due to the acquisitions that occurred in the years ended December 31, 2016,2015 and 2014. 25 Item 7.Management’s Discussion and Analysis of Financial Condition and Results of OperationsWe believe the following discussion and analysis provides information that is relevant to an assessment and understanding of our consolidatedresults of operations and financial condition. The discussion and analysis should be read in conjunction with the consolidated financial statements andrelated notes thereto appearing elsewhere in this Form 10-K. This Management’s Discussion and Analysis will help you understand: •The impact of forward-looking statements; •Key transactions and events during 2016 and 2015; •Our financial structure, including our historical financial presentation; •Our results of operations for the previous three years, as well as certain projections for the future; •Certain aspects of our relationships with our subsidiaries; •Our liquidity and capital resources; •The impact of recently issued accounting standards on our financial statements; and •Our critical accounting policies and estimates.Forward-Looking InformationWe have made forward-looking statements in this Report on Form 10-K. These statements are subject to risks and uncertainties, and there can be noguarantee that these statements will prove to be correct. Forward-looking statements include assumptions as to how we may perform in the future. When weuse words like “seek,” “strive,” “believe,” “expect,” “anticipate,” “predict,” “potential,” “continue,” “will,” “may,” “could,” “intend,” “plan,” “target,”“project” and “estimate” or similar expressions, we are making forward-looking statements. You should understand that the following important factors, inaddition to the Risk Factors set forth above or elsewhere in this Report on Form 10-K, could cause our results to differ materially from those expressed in ourforward-looking statements. These factors include: •our ability to retain and expand relationships with existing clients and attract and implement new clients; •our reliance on the fees generated by the transaction volume, product sales and technology and agency projects and support of our clients; •our reliance on our clients’ projections or transaction volume or product sales; •our dependency upon our agreements with International Business Machines Corporation (“IBM”) and Ricoh; •our dependency upon our agreements with our major clients; •our client mix, their business volumes and the seasonality of their business; •our ability to finalize pending client and customer contracts; •the impact of strategic alliances and acquisitions; •trends in e-commerce, outsourcing, government regulation, both foreign and domestic, and the market for our services; •whether we can continue and manage growth; •increased competition; •our ability to generate more revenue and achieve sustainable profitability; •effects of changes in profit margins; •the customer and supplier concentration of our business; •our reliance on third-party providers and other subcontracted services; •the unknown effects of possible system failures and rapid changes in technology; •foreign currency risks and other risks of operating in foreign countries; •potential litigation; •our dependency upon key personnel; •our ability to attract and retain seasonal and temporary workers;26 •the impact of new accounting standards and changes in existing accounting rules or the interpretations of those rules; •our ability to raise additional capital or obtain additional financing; •our ability, and the ability of our subsidiaries, to borrow under current financing arrangements and maintain compliance with debt covenants; •our relationship with, and our guarantees of, certain of the liabilities and indebtedness of our subsidiaries; and •taxation on the sale of our products and provision of our services.We have based these statements on our current expectations about future events. Although we believe the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee these expectations will actually be achieved. In addition, some forward-looking statements are basedupon assumptions as to future events that may not prove to be accurate. Therefore, actual outcomes and results may differ materially from what is expected orforecasted in such forward-looking statements. We undertake no obligation to update publicly any forward-looking statement for any reason, even if newinformation becomes available or other events occur in the future. There may be additional risks we do not currently view as material or that are not presentlyknown. In evaluating these statements, you should consider various factors, including the risks set forth in the section entitled “Risk Factors.”Key Transactions and EventsWe were impacted by the following key transactions and events in 2015 and 2016 that affect comparability of our results to 2017 and other periods: Year ended December 31, 2016: •Acquired the outstanding capital stock of Conexus Limited (“Conexus”) on June 8, 2016. The results of operations of Conexus have beenincluded in our consolidated financial statements since the acquisition date. Year ended December 31, 2015: •Acquired the outstanding capital stock of Moda Superbe Limited (“Moda”) on June 11, 2015. The results of operations of Moda have beenincluded in our consolidated financial statements since the acquisition date. •Completed an asset purchase agreement with CrossView, Inc. (“CrossView”) and its shareholders on August 5, 2015. The results of operationsof CrossView have been included in our consolidated financial statements since the acquisition date.OverviewWe derive our revenues from providing a broad range of services using three different seller services financial models: 1) the Service Fee model, 2) theAgent (or Flash) model and 3) the Retail model.Service Fee Model. We refer to our standard seller services financial model as the Service Fee model. In this model, our clients own the inventory andare the merchants of record and engage us to provide various infrastructure, technology and digital agency services in support of their business operations.We derive our service fee revenues from a broad range of service offerings that include digital agency and marketing, eCommerce technologies, systemintegration, order management, customer care, logistics and fulfillment, financial management and professional consulting. We offer our services as anintegrated solution, which enables our clients to outsource their complete ecommerce needs to a single source and to focus on their core competencies,though clients are also able to select individual or groupings of our various service offerings on an à la carte basis. We support clients in a wide array ofindustries, including fashion apparel and accessories, fragrance and beauty products, CPG, home furnishings and housewares, coins and collectibles, andtechnology products.In the Service Fee model, we typically charge for our services on a cost-plus basis, a percent of shipped revenue basis, a time and materials, project orretainer basis for our professional services or a per-transaction basis, such as a per-labor hour basis for web-enabled customer contact center services and a per-item basis for fulfillment services. Additional fees are billed for other services. We price our services based on a variety of factors, including the depth andcomplexity of the services provided, the amount of capital expenditures or systems customization required, the length of contract and other factors.Many of our service fee contracts involve third-party vendors who provide additional services, such as package delivery. The costs we are charged bythese third-party vendors for these services are often passed on to our clients. Our billings for reimbursements of these costs and other ‘out-of-pocket’expenses include travel, shipping and handling costs and telecommunication charges and are included in pass-through revenue.The seasonality of our service fee business is dependent upon the seasonality of our clients’ business and sales of their products. Accordingly, we mustrely upon the projections of our clients in assessing quarterly variability. We believe that with our current client27 mix and their current business volumes, our run rate service fee business activity will generally be highest during the quarter ended December 31. We believeour historical revenue pattern makes it difficult to predict the effect of seasonality on our future revenues and results of operations. We believe that results ofoperations for a quarterly period may not be indicative of the results for any other quarter or for the full year.Agent (Flash) Model. As an additional service, we offer the Agent, or Flash, financial model, in which our clients maintain ownership of the productinventory stored at our locations as in the Service Fee model. When a customer orders the product from our clients, a “flash” sale transaction passes productownership to us for each order and we in turn immediately re-sell the product to the customer. The “flash” ownership exchange establishes us as the merchantof record, which enables us to use our existing merchant infrastructure to process sales to end customers, removing the need for the clients to establish thesebusiness processes internally, but permitting them to control the sales process to end customers. In this model, based on the terms of our current clientarrangements, we record product revenue net of cost of product revenue as a component of service fee revenue in our consolidated statement of operations.Retail Model. Our Retail model allows us to purchase inventory from the client. In this model, we place the initial and replenishment purchase orderswith the client and take ownership of the product upon delivery to our facility. In this model, depending on the terms of our client arrangements, we may ownthe inventory and the accounts receivable arising from our product sales. Under the Retail model, depending upon the product category and salescharacteristics, we may require the client to provide product price protection as well as product purchase payment terms, right of return, and obsolescenceprotection appropriate to the product sales profile. Depending on the terms of our client arrangements in the Retail model, we record in our consolidatedstatement of operations either: 1) product revenue as a component of product revenue, or 2) product revenue net of cost of product revenue as a component ofservice fee revenue. In general, we seek to structure client relationships in our Retail model under the net revenue approach to more closely align with ourservice fee revenue financial presentation and mitigate inventory ownership, although we have one client still utilizing the gross revenue approach. Freightcosts billed to customers are reflected as components of product revenue. This business model generally requires significant working capital, for which wehave credit available either through credit terms provided by our clients or under senior credit facilities.In general, we provide the Service Fee model through all of our subsidiaries, the Agent (or Flash) model through our PFSweb and Supplies Distributorssubsidiaries and the Retail model through our Supplies Distributors subsidiary.Growth is a key element to achieving our future goals, including achieving and maintaining sustainable profitability. Growth in our Service Fee andAgent models is driven by two main elements: new client relationships and organic growth from existing clients. We focus our sales efforts on larger contractswith brand-name companies within four primary target markets, health and beauty, home goods and collectibles, fashion and consumer packaged goods,which, by nature, require a longer duration to close but also have the potential to be higher quality and longer duration engagements. Through recentacquisitions, we have expanded our service offering capabilities and added new client relationships, which we currently expect to enhance our growthopportunities.Currently, we are targeting growth within our Retail model to be through relationships with clients under which we can record service fee revenue(product revenue net of cost of product revenue) in our consolidated statement of operations as opposed to product revenue as generated in the Agent orFlash model above. These relationships are often driven by the sales and marketing efforts of the manufacturers and third party sales partners. In addition, as aresult of certain operational restructuring of its business, our primary client relationship operating in the Retail model, Ricoh, has implemented, and willcontinue to implement, certain changes in the sale and distribution of Ricoh products. The changes have resulted, and are expected to continue to result, inreduced product revenues and profitability under our Retail model.We continue to monitor and control our costs to focus on profitability. While we are targeting our new service fee contracts to yield incremental grossprofit, we also expect to incur incremental investments in technology development, operational and support management and sales and marketing expensesto help generate growth.Our expenses comprise primarily four categories: 1) cost of service fee revenue, 2) cost of product revenue, 3) cost of pass-through revenue and 4)selling, general and administrative expenses.Cost of service fee revenue – consists primarily of compensation and related expenses for our web-enabled customer contact center services,international fulfillment and distribution services and professional, digital agency and technology services, and other fixed and variable expenses directlyrelated to providing services under the terms of fee based contracts, including certain occupancy and information technology costs and depreciation andamortization expenses.Cost of product revenue – consists of the purchase price of product sold and freight costs, which are reduced by certain reimbursable expenses. Thesereimbursable expenses include pass-through customer marketing programs, direct costs incurred in passing on any price decreases offered by vendors to coverprice protection and certain special bids, the cost of products provided to replace defective product returned by customers and certain other expenses asdefined under the distributor agreements.Cost of pass-through revenue – the related reimbursable costs for pass-through expenditures are reflected as cost of pass-through revenue.28 Selling, General and Administrative expenses – consist of expenses such as compensation and related expenses for sales and marketing staff,distribution costs (excluding freight) applicable to the Supplies Distributors business and the Retail model, executive, management and administrativepersonnel and other overhead costs, including certain occupancy and information technology costs and depreciation and amortization expenses andacquisition related costs.Monitoring and controlling our available cash balances and our expenses continues to be a primary focus. Our cash and liquidity positions areimportant components of our financing of both current operations and our targeted growth.2018 Update – Subsequent to December 31, 2017, the Company continued with its reorganization efforts to migrate from its current operatingsegments into two new operating segments, Professional Services and PFS Operations. As a result, we expect to report a change in our operating segmentsduring 2018.Results of OperationsThe following table discloses certain financial information for the periods presented, expressed in terms of dollars, dollar change, percentage changeand as a percentage of total revenue (in millions). Change % of Net Revenues Change % of NetRevenues 2017 2016 $ % 2017 2016 2015 $ % 2015 Revenues Service fee revenue$233.6 $226.2 $7.4 3.3% 71.5% 67.6% $182.2 $44.0 24.1% 63.2% Product revenue, net 40.7 48.7 (8.0) (16.5)% 12.4% 14.6% 58.7 (10.0) (17.0)% 20.4% Pass-through revenue 52.6 59.8 (7.2) (12.0)% 16.1% 17.8% 47.4 12.4 26.0% 16.4% Total revenues 326.9 334.7 (7.8) (2.3)% 100.0% 100.0% 288.3 46.4 16.1% 100.0% Cost of Revenues Cost of service fee revenue 155.2 155.5 (0.3) (0.2)% 66.4%(1) 68.8%(1) 123.6 31.9 25.8% 67.8%(1)Cost of product revenue 38.5 45.9 (7.4) (16.1)% 94.7%(2) 94.2%(2) 55.6 (9.7) (17.5)% 94.8%(2)Pass-through cost of revenue 52.6 59.8 (7.2) (12.0)% 100.0%(3) 100.0%(3) 47.4 12.4 26.0% 100.0%(3)Total cost of revenues 246.3 261.2 (14.9) (5.7)% 75.3% 78.0% 226.6 34.6 15.3% 78.6% Service fee gross profit 78.4 70.7 7.7 11.0% 33.6%(1) 31.2%(1) 58.6 12.1 20.6% 32.2%(1)Product revenue gross profit 2.2 2.8 (0.6) (23.2)% 5.3%(2) 5.8%(2) 3.1 (0.3) (8.5)% 5.2%(2)Pass-through gross profit — — — — — (3) — (3) — — — — (3)Total gross profit 80.6 73.5 7.1 9.7% 24.7% 22.0% 61.7 11.8 19.1% 21.4% Selling General and Administrative expenses 80.0 76.3 3.7 4.8% 24.5% 22.8% 66.3 10.0 (15.1)% 23.0% Income (loss) from operations 0.6 (2.8) 3.4 (121.1)% 0.2% (0.8)% (4.6) 1.8 38.4% (1.6)% Interest expense, net 2.7 2.3 0.4 17.9% 0.8% 0.7% 1.8 0.5 (32.2)% 0.6% Loss from operations before income taxes (2.1) (5.1) 3.0 (58.6)% (0.7)% (1.5)% (6.4) 1.3 18.9% (2.2)% Income tax expense, net 1.8 2.4 (0.6) (22.9)% 0.6% 0.7% 1.5 0.9 (58.1)% 0.5% $(3.9) $(7.5) $3.6 (47.4)% (1.2)% (2.3)% $(7.9) $0.4 4.2% (2.7)% (1)Represents the percent of Service fee revenue.(2)Represents the percent of Product revenue, net.(3)Represents the percent of Pass-through revenue.Year Ended December 31, 2017 Compared to Year Ended December 31, 2016Service fee revenue. Service fee revenue increased $7.4 million, or 3.3%, in 2017 as compared to 2016. The increase in service fee revenue in 2017 ascompared to 2016 was primarily due to the impact of expanded and new client relationships, partially offset by the conclusion or reduction of operations ofcertain client programs during 2017.The change in service fee revenue, excluding pass-through revenue, is shown below ($ millions): Period ended December 31, 2016$226.2 New service contract relationships 16.0 Change in existing client relationships and terminated client relationships notincluded in 2017 revenue (8.6)Period ended December 31, 2017$233.6When considering client relationships, we define an existing client to be a client from whom we earned revenue in both the current and prior year; wedefine a new client to be a client from whom we only earned revenue in the current year; and we define a terminated client as a client from whom we onlyearned revenue in the prior year.29 Product revenue, net. Product revenue decreased $8.0 million, or 16.5%, in 2017 as compared to 2016. This reduction in revenue was primarily due tothe operational restructuring by Ricoh of its business, including discontinuance of certain product lines, which has resulted, and is expected to continue toresult, in lower product revenue from the sale of Ricoh products.Cost of Service Fee Revenue. Service fee gross profit as a percentage of service fees increased to 33.6% in 2017 from 31.2% in 2016. In 2016, weincurred incremental facility, labor and other costs to support the setup and launch of new client relationships, in particular, for certain of these new clientswhose unique business models led to unanticipated operational requirements requiring remediation to the solutions while also supporting the clients’seasonal peak. During 2017, we terminated our relationships with certain lower margin clients and were able to increase profit on other clients acquired in2016.Cost of Product Revenue. Cost of product revenue decreased by $7.4 million, or 16.1%, to $38.5 million in 2017 as compared to 2016. The decrease isdirectly attributable to the decrease in product revenue. The resulting gross profit margin was $2.2 million, or 5.3% of product revenue, for the year endedDecember 31, 2017 and $2.8 million, or 5.8% of product revenue, for 2016.Selling, General and Administrative (“SG&A”) Expenses. SG&A expenses were $80.0 million, or 24.5% of total revenues in 2017 and $76.3 million,or 22.8% of total revenues in 2016. The increase in the SG&A expense and percentage is primarily due to an increase in payroll-related expenses, includingincreases in incentive-based cash and stock compensation, and an increase in acquisition-related, restructuring and other costs.Income Taxes. During 2017, we recorded a tax provision comprised primarily of $1.1 million related to the majority of our international operations,$0.6 million related to state income taxes, and $0.1 million associated with the tax amortization of goodwill relation to our CrossView acquisition. Avaluation allowance has been provided for the majority of our domestic net deferred tax assets, which are primarily related to our net operating losscarryforwards, and for certain foreign deferred tax assets.On December 22, 2017, the US Government enacted the U.S. Tax Cuts and Jobs Act (the “Tax Reform Act”). The Tax Reform Act reduces the USfederal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that werepreviously tax deferred and creates new taxes on certain foreign sourced earnings. As of December 31, 2017, we have not completed our accounting for thetax effects of enactment of the Tax Reform Act; however, in accordance with the Securities and Exchange Commission Staff Accounting Bulletin No.118,Income Tax Account Implications of the Tax Cuts and Job Act (SAB118), we have made reasonable estimates when possible.We remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%.However, we are still analyzing certain aspects of the Tax Reform Act and refining our calculations, which could potentially affect the measurement of thesebalances or potentially give rise to new deferred tax amounts. The provisional amount related to the remeasurement of our deferred tax balance was $12.1million that was mostly offset by a change in the valuation allowance except for a $0.6 million benefit that was recorded to our income statement related totax amortization of goodwill. The one-time transition tax is based on our total post-1986 earnings and profits (E&P) that we previously deferred from USincome taxes. We have not yet completed our calculation of the total post-1986 E&P for these foreign subsidiaries. However, based on our estimate webelieve there is a net deficit E&P and, therefore, have not recorded any liabilities related to this tax.The preliminary net tax effects recorded may differ in the future due to changes in the interpretations of the Tax Reform Act, legislative action, andchanges to estimates we have utilized to calculate the tax impact. We expect to finalize the tax analysis related to the Tax Reform Act with the filing of ourtax return and record any differences between the final and provisional amounts in the 2018 fourth quarter at that time, if any. Year Ended December 31, 2016 Compared to Year Ended December 31, 2015Service fee revenue. Service fee revenue increased $44.0 million, or 24.1%, in 2016 as compared to 2015. The increase in service fee revenue in 2016as compared to 2015 was primarily due to the impact of expanded and new client relationships, including service fee revenues generated by our acquiredsubsidiaries Moda beginning in June 2015, CrossView beginning in August 2015 and Conexus beginning in June 2016, partially offset by the conclusion orreduction of operations of certain client programs during 2016.The change in service fee revenue, excluding pass-through revenue, is shown below ($ millions): Period ended December 31, 2015$182.2 New service contract relationships 27.0 Change in existing client service fee relationships 23.6 Terminated client relationships not included in 2016 revenue (6.6)Period ended December 31, 2016$226.230 When considering client relationships, we define an existing client to be a client from whom we earned revenue in both the current and prior year; wedefine a new client to be a client from whom we only earned revenue in the current year; and we define a terminated client as a client from whom we onlyearned revenue in the prior year. The growth of existing client relationships in 2016 includes the benefit of a full period of client activity applicable to clientrelationships acquired in conjunction with the Moda acquisition in June 2015 and CrossView acquisition in August 2015, compared to only a partial periodof revenue in 2015. The new service contract relationships include an aggregate of approximately $3.3 million of revenue applicable to Conexus, acquired inJune 2016.Product revenue, net. Product revenue decreased $10.0 million, or 17.0%, in 2016 as compared to 2015. This reduction in revenue was primarily dueto the operational restructuring by Ricoh of its business, including discontinuance of certain product lines, which has resulted, and is expected to continue toresult, in lower product revenue from the sale of Ricoh products.Cost of Service Fee Revenue. Service fee gross profit as a percentage of service fees decreased to 31.2% in 2016 from 32.2% in 2015. During 2016 weimplemented three new, large fulfillment solutions in the U.S. along with several other engagements. The decline in gross margin is primarily due toincremental facility, labor and other costs incurred to support the setup and launch of new client relationships, especially for certain of these new clientswhose unique business models led to unanticipated operational requirements requiring remediation to the solutions while also supporting the clients’seasonal peak. The impact of these higher labor and operating costs was partially offset by the benefit of higher margin project activity and higher marginprofessional services activity, including our agency and technology services, which have been further bolstered by our acquisitions of Moda and Crossviewin mid-2015 and Conexus in June 2016.Cost of Product Revenue. Cost of product revenue decreased by $9.7 million, or 17.5%, to $45.9 million in 2016 as compared to 2015. The resultinggross profit margin was $2.8 million or 5.8% of product revenue for the year ended December 31, 2016 and $3.1 million or 5.2% of product revenue for 2015.Selling, General and Administrative (“SG&A”) Expenses. SG&A expenses were $76.3 million, or 22.8% of total revenues in 2016 and $66.3 million,or 23.0% of total revenues in 2015. The year ended December 31, 2016 includes $13.1 million of SG&A expenses for our newly consolidated acquisitions,Moda, CrossView and Conexus (including $3.5 million of amortization of acquisition related intangible assets), which were either not yet acquired as ofDecember 31, 2015 or not included for the full year 2015. The year ended December 31, 2015 included $5.2 million of SG&A expenses for Moda andCrossView (including $1.9 million of amortization of acquisition related intangible assets) and $0.4 million of expense related to the settlement of a claimrelating to a discontinued business in 2015. SG&A expenses for 2016 and 2015 include approximately $3.5 million and $5.8 million, respectively ofrestructuring and acquisition related charges and approximately $4.0 million and $2.9 million, respectively of amortization of identifiable intangible assetsrelated to our acquisitions. Excluding the restructuring and acquisition related charges and amortization of acquired identifiable intangibles assets in 2016and 2015 and the claim settlement in 2015, SG&A expenses were 21.0% and 20.0% of total revenues in 2016 and 2015, respectively. The remaining increasein the SG&A percentage is primarily due to increases in personnel to support our professional services business activity related expenses, as well as sales andmarketing activities and facility costs to support our growth, partially offset by a reduction in incentive based cash and stock compensation.Income Taxes. We recorded a tax provision associated primarily with state income taxes and the majority of our international operations. A valuationallowance has been provided for the majority of our domestic net deferred tax assets, which are primarily related to our net operating loss carryforwards, andfor certain foreign deferred tax assets. We also recorded a deferred tax provision associated with the tax amortization of goodwill relation to our CrossViewacquisition. Supplies Distributors and its SubsidiariesWe conduct a portion of our Retail business model operations through Supplies Distributors, which act as a distributor/reseller of various Ricoh andother products. We conduct these services through transaction management services agreements under which PFS provides transaction management andfulfillment services to Supplies Distributors. In addition, we have also provided Supplies Distributors with a subordinated loan that, as of December 31, 2017,had an outstanding balance of $2.5 million.Supplies Distributors paid us dividends of $1.7 million, $1.1 million and $0.9 million in 2017, 2016 and 2015, respectively, which eliminate inconsolidation. Supplies Distributors has received lender approval to pay dividends of approximately $1.7 million in 2018, provided that no distribution maybe made if, after giving effect thereto, Supplies Distributors or its subsidiaries would be in noncompliance with its financial covenants under its currentfacilities.Liquidity and Capital ResourcesWe currently believe our cash position, financing available under our credit facilities and funds generated from operations will satisfy our presentlyknown operating cash needs, our working capital and capital expenditure requirements, our current debt and lease obligations, and additional loans to oursubsidiaries, if necessary, for at least the next twelve months.31 To obtain additional financing in the future, in addition to our current cash position, we plan to evaluate various financing alternatives including thesale of equity, utilizing capital or operating leases, borrowing under our credit facilities, expanding our current credit facilities or entering into new debtagreements. No assurances can be given we will be successful in obtaining any additional financing or the terms thereof.Our cash position decreased in 2017 primarily from using cash generated from operations to make capital expenditures, payments for acquisition-related contingencies, and to service debt obligations.Cash Flows from Operating ActivitiesDuring 2017, cash income from operations before working capital changes was $14.7 million, compared to $11.2 million in 2016 and $12.0 in 2015.In addition, we received cash flow benefits due to decreases in accounts receivable, prepaid expenses, other receivables and other assets, as well asinventories, the latter decrease caused by the reduction of our Ricoh related product revenue business. The above cash proceeds were partially offset byincreases in accounts payable, deferred revenue, accrued expenses and other liabilities.Cash Flows from Investing ActivitiesCash used in investing activities included capital expenditures of $4.7 million, $8.7 million and $4.5 million in the years ended December 31, 2017,2016 and 2015, respectively, exclusive of property and equipment acquired under debt and capital lease financing, which consisted primarily of capitalizedsoftware costs and equipment purchases.Capital expenditures have historically consisted of additions to upgrade our management information systems, development of customizedtechnology solutions to support and integrate with our service fee clients and general expansion and upgrades to our facilities, both domestic and foreign.We expect to incur capital expenditures to support new contracts and anticipated future growth opportunities. Based on our current client business activityand our targeted growth plans, we anticipate our total investment in upgrades and additions to facilities and information technology solutions and servicesfor the upcoming twelve months, including costs to implement new clients, will be approximately $7.0 million to $10.0 million, although additional capitalexpenditures may be necessary to support the infrastructure requirements of new clients. To maintain our current operating cash position, a portion of theseexpenditures may be financed through client reimbursements, debt, operating or capital leases or additional equity. We may elect to modify or defer a portionof such anticipated investments in the event that we do not obtain the financing results necessary to support such investments.In 2016 and 2015, cash flows from investing activities included initial cash payments for acquisitions, net of cash acquired, of $8.4 million in 2016for Conexus, and $31.6 million in 2015 for Moda and CrossView.Cash Flows from Financing ActivitiesDuring 2017, cash used in financing activities was $14.7 million, primarily related to repayments on our debt and capital lease obligations andperformance-based contingent payments, partially offset by borrowings under our revolving loan. In each of the years 2016 and 2015, cash flows fromfinancing activities of $7.0 million and $18.6 million, respectively, were primarily due to proceeds from issuance of debt, net of debt and capital leasepayments and performance-based contingent payments related to our recent acquisitions.Payments made in relation to performance-based contingent payments were $2.0 million paid in 2017 for CrossView 2016 performance-basedcontingent payments, $9.5 million paid in 2016 for REV Solutions, Inc. and REVTECH Solutions India Private Limited (collectively “REV”), LiveAreaLabs,Inc. (“LAL”) and CrossView 2015 performance-based contingent payments and $2.0 million paid in 2015 for REV and LAL 2014 performance-basedcontingent payments.Working CapitalDuring 2017, our working capital decreased to $13.7 million from $18.6 million at December 31, 2016, primarily driven by (i) $11.5 million netreduction of long-term debt, (ii) $3.0 million reduction of capital lease obligations, and (iii) $4.7 million used to purchase property and equipment, offset byincome from operations before working capital changes.Inventory FinancingTo finance its distribution of Ricoh products in the U.S., Supplies Distributors has a short-term credit facility with IBM Credit LLC (“IBM Credit”)that provides financing for eligible inventory and certain receivables for up to $13.0 million. We have provided a collateralized guarantee to secure therepayment of this credit facility. The IBM Credit facility does not have a stated maturity and both parties have the ability to exit the facility following a 90-day notice. The Company has direct vendor credit terms with Ricoh to finance Supplies Distributors European subsidiary’s inventory purchases.32 This credit facility contains various restrictions upon the ability of Supplies Distributors and its subsidiaries to, among other things, merge,consolidate, sell assets, incur indebtedness, make loans, investments and payments to related parties (including entities directly or indirectly owned byPFSweb, Inc.), provide guarantees, make investments and loans, pledge assets, make changes to capital stock ownership structure and pay dividends, as wellas financial covenants, such as annualized revenue to working capital, net profit after tax to revenue and total liabilities to tangible net worth, as defined, andare secured by all of the assets of Supplies Distributors, as well as a collateralized guaranty of PFSweb. Additionally, we are required to maintain asubordinated loan to Supplies Distributors of no less than $2.5 million, not maintain restricted cash of more than $5.0 million, are restricted with regard totransactions with related parties, indebtedness and changes to capital stock ownership. Furthermore, we are obligated to repay any over-advance made toSupplies Distributors or its subsidiaries under these facilities if they are unable to do so. We have also provided a guarantee of substantially all of theobligations of Supplies Distributors and its subsidiaries to IBM and Ricoh.In January 2018, Supplies Distributors entered into Amendment No. 19 to the IBM Credit Facility. The Amended IBM Credit Facility adjusts theminimum borrowing under the facility from $13.0 million to $11.0 million and lowers the minimum PFS Subordinated Note receivable PFSweb is required tomaintain from $2.5 million to $1.0 million.Debt and Capital Lease ObligationsU.S. Credit Agreement. In August 2015, we entered into a new credit agreement (“Credit Agreement”) with Regions Bank, as agent for itself, Bank ofAmerica N.A., HSBC Bank USA, National Association and one or more future lenders (the “Lenders”). Under this Credit Agreement, and subject to the termsset forth therein, the Lenders have agreed to provide a revolving loan facility for up to $32.5 million and a term loan facility for up to $30 million. Subject tothe terms of the Credit Agreement, we have the ability to increase the total loan facilities to $75 million. Availability under the revolving loan facility, whichwas approximately $19.3 million as of December 31, 2017, may not exceed a borrowing base of eligible accounts receivable (as defined). Advances under theCredit Agreement accrue interest at a variable rate, plus an applicable margin, and have a five year maturity, with scheduled amortization payments for termloan advances. The Credit Agreement is secured by a lien on substantially all of the assets of the Company and its U.S. subsidiaries and a pledge of 65% ofthe shares of certain of the Company’s foreign subsidiaries. The Credit Agreement contains cross default provisions, various restrictions upon our ability to,among other things, merge, consolidate, sell assets, incur indebtedness, make loans and payments to subsidiaries, affiliates and related parties, make capitalexpenditures, make investments and loans, pledge assets, make changes to capital stock ownership structure, as well as financial covenants, as defined, of aminimum fixed charge ratio and a maximum leverage ratio. In June 2016, PFSweb also entered into a Master Agreement with Regions Bank to provideequipment loans financing for certain capital expenditures.Master Lease Agreements. The Company has various agreements that provide for leasing or financing transactions of equipment and other assets andwill continue to enter into such arrangements as needed to finance the purchasing or leasing of certain equipment or other assets. Borrowings under theseagreements, which generally have terms of three to five years, are generally secured by the related equipment, and in certain cases, by a Company parentguarantee.Other than performance-based contingent payments applicable to our CrossView acquisition, and our capital and operating lease commitments, we donot have any other material financial commitments, although future client contracts may require capital expenditures and lease commitments to support theservices provided to such clients.Debt Covenants / Restricted Net AssetsCertain of our credit facilities contain various financial and non-financial covenants, including covenants that restrict our ability to incur additionalindebtedness, create or permit liens on assets, engage in mergers or consolidations, and place restrictions on the transfer of assets or the payment of dividendsbetween us and our subsidiaries. At December 31, 2017 and 2016, we had restricted net assets of approximately $63.3 million and $71.6 million,respectively.To the extent we fail to comply with our debt covenants, including the financial covenant requirements and we are not able to obtain a waiver, thelenders would be entitled to accelerate the repayment of any outstanding credit facility obligations, and exercise all other rights and remedies, including saleof collateral. An acceleration of the repayment of our credit facility obligations may have a material adverse impact on our financial condition and results ofoperations. We can provide no assurance we will have the financial ability to repay all such obligations. As of December 31, 2017, we were in compliancewith all debt covenants. Further, non-renewal of any of our credit facilities may have a material adverse impact on our business and financial condition.Contractual ObligationsThe following is a schedule of our total contractual cash obligations, which is comprised of debt, performance-based contingent payments, operatingleases and capital leases (including interest), as of December 31, 2017 (in millions):33 Payments Due By Period Total Less than1 Year 1 - 3Years 3 - 5Years More than5 Years Contractual Obligations Debt $44,423 $4,075 $39,117 $1,231 $— Capital lease obligations 3,032 2,256 776 — — Performance-based contingent payments 3,967 3,967 — — — Operating leases 58,760 10,217 18,898 15,757 13,888 Total $110,182 $20,515 $58,791 $16,988 $13,888Off-Balance Sheet ArrangementsThere are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes infinancial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.Impact of Recently Issued Accounting StandardsIn May 2014, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) 2014-09, Revenue fromContracts with Customers, As Amended (“ASU 2014-09”), which will replace numerous requirements in U.S. GAAP, including industry-specific requirements,provides companies with a single revenue recognition model for recognizing revenue from contracts with customers and significantly expands the disclosurerequirements for revenue arrangements. The new standard, as amended, will be effective for the Company for interim and annual reporting periods beginningon January 1, 2018. The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would beapplied to each prior reporting period presented, or the modified retrospective method, in which case the cumulative effect of applying the standard would berecognized at the date of initial application with disclosure of results under the new and old standards for the first year of adoption.The Company will adopt the standard as of January 1, 2018, using the modified retrospective transition method. Under the modified retrospectivetransition method, the Company will calculate and record the cumulative effect of adopting the new standard at January 1, 2018 for all open contracts, in theCompany’s Quarterly Report on Form 10-Q for the first quarter of 2018.Based on its evaluation process, the Company has identified certain potential areas of impact. Application of the new standard requires thatincremental costs of obtaining a contract (including sales commissions plus any associated fringe benefits) be recognized as an asset and expensed over theexpected life of the arrangement. Currently the Company expenses certain contract acquisition costs as incurred. Under the new standard the Company willdefer incremental commission costs to obtain a contract and amortize those costs over the period of benefit. ASU 2014-09 allows, as a policy election, salescommissions related to contracts less than one year to be expensed as incurred instead of capitalized, as a practical expedient. The Company has elected thispractical expedient. Therefore, only commissions related to contracts greater than one year will be capitalized.Additionally, the Company has reviewed the way it manages volume tiered discounts and penalties. Currently, revenue adjustments are recorded asdiscounts or penalties when incurred. Under ASU 2014-09, these items will be treated as variable consideration and good faith estimates will be made upfront, which will have the impact of reducing some of the revenue. Variable consideration will be reassessed quarterly.Contract modifications under prior guidance were handled as modifications, if the adjustment was for additional hours on time and materials contracts,which were adjusted and charged as work is performed monthly. Under ASU 2014-09, we will continue to account for large scope changes with significantadditional distinct services with related price increases that reflect our stand-alone selling price of the scope change as separate contracts. ASU 2014-09allows, as a transition practical expedient, for contracts modified prior to the beginning of the earliest reporting period presented under the new standard(January 1, 2018 for the Company), an entity can reflect the aggregate effect of all modifications that occur before the beginning of the earliest periodpresented under the new standard when identifying the satisfied and unsatisfied performance obligations, determining the transaction price and allocating thetransaction price to the satisfied and unsatisfied performance obligations for the modified contract at transition. We are electing this practical expedient.Based on contracts in process at December 31, 2017, the Company expects to record, upon adoption of ASU 2014-09, a net cumulative adjustment toshareholders’ equity not to exceed $1.0 million. The adjustment to retained earnings primarily relates to the modification of the amortization ofimplementation related deferred revenues and costs. Sales commissions were not a material amount for open contracts at December 31, 2017 and, therefore,will not have an impact at adoption.The Company will make certain presentation changes on its consolidated balance sheet to comply with the new standard.34 In February 2016, the FASB issued ASU No. 2016-02, “Leases” (“ASU 2016-02”). ASU 2016-02 establishes a right-of-use (“ROU”) model thatrequires 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 aseither finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for fiscal yearsbeginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lesseesfor capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, withcertain practical expedients available. We are currently assessing the ASU’s impact on our consolidated financial statements, but do expect the adoption tohave 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 No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and CashPayments - a consensus of the Emerging Issues Task Force” (“ASU 2016-15”). ASU 2016-15 is intended to reduce diversity in practice in how certaintransactions 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 equitymethod investments and beneficial interests in securitization transactions. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, andinterim periods within those fiscal years. Early adoption is permitted. ASU 2016-15 is not expected to have a material impact on the Company’s consolidatedfinancial 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 orbusinesses, ASU 2017-01 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2017, and interim periodswithin those annual periods. ASU 2017-01 is not expected to have a material impact on the Company’s 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 reportingunit’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 interimperiods therein, beginning after December 15, 2019, with early adoption permitted. We are currently evaluating the effect of ASU 2017-04.On May 10, 2017, the FASB issued ASU No. 2017-09, “Compensation–Stock Compensation (Topic 718): Scope of Modification Accounting,” (“ASU2017-09”) clarifying when a change to the terms or conditions of a stock-based payment award must be accounted for as a modification. ASU 2017-09requires modification accounting if the fair value, vesting condition or the classification of the award is not the same immediately before and after a changeto the terms and conditions of the award. ASU 2017-09 is effective for the Company on a prospective basis beginning on January 1, 2018. ASU 2017-09 isnot expected to have an impact on the Company’s consolidated financial statements as it is not the Company’s practice to change either the terms orconditions of stock-based payment awards once they are granted. Critical Accounting Policies and EstimatesOur consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States ofAmerica. These accounting principles require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of ourfinancial statements and the reported amounts of revenues and expenses during the reporting period. While we do not believe the reported amounts would bematerially different, application of these policies involves the exercise of judgment and the use of assumptions as to future uncertainties and, as a result,actual results could differ from these estimates. If there is a significant unfavorable change to current conditions, it could result in a material adverse impact toour business, operating results and financial condition. We evaluate our estimates and assumptions on an ongoing basis. We base our estimates on experienceand on various other assumptions that we believe to be reasonable under the circumstances. All of our significant accounting policies are disclosed in thenotes to our consolidated financial statements.We have defined a critical accounting estimate as one that is both important to the portrayal of our financial condition and results of operations andrequires us to make difficult, subjective or complex judgments or estimates about matters that are uncertain. During the past two years, we have not made anymaterial changes in accounting methodology used to establish the critical accounting estimates discussed below. The following represent certain criticalaccounting policies that require us to exercise our business judgment or make significant estimates. In addition, there are other items within our consolidatedfinancial statements that require estimation but are not deemed critical as defined above.Revenue RecognitionWe derive revenue primarily from services provided under contractual arrangements with our clients or from the sale of products under our distributoragreements. We recognize revenue when persuasive evidence of a sales arrangement exists, product35 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 services, we record revenue on a gross basis when we are a principal to thetransaction and net of costs when we are acting as an agent between the customer or client and the vendor. We consider several factors to determine whetherwe are a principal or an agent, most notably whether we are the primary obligor to the vendor or customer, have established our own pricing and haveinventory and credit risks, if applicable.Our service fee revenue relates to our distribution services, order management/customer care services, professional, digital agency and technologyservices. Distribution services relate primarily to inventory management, product receiving, warehousing and fulfillment (i.e., picking, packing and shippingproduct on our clients’ behalf). Order management/customer care services relate primarily to taking customer orders for our clients’ products via variouschannels such as telephone call-center, electronic or facsimile. These services also entail addressing customer questions related to orders, as well as cross-selling/up-selling activities. Professional and technology services relate primarily to design, implementation and support of eCommerce platforms, websitesolutions and quality control for our clients.We typically charge our service fee revenue on either a cost-plus basis, a percent of shipped revenue basis, a time and materials, project or retainerbasis 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 customercontact center services. Additional fees are billed for other services. For technology and digital agency services, we may charge on a fixed cost basis based onan estimated maximum number of professional service labor hours.We evaluate our contractual arrangements to determine whether or not they include multiple service elements. Revenue recognition is determined forthe separate service elements of the contract in accordance with the requirements of Accounting Standards Codification 605, “Revenue Recognition.” Adeliverable constitutes a separate unit of accounting when it has stand-alone value and there are no return rights or other contingencies present for thedelivered elements. We allocate revenue to each element based on estimated selling price. Each of our 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 we are not able to establishvendor specific objective evidence of fair value for our services, nor is third-party evidence available to establish stand-alone selling prices. Accordingly weuse our best estimate of selling price for the deliverables. We establish our estimates considering internal factors such as margin objectives, pricing practicesand controls as well as market conditions such as competitor pricing strategies.We perform front-end set-up and integration services to support client eCommerce platforms and websites. When we determine these front-end set-upand integration services do not meet the criteria for recognition as a separate unit of accounting, we defer the start-up fees received and the related costs, andrecognize them over the expected performance period. When we determine these front-end set-up and integration services do meet the criteria for recognitionas a separate unit of accounting, for time and material arrangements, we recognize revenue as services are rendered and costs as they are incurred. For fixed-price arrangements, we use the completed contract method to recognize revenues and costs if reasonable and reliable cost estimates for a project cannot bemade. If reasonable and reliable costs estimates for a project can be made, we recognize revenue over the expected performance period on a proportionalperformance basis, as determined by the relationship of actual effort incurred compared to the estimated total contract effort. We use this method because weconsider effort incurred to date to be the best available measure of progress on contract in progress. Provisions for estimated losses on uncompleted contracts,if any, are made in the period in which such losses are determined. Change orders that result from modification of an original contract are taken intoconsideration for revenue recognition when they result in a change of total contract value and are approved by our clients.Depending on the terms of the customer arrangement, product revenue is recognized either upon shipment of the product or when the customerreceives the 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. If actual sales returns, allowances and discounts are greater thanestimated by management, additional expense may be incurred.Cost of Service Fee RevenueOur cost of service fee revenue represents the cost to provide the services described above, primarily compensation and related expenses and otherfixed and variable expenses directly related to providing the services. These also include certain occupancy and information technology costs anddepreciation and amortization expenses. Certain of these costs are allocated from general and administrative expenses. For these allocations, we estimate theamount of direct expenses based on client-specific information, such as the number of transactions processed. We believe our allocation methodology isreasonable, however a change in assumptions would result in a different gross profit in our statement of operations, yet no change to the resulting net incomeor loss.36 Allowance for Doubtful AccountsThe determination of the collectability of amounts due from our clients and customers requires us to use estimates and make judgments regardingfuture events and trends, including monitoring our customers’ payment history and current credit worthiness to determine that collectability is reasonablyassured, as well as consideration of the overall business climate in which our clients and customers operate. Inherently, these uncertainties require us to makefrequent judgments and estimates regarding our clients and customers’ ability to pay amounts due us to determine the appropriate amount of valuationallowances required for doubtful accounts. Provisions for doubtful accounts are recorded when it becomes evident the client or customer will not make therequired payments at either contractual due dates or in the future. These provisions may be based on discussions with the client or customer or the age of theamount due.In our Retail model, we also maintain an allowance for uncollectible vendor receivables, which arise from inventory returns to vendors, vendorrebates, price protections and other promotions. We determine the sufficiency of the vendor receivable allowance based upon various factors, includingpayment history and vendor communication. Amounts received from vendors may vary from amounts recorded because of potential non-compliance withcertain elements of vendor programs. If our estimated allowances for uncollectible accounts or vendor receivables subsequently prove insufficient, anadditional allowance may be required.We believe our allowances for doubtful accounts are adequate to cover anticipated losses under current conditions; however, uncertainties regardingchanges in the financial condition of our clients and customers, either adverse or positive, could impact the amount and timing of any additional provisionsfor doubtful accounts that may be required.Inventory ReservesInventories (merchandise, held for resale, all of which are finished goods) are stated at the lower of weighted average cost and net realizable value.Supplies Distributors and its subsidiaries assume responsibility for slow-moving inventory under certain distributor agreements, subject to certaintermination rights, but have the right to return product rendered obsolete by engineering changes, as defined. We review inventories for impairment on aperiodic basis, but at a minimum, annually. Recoverability of the inventory on hand is measured by comparisons of the carrying value to the fair value of theinventory. This requires us to record provisions and maintain reserves for excess or obsolete inventory. If write-downs of inventories are necessary, the costbasis of that inventory is adjusted. To determine these reserve amounts, we regularly review inventory quantities on hand and compare them to estimates offuture product demand and market conditions. These estimates and forecasts inherently include uncertainties and require us to make judgments regardingpotential outcomes. We believe our reserves are adequate to cover anticipated losses under current conditions; however, significant or unanticipated changesto our estimates and forecasts, either adverse or positive, could impact the amount and timing of any additional provisions for excess or obsolete inventorythat may be required.Stock CompensationWe utilize our Employee Stock and Incentive Plan (the “Employee Plan”) to help attract, retain and incentivize qualified executives, key employeesand non-employee directors to increase our shareholder value and help build and sustain growth. The Employee Plan provides for the granting of incentiveawards in a variety of forms, such as the award of an option, stock appreciation right, restricted stock award, restricted stock unit, deferred stock unit, amongother stock-based awards.Compensation cost is measured based on the grant date fair value of the award. Depending on the conditions associated with the vesting of the award,compensation cost is recognized on a straight-line or graded basis, net of estimated forfeitures, over the requisite service period of each award.We estimate the fair value of each option grant on the date of grant using the Black-Scholes option-pricing model. For certain of the awards that havea market condition, we estimate the compensation cost using a Monte-Carlo simulation. The estimated fair value for awards involves assumptions forexpected dividend yield, stock price volatility, risk-free interest rates and the expected life of the award.If, in the future, we determine that another method of estimating an award’s fair value is more reasonable, or, if another method for calculating theseinput assumptions is prescribed by authoritative guidance, and, therefore, should be used to estimate expected volatility or expected term, the fair valuecalculated for our stock-based compensation could change significantly.37 Income TaxesThe liability method is used for determining our income taxes, under which current and deferred tax liabilities and assets are recorded in accordancewith enacted tax laws and rates. Under this method, the amounts of deferred tax liabilities and assets at the end of each period are determined using the taxrate expected to be in effect when taxes are actually paid or recovered. Valuation allowances are established to reduce deferred tax assets to their netrealizable value when it is more likely than not that some portion or all of the deferred tax assets will not be realized. In determining the need for valuationallowances, we have considered and made judgments and estimates regarding estimated future taxable income. These estimates and judgments include somedegree of uncertainty and changes in these estimates and assumptions could require us to adjust the valuation allowances for our deferred tax assets. Theultimate realization of our deferred tax assets depends on the generation of sufficient taxable income in the applicable taxing jurisdictions. Although webelieve our estimates and judgments are reasonable, actual results may differ, which could be material.Because we operate in multiple countries, we are subject to the jurisdiction of multiple domestic and foreign tax authorities. Determination of taxableincome in any jurisdiction requires the interpretation of the related tax laws and regulations and the use of estimates and assumptions regarding significantfuture events such as the amount, timing and character of deductions, permissible revenue recognition methods under the tax law and the sources andcharacter of income and tax credits. Changes in tax laws, regulations, foreign currency exchange restrictions or our level of operations or profitability in eachtaxing jurisdiction could have an impact on the amount of income taxes that we provide during any given year.Business CombinationsWe account for business combinations under the acquisition method of accounting, which requires the assets and liabilities to be recorded at theirrespective fair values as of the acquisition date in the consolidated financial statements. The determination of estimated fair value may require us to makesignificant estimates and assumptions, including estimates of future financial performance the acquired entity. The purchase price is the fair value of the totalconsideration conveyed to the seller and the excess of the purchase price over the fair value of the acquired identifiable net assets, where applicable, isrecorded as goodwill. The results of operations of an acquired business are included in our consolidated financial statements from the date of acquisition.Costs associated with the acquisition of a business are expensed in the period incurred.Long-Lived Assets, Goodwill and Intangible AssetsLong-lived assets include property, intangible assets, goodwill and certain other assets. We make judgments and estimates in conjunction with thecarrying value of these assets, including amounts to be capitalized, depreciation and amortization methods and useful lives. Additionally, we review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We reviewgoodwill for impairment at least annually as of year-end. We record impairment losses in the period in which we determine the carrying amount is notrecoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected tobe generated by the asset. This may require us to make judgments regarding long-term forecasts of our future revenues and costs related to the assets subjectto review. Item 7A.Quantitative and Qualitative Disclosures About Market RiskWe are exposed to various market risks including interest rates on our financial instruments and foreign exchange rates.Interest Rate RiskOur interest rate risk relates to the outstanding balances on our inventory and working capital financing agreements and credit agreement whichamounted to $51.3 million at December 31, 2017. A 100 basis point movement in interest rates would result in approximately $0.5 million annualizedincrease or decrease in interest expense based on the outstanding balance of these agreements at December 31, 2017.Foreign Exchange RiskCurrently, our foreign currency exchange rate risk is primarily limited to the Canadian Dollar, the Euro, the British Pound and the Indian Rupee. In thefuture, our foreign currency exchange risk may also include other currencies applicable to certain of our international operations. We may, from time to time,employ derivative financial instruments to manage our exposure to fluctuations in foreign currency rates. To hedge our net investment and intercompanypayable or receivable balances in foreign operations, we may enter into forward currency exchange contracts. No derivative instruments or forward currencyexchange contracts were entered into during 2017, 2016 or 2015.38 Item 8. Financial Statements and Supplementary DataINDEX TO CONSOLIDATED FINANCIAL STATEMENTS PagePFSweb, Inc. and Subsidiaries Report of Independent Registered Public Accounting Firm40 Consolidated Balance Sheets41 Consolidated Statements of Operations and Comprehensive Loss42 Consolidated Statements of Shareholders’ Equity43 Consolidated Statements of Cash Flows44 Notes to Consolidated Financial Statements45 39 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Shareholders and Board of Directors PFSweb, Inc.505 Millennium Dr.Allen, TX 75013 Opinion on the Consolidated Financial StatementsWe have audited the accompanying consolidated balance sheets of PFSweb, Inc. and subsidiaries (the “Company”) as of December 31, 2017 and 2016, therelated consolidated statements of operations and comprehensive loss, shareholders’ equity, and cash flows for each of the three years in the period endedDecember 31, 2017, and the related notes and schedules listed in Item 15(a)(1) of this annual report on Form 10-K (collectively referred to as the“consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of theCompany and subsidiaries at December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the periodended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company'sinternal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued bythe Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 16, 2018 expressed an unqualified opinionthereon.Basis for OpinionThese consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’sconsolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent withrespect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and ExchangeCommission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud,and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosuresin the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management,as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ BDO USA, LLPWe have served as the Company's auditor since 2015.Dallas, TexasMarch 16, 2018 40 PFSWEB, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETSAS OF DECEMBER 31(In thousands, except share data) 2017 2016 ASSETS CURRENT ASSETS: Cash and cash equivalents$19,078 $24,425 Restricted cash 214 215 Accounts receivable, net of allowance for doubtful accounts of $373 and $494 at December 31, 2017 andDecember 31, 2016, respectively 72,062 80,223 Inventories, net of reserves of $342 and $568 at December 31, 2017 and December 31, 2016, respectively 5,326 6,632 Other receivables 5,366 6,750 Prepaid expenses and other current assets 6,633 7,299 Total current assets 108,679 125,544 PROPERTY AND EQUIPMENT, net 24,178 30,264 IDENTIFIABLE INTANGIBLES, net 3,371 6,864 GOODWILL 45,698 46,210 OTHER ASSETS 3,861 2,454 Total assets$185,787 $211,336 LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES: Trade accounts payable$45,070 $59,752 Accrued expenses 29,074 30,360 Current portion of long-term debt and capital lease obligations 9,460 7,300 Deferred revenue 7,405 7,156 Performance-based contingent payments 3,967 2,405 Total current liabilities 94,976 106,973 LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, less current portion 37,866 52,399 DEFERRED REVENUE, less current portion 4,034 4,127 DEFERRED RENT 5,464 4,810 PERFORMANCE-BASED CONTINGENT PAYMENTS, less current portion — 1,678 OTHER LIABILITIES 2,150 1,066 Total liabilities 144,490 171,053 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; 19,058,685 and 18,768,567 shares issued at December 31, 2017 and December 31, 2016, respectively; and 19,025,218 and 18,735,100 outstanding at December 31, 2017 and December 31, 2016, respectively 19 19 Additional paid-in capital 150,614 146,286 Accumulated deficit (109,281) (105,317)Accumulated other comprehensive income (loss) 70 (580)Treasury stock at cost, 33,467 shares (125) (125)Total shareholders’ equity 41,297 40,283 Total liabilities and shareholders’ equity$185,787 $211,336The accompanying notes are an integral part of these consolidated financial statements. 41 PFSWEB, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSSFOR THE YEARS ENDED DECEMBER 31(In thousands, except per share data) 2017 2016 2015 REVENUES: Service fee revenue$233,580 $226,165 $182,175 Product revenue, net 40,663 48,695 58,659 Pass-through revenue 52,582 59,783 47,435 Total revenues 326,825 334,643 288,269 COSTS OF REVENUES: Cost of service fee revenue 155,160 155,513 123,574 Cost of product revenue 38,504 45,883 55,587 Cost of pass-through revenue 52,582 59,783 47,435 Total costs of revenues 246,246 261,179 226,596 Gross profit 80,579 73,464 61,673 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 79,981 76,304 66,280 Income (loss) from operations 598 (2,840) (4,607)INTEREST EXPENSE, net 2,738 2,323 1,757 Loss from operations before income taxes (2,140) (5,163) (6,364)INCOME TAX EXPENSE 1,824 2,367 1,497 NET LOSS$(3,964) $(7,530) $(7,861) NET LOSS PER SHARE: Basic and diluted$(0.21) $(0.41) $(0.45)WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: Basic and diluted 18,933 18,542 17,608 COMPREHENSIVE LOSS: Net loss$(3,964) $(7,530) $(7,861)Foreign currency translation adjustment, net of taxes 650 (284) (978)TOTAL COMPREHENSIVE LOSS$(3,314) $(7,814) $(8,839) The accompanying notes are an integral part of these consolidated financial statements. 42 PFSWEB, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY(In thousands, except share data) Accumulated Additional Other Total Common Stock Paid-In Accumulated Comprehensive Treasury Stock Shareholders' Shares Amount Capital Deficit Income (Loss) Shares Amount Equity Balance, December 31, 2014 17,047,093 $17 $129,457 $(89,926) $682 33,467 $(125) $40,105 Net loss— — — (7,861) — — — (7,861)Stock-based compensation expense— — 4,637 — — — — 4,637 Exercise of stock options 382,893 — 1,483 — — — — 1,483 Issuance of restricted stock 109,486 — — — — — — — Tax withholding on restricted stock— — (646) — — — — (646)Shares issued related to acquisitions 596,746 1 6,842 — — — — 6,843 Non-cash compensation expense— — 175 — — — — 175 Foreign currency translation adjustment, netof taxes— — — — (978) — — (978)Balance, December 31, 2015 18,136,218 18 141,948 (97,787) (296) 33,467 (125) 43,758 Net loss— — — (7,530) — — — (7,530)Stock-based compensation expense— — 2,111 — — — — 2,111 Exercise of stock options 250,256 1 1,203 — — — — 1,204 Issuance of restricted stock 210,076 — — — — — — — Tax withholding on restricted stock— — (1,307) — — — — (1,307)Shares issued related to acquisitions 172,017 — 2,331 — — — — 2,331 Foreign currency translation adjustment, netof taxes— — — — (284) — — (284)Balance, December 31, 2016 18,768,567 19 146,286 (105,317) (580) 33,467 (125) 40,283 Net loss— — — (3,964) — — — (3,964)Stock-based compensation expense— — 3,333 — — — — 3,333 Exercise of stock options 168,823 — 770 — — — — 770 Issuance of restricted stock 73,122 — — — Tax withholding on restricted stock— — (256) (256)Non-cash compensation expense— — 128 128 Shares issued related to acquisitions 48,173 — 353 — — — — 353 Foreign currency translation adjustment, netof taxes— — — — 650 — — 650 Balance, December 31, 2017 19,058,685 $19 $150,614 $(109,281) $70 33,467 $(125) $41,297 The accompanying notes are an integral part of these consolidated financial statements. 43 PFSWEB, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE YEARS ENDED DECEMBER 31(In thousands) 2017 2016 2015 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss$(3,964) $(7,530) $(7,861)Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 14,899 15,377 14,831 Amortization of debt issuance costs 149 146 52 Provision for doubtful accounts (26) 4 187 Provision for excess and obsolete inventory 58 57 93 Loss on disposition of fixed assets 159 219 — Deferred income taxes (274) 823 58 Stock-based compensation expense 3,333 2,111 4,637 Non-cash compensation expense 128 — 175 Changes in operating assets and liabilities: Accounts receivable 10,595 (8,931) (5,632)Inventories 1,266 2,578 1,070 Prepaid expenses, other receivables and other assets 2,036 424 (824)Deferred rent (14) 887 (542)Accounts payable, deferred revenue, accrued expenses and other liabilities (17,294) 7,101 16,427 Net cash provided by operating activities 11,051 13,266 22,671 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (4,652) (8,713) (4,489)Proceeds from sale of property and equipment 65 — — Acquisitions, net of cash acquired — (8,359) (31,619)Net cash used in investing activities (4,587) (17,072) (36,108) CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock 770 1,203 1,483 Taxes paid on behalf of employees for withheld shares (256) (1,307) (646)Decrease in restricted cash 2 60 383 Payments on performance-based contingent payments (2,004) (9,454) (2,043)Payments on capital lease obligations (3,064) (2,981) (2,417)Payments on term loan (2,438) (563) — Borrowings on term loan — 20,000 10,000 Payments on revolving loan (97,846) (83,553) (35,083)Borrowings on revolving loan 89,989 84,280 54,366 Payments on other debt (1,219) (686) (117,785)Borrowings on other debt 1,353 — 111,022 Debt issuance costs — — (723)Net cash (used in) provided by financing activities (14,713) 6,999 18,557 EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS 2,902 (549) (1,467) NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (5,347) 2,644 3,653 CASH AND CASH EQUIVALENTS, beginning of period 24,425 21,781 18,128 CASH AND CASH EQUIVALENTS, end of period$19,078 $24,425 $21,781 SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for income taxes 2,131 1,669 1,367 Cash paid for interest 2,496 1,753 975 Non-cash investing and financing activities: Property and equipment acquired under long-term debt and capital leases$374 $6,793 $4,649 Performance-based contingent payments through stock issuance$353 $2,238 $6,600 The accompanying notes are an integral part of these consolidated financial statements. 44PFSWEB, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. OverviewPFSweb, 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 IndiaPrivate Limited; “LAL” refers to LiveAreaLabs, Inc.; “Moda” refers to Moda Superbe Limited; “CrossView” refers to CrossView, Inc.; “Conexus” refers toConexus Limited; and “PFSweb” refers to PFSweb, Inc. and its subsidiaries, excluding Supplies Distributors and Retail Connect.PFSweb OverviewPFSweb is a global provider of omni-channel commerce solutions, including a broad range of technology, infrastructure and professional services, tomajor brand name companies and others seeking to optimize their supply chain and to enhance their online and traditional business channels and initiativesin 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 OverviewSupplies Distributors and PFSweb operate under distributor agreements with Ricoh Company Limited and Ricoh USA Inc., a strategic business unitwithin the Ricoh Family Group of Companies (collectively hereafter referred to as “Ricoh”), under which Supplies Distributors acts as a distributor of variousRicoh products. Supplies Distributors sells its products in the United States, Canada and Europe. Pursuant to agreements between PFSweb and SuppliesDistributors, PFSweb provides transaction management and fulfillment services to Supplies Distributors.The majority of Supplies Distributors’ revenue is generated by its sale of product purchased from Ricoh. Under the distributor agreements, which aresubject to periodic renewals, Ricoh sells product to Supplies Distributors and reimburses Supplies Distributors for certain freight costs, direct costs incurred inpassing on any price decreases offered by Ricoh to Supplies Distributors or its customers to cover price protection and certain special bids, the cost ofproducts provided to replace defective product returned by customers and other certain expenses, as defined. Supplies Distributors can return to Ricohproduct rendered obsolete by Ricoh engineering changes after customer demand ends. Ricoh determines when a product is obsolete. Ricoh and SuppliesDistributors also have agreements under which Ricoh reimburses or collects from Supplies Distributors amounts calculated in certain inventory costadjustments. Supplies Distributors passes through to customers marketing programs specified by Ricoh and administers such programs according to Ricohguidelines.Supplies Distributors also maintains agreements with certain additional clients where it operates as an agent for the resale of product between theclient and the customer, and records product revenue net of cost of product revenue as a component of service fee revenue. 2. Significant Accounting PoliciesPrinciples of ConsolidationAll intercompany accounts and transactions have been eliminated in consolidation.Use of EstimatesThe preparation of consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in theUnited States of America (“US 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, generaland administrative expenses in these consolidated financial statements also require management estimates and assumptions.45PFSWEB, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued) Estimates and assumptions about future events and their effects cannot be determined with certainty. The Company bases its estimates on historicalexperience and various other assumptions believed to be applicable and reasonable under the circumstances. These estimates may change as new eventsoccur, as additional information is obtained and as the operating environment changes. These changes have been included in the consolidated financialstatements as soon as they became known. In addition, management is periodically faced with uncertainties, the outcomes of which are not within its controland will not be known for prolonged periods of time. Based on a critical assessment of accounting policies and the underlying judgments and uncertaintiesaffecting the application of those policies, management believes the Company’s consolidated financial statements are fairly stated in accordance withUS GAAP, and provide a fair presentation of the Company’s financial position and results of operations.Revenue and Cost RecognitionThe Company derives revenue primarily from services provided under contractual arrangements with its clients or from the sale of products under itsdistributor agreements. The following revenue recognition policies define the manner in which the Company accounts for sales transactions.The Company recognizes revenue when persuasive evidence of a sales arrangement exists, product shipment or delivery has occurred or services havebeen 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 theCompany 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. TheCompany considers several factors to determine whether it is a principal or an agent, most notably whether the Company is the primary obligor to the vendoror customer, has established its own pricing and has inventory and credit risks, if applicable.Service Fee Revenue ActivityThe Company’s service fee revenue primarily relates to its distribution services, order management/customer care services, professional digital agencyand 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 andmaterials, 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 basisfor 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 isdetermined 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 othercontingencies present for the delivered elements. The Company allocates revenue to each element based on estimated selling price. Each of the Company’sclient contracts, and the related services, is unique, with individual needs and criteria customized for each client. Each client engagement is scoped andpriced 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 evidenceavailable to establish stand-alone selling prices. Accordingly, the Company uses management’s best estimate of selling price for the deliverables. TheCompany establishes its estimates considering internal factors, such as margin objectives, pricing practices and controls, as well as market conditions, such ascompetitor 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 includeaddressing customer questions related to orders, as well as cross-selling/up-selling activities. Service fee revenue for this activity is recognized as the servicesare 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 provides digital agency services that enable clientmarketing programs to attract new customers, convert buyers and increase website value. These fees are typically charged on either a per labor hour ortransaction basis, a dedicated resource model, a fixed price arrangement, or a percent of merchandise shipped basis. Service fee revenue for this activity isgenerally recognized as the services are rendered.46PFSWEB, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued) The Company performs front-end set-up and integration services to support client eCommerce platforms and websites. When the Company determinesthese 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 feesreceived and the related costs, and recognizes them over the expected performance period. When the Company determines these front-end set-up andintegration services do meet the criteria for recognition as a separate unit of accounting, for time and material arrangements, the Company recognizes revenueas services are rendered and costs as they are incurred. For fixed-price arrangements, the Company uses the completed contract method to recognize revenuesand 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, theCompany recognizes revenue over the expected performance period on a proportional performance basis, as determined by the relationship of actual costsincurred 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 andhandling costs and telecommunication charges, are included in pass-through revenue. The related reimbursable costs are reflected as cost of pass-throughrevenue.The Company’s cost of service fee revenue, representing the cost to provide the services described above, is recognized as incurred. Cost of service feerevenue also includes certain costs associated with technology collaboration and ongoing technology support that include maintenance, web hosting andother ongoing programming activities. These activities are primarily performed to support the distribution and order management/customer care services andare recognized as incurred.Product Revenue ActivityDepending on the terms of the customer arrangement, Supplies Distributors recognizes product revenue and product cost either upon the shipment ofproduct to customers or when the customer receives the product. Supplies Distributors permits its customers to return product for credit against otherpurchases, which include returns for defective products (that Supplies Distributors then returns to the manufacturer) and incorrect shipments. SuppliesDistributors 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 productrevenue.Under its distributor agreements, Supplies Distributors bills Ricoh for reimbursements of certain expenses, including: pass-through customermarketing programs, including rebates and coop funds; certain freight costs; direct costs incurred in passing on any price decreases offered by Ricoh toSupplies Distributors or its customers to cover price protection and certain special bids; the cost of products provided to replace defective product returnedby customers; and certain other expenses as defined. Supplies Distributors records these reimbursable amounts as they are incurred as other receivables in theconsolidated balance sheet with a corresponding reduction in either inventory or cost of product revenue. Supplies Distributors also records pass-throughcustomer marketing programs as a reduction of both product revenue and cost of product revenue.Deferred Revenues and Deferred CostsThe Company primarily performs its distribution services, order management, customer care and certain other 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 sometimes receives start-up fees to cover its implementation costs, including certain technology infrastructure and development costs. Whenthe Company determines that these start-up and integration activities do not meet the criteria for recognition as a separate unit of accounting, the Companydefers the start-up fees received, and the related costs, and recognizes them over the expected performance period. The amortization of deferred revenue isincluded as a component of service fee revenue. The amortization of deferred implementation costs is included as a cost of service fee revenue. To the extentimplementation costs for non-technology infrastructure and development exceed the corresponding fees received, the excess costs are expensed as incurred.Current and non-current deferred implementation costs, excluding technology and development costs, are a component of prepaid expenses and othercurrent assets and other assets, respectively.47PFSWEB, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued) Concentration of Business and Credit RiskDuring 2017 and 2016, no product customer or service fee client relationships represented more than 10% of the Company’s consolidated total netrevenues. During 2015, one service fee client relationship, the United States Mint, represented approximately 11%, or $31.2 million, of the Company’sconsolidated total net revenues. As of December 31, 2017, no client exceeded 10% of the Company’s total accounts receivable. As of December 31, 2016,one client exceeded 10% of the Company’s consolidated accounts receivable. Cash and Cash EquivalentsCash equivalents are defined as short-term highly liquid investments with original maturities, when acquired, of three months or less. At times, theCompany has cash balances in domestic bank accounts that exceed Federal Deposit Insurance Corporation insured limits. The Company has not experiencedany losses related to these cash concentrations.Accounts ReceivableThe Company recognizes revenue and records trade accounts receivable, pursuant to the methods described above, when collectability is reasonablyassured. Collectability is evaluated in the aggregate and on an individual customer or client basis taking into consideration payment due date, historicalpayment trends, current financial position, results of independent credit evaluations and payment terms. Related reserves are determined by either usingpercentages applied to certain aged receivable categories based on historical results, reevaluated and adjusted as additional information is received, or aspecific identification method. After all attempts to collect a receivable have failed, the receivable is written off against the allowance for doubtful accounts.Other ReceivablesOther receivables primarily include amounts due from Ricoh for costs incurred by the Company under the distributor agreements and value added taxreceivables.InventoriesInventories (all of which are finished goods) are stated at the lower of weighted average cost and net realizable value. The Company establishesinventory reserves based upon estimates of declines in values due to inventories that are slow moving or obsolete, excess levels of inventory or valuesassessed at lower than cost.Supplies Distributors assumes responsibility for slow-moving inventory under its Ricoh distributor agreements, subject to certain termination rights,but has the right to return product rendered obsolete by engineering changes, as defined. In the event PFSweb, Supplies Distributors and Ricoh terminate thedistributor agreements, the agreements provide for the parties to mutually agree on a plan of disposition of Supplies Distributors’ then existing inventory.Property and EquipmentThe Company makes judgments and estimates in conjunction with the carrying value of property and equipment, including amounts to be capitalized,depreciation and amortization methods and useful lives. Property and equipment are stated at cost and are depreciated using the straight-line method over theestimated useful lives of the respective assets. Capitalized implementation costs are depreciated over the respective client expected performance period.Leasehold improvements are amortized over the shorter of the useful life of the related asset or the remaining lease term.When events or changes in circumstances indicate that the carrying amount of our property and equipment might not be recoverable, the expectedfuture undiscounted cash flows from the asset are estimated and compared with the carrying amount of the asset. If the sum of the estimated undiscountedcash flows is less than the carrying amount of the asset, an impairment loss is recorded. The impairment loss is measured by comparing the fair value of theasset with its carrying amount. Fair value is generally determined based on discounted cash flows or appraised values, as appropriate.48PFSWEB, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued) Business CombinationsThe Company accounts for business combinations under the acquisition method of accounting, which requires the assets and liabilities to be recordedat their respective fair values as of the acquisition date in the consolidated financial statements. The determination of estimated fair value may requiremanagement to make significant estimates and assumptions. The purchase price is the fair value of the total consideration conveyed to the seller and theexcess of the purchase price over the fair value of the acquired identifiable net assets, where applicable, is recorded as goodwill. The results of operations ofan acquired business are included in the Company’s consolidated financial statements from the date of acquisition. Costs associated with the acquisition of abusiness are expensed in the period incurred.Definite-Lived Intangible Assets The Company’s definite-lived intangible assets are primarily comprised of non-compete agreements, trade names, customer relationships anddeveloped technology.Definite-lived intangible assets are amortized over their estimated useful life and only tested for impairment whenever events or circumstancesindicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when the carrying amount of the asset exceedsthe estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition. The impairment loss to be recordedwould be the excess of the asset’s carrying value over its fair value. Fair value is determined using a discounted cash flow analysis or other valuationtechnique.GoodwillGoodwill represents the excess of the purchase price over the fair value of the identifiable net assets acquired. Goodwill and other intangible assetswith indefinite lives are not amortized to operations, but instead are reviewed for impairment at least annually in the fourth quarter, or more frequently whenthere is an indicator of impairment. Goodwill impairment exists when a reporting unit’s goodwill carrying value exceeds its implied fair value. The Companyhas no intangible asset with indefinite useful lives, other than goodwill.ASU Topic 350: Testing Goodwill for Impairment (“ASU Topic 350”) permits an entity to make a qualitative assessment of whether it is more likelythan not that a reporting unit’s fair value is less than its carrying amount before applying a two-step goodwill impairment test. This qualified assessment isreferred to as “Step 0.” When performing Step 0, an entity evaluates relevant events and circumstances, including but not limited to, macroeconomicconditions, industry and market conditions, overall financial performance, reporting unit specific events and entity specific events. If, after completing Step0, an entity concludes that it is not likely that the fair value of the reporting unit is less than its carrying amount, it would not be required to perform a two-step impairment test for that reporting unit.In the event that the conclusion of Step 0 requires the two-step test, the first step compares the fair value of the reporting unit with its carrying value,including goodwill. If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit andthe entity must perform step two of the impairment test. Under step two, an impairment loss is recognized for any excess of the carrying amount of thereporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of thereporting unit in a manner similar to a purchase price allocation and the residual fair value after this allocation is the implied fair value of the reporting unitgoodwill. Fair value of the reporting unit is determined using a discounted cash flow analysis. If the fair value of the reporting unit exceeds its carrying value,step two does not need to be performed. An impairment loss is recognized to the extent that the carrying amount of goodwill exceeds its implied fair value.If the Company is required to perform the two-step test described in the preceding paragraph, it would determine fair value using generally acceptedvaluation techniques, including discounted cash flows and market multiple analyses. These types of analyses contain uncertainties because they requiremanagement to make assumptions and to apply judgment to estimate industry economic factors and the profitability of future business strategies.The Company’s valuation methodology for assessing impairment would require management to make judgments and assumptions based on historicalexperience and projections of future operating performance. If these assumptions differ materially from future results, the Company may record impairmentcharges in the future.Foreign Currency Translation and TransactionsThe functional currency of each of the Company’s foreign subsidiaries is local currency. Assets and liabilities are translated at exchange rates in effectat the end of the period, and income and expense items are translated at the average exchange rates on a monthly basis. Translation adjustments areaccumulated and reported as a component of accumulated other comprehensive income in the consolidated statements of shareholders’ equity.49PFSWEB, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued) The Company includes currency gains and losses on short-term intercompany advances in the determination of net income and loss. The Company reportsgains and losses on intercompany foreign currency transactions that are of a long-term investment nature as a component of accumulated othercomprehensive income in the consolidated statements of shareholders’ equity.Stock-Based CompensationThe Company uses stock-based compensation, including stock options, deferred stock units and other stock-based awards to provide long-termperformance incentives for its executives, key employees and non-employee directors. From the service inception date to the grant date, the Companyrecognizes compensation cost for all share-based payments based on the reporting date fair value of the award. After the grant date, compensation cost ismeasured based on the grant date fair value. Depending on the conditions associated with the vesting of the award, compensation cost is recognized on astraight-line or graded basis, net of estimated forfeitures, over the requisite service period of each award. The Company records compensation cost as acomponent of selling, general and administrative expenses in the consolidated statements of operations.The Company estimates the fair value of each option grant on the date of grant using the Black-Scholes option-pricing model and estimates thecompensation cost for certain of the awards that have a performance condition using a Monte-Carlo simulation. The estimated fair value for awards involvesassumptions for expected dividend yield, stock price volatility, risk-free interest rates and the expected life of the award.Income TaxesDeferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carryingamounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected toapply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets andliabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established whennecessary to reduce deferred tax assets to the amount more likely than not to be realized.The Company recognizes interest and penalties related to certain tax positions in income tax expense and monitors uncertain tax positions andrecognizes tax benefits only when management believes the relevant tax positions would more likely than not be sustained upon examination.Fair Value of Financial InstrumentsIn accordance with ASC 825, Financial Instruments, fair value is determined utilizing a hierarchy of valuation techniques. The three levels of the fairvalue hierarchy are as follows:Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.Level 2: Inputs, other than quoted prices, that are observable for the asset or liability, either directly or indirectly; these include quoted prices forsimilar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.The carrying value of the Company’s financial instruments, which include cash and cash equivalents, accounts receivable, accounts payable, debt andcapital lease obligations, approximate their fair values at December 31, 2017 and 2016 based on short terms to maturity or current market prices and interestrates or observable inputs such as quoted prices in active markets.Nonrecurring Fair Value MeasurementsThe purchase price of business acquisitions is allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based ontheir estimated fair values on the acquisition dates, with any excess recorded as goodwill. The Company utilizes Level 3 inputs in the determination of theinitial fair value of assets and liabilities. Non-financial assets such as goodwill, intangible assets, software development costs and property and equipment aresubsequently measured at fair value when there is an indicator of impairment and recorded at fair value only when impairment is recognized.Impact of Recently Issued Accounting StandardsPronouncements Recently AdoptedIn July 2015, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) No. 2015-11, “Simplifying theMeasurement of Inventory” (“ASU 2015-11”), which modifies existing requirements regarding measuring inventory at the lower of cost and market. Underexisting standards, the market amount requires consideration of replacement cost, net realizable value (“NRV”), and NRV less an approximately normal profitmargin. ASU 2015-11 replaces market with NRV, defined as50PFSWEB, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued) estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This eliminates theneed to determine and consider replacement cost or NRV less an approximately normal profit margin when measuring inventory. This standard is effective forthe Company prospectively beginning January 1, 2017. Adoption of ASU 2015-11 did not have a material impact on the Company’s consolidated financialstatements.In November 2015, the FASB issued Accounting Standards Update No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification ofDeferred Taxes” (“ASU 2015-17”), which simplifies the presentation of deferred income taxes by requiring deferred tax assets and liabilities be classified asnoncurrent on the balance sheet. ASU 2015-17 is effective beginning on January 1, 2017 with early application permitted as of the beginning of any interimor annual reporting period. Adoption of ASU 2015-17 did not have a material impact on the Company’s consolidated financial statements.Pronouncements Not Yet AdoptedIn May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, As Amended (“ASU 2014-09”), which will replace numerousrequirements in U.S. GAAP, including industry-specific requirements, provides companies with a single revenue recognition model for recognizing revenuefrom contracts with customers and significantly expands the disclosure requirements for revenue arrangements. The new standard, as amended, will beeffective for the Company for interim and annual reporting periods beginning on January 1, 2018. The two permitted transition methods under the newstandard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented, or the modified retrospectivemethod, in which case the cumulative effect of applying the standard would be recognized at the date of initial application with disclosure of results underthe new and old standards for the first year of adoption.The Company will adopt the standard as of January 1, 2018, using the modified retrospective transition method. Under the modified retrospectivetransition method, the Company will calculate and record the cumulative effect of adopting the new standard at January 1, 2018 for all open contracts, in theCompany’s Quarterly Report on Form 10-Q for the first quarter of 2018.Based on its evaluation process, the Company has identified certain potential areas of impact. Application of the new standard requires thatincremental costs of obtaining a contract (including sales commissions plus any associated fringe benefits) be recognized as an asset and expensed over theexpected life of the arrangement. Currently the Company expenses certain contract acquisition costs as incurred. Under the new standard the Company willdefer incremental commission costs to obtain a contract and amortize those costs over the period of benefit. ASU 2014-09 allows, as a policy election, salescommissions related to contracts less than one year to be expensed as incurred instead of capitalized, as a practical expedient. The Company has elected thispractical expedient. Therefore, only commissions related to contracts greater than one year will be capitalized.Additionally, the Company has reviewed the way it manages volume tiered discounts and penalties. Currently, revenue adjustments are recorded asdiscounts or penalties when incurred. Under ASU 2014-09, these items will be treated as variable consideration and good faith estimates will be made upfront, which will have the impact of reducing some of the revenue. Variable consideration will be reassessed quarterly.Contract modifications under prior guidance were handled as modifications, if the adjustment was for additional hours on time and materials contracts,which were adjusted and charged as work is performed monthly. Under ASU 2014-09, we will continue to account for large scope changes with significantadditional distinct services with related price increases that reflect our stand-alone selling price of the scope change as separate contracts. ASU 2014-09allows, as a transition practical expedient, for contracts modified prior to the beginning of the earliest reporting period presented under the new standard(January 1, 2018 for the Company), an entity can reflect the aggregate effect of all modifications that occur before the beginning of the earliest periodpresented under the new standard when identifying the satisfied and unsatisfied performance obligations, determining the transaction price and allocating thetransaction price to the satisfied and unsatisfied performance obligations for the modified contract at transition. We are electing this practical expedient.Based on contracts in process at December 31, 2017, the Company expects to record, upon adoption of ASU 2014-09, a net cumulative adjustment toshareholders’ equity not to exceed $1.0 million. The adjustment to retained earnings primarily relates to the modification of the amortization ofimplementation related deferred revenues and costs. Sales commissions were not a material amount for open contracts at December 31, 2017 and, therefore,will not have an impact at adoption.The Company will make certain presentation changes on its consolidated balance sheet to comply with the new standard.In February 2016, the FASB issued ASU No. 2016-02, “Leases” (“ASU 2016-02”). ASU 2016-02 establishes a right-of-use (“ROU”) model thatrequires 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 aseither finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for fiscal yearsbeginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lesseesfor capital and operating leases existing51PFSWEB, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued) at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. TheCompany is currently assessing the impact of ASU 2016-02 on its consolidated financial statements, but does expect the adoption to have a material impactto the balance sheet through the addition of an ROU asset and corresponding lease liability.In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and CashPayments - a consensus of the Emerging Issues Task Force” (“ASU 2016-15”). ASU 2016-15 is intended to reduce diversity in practice in how certaintransactions 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 equitymethod investments and beneficial interests in securitization transactions. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, andinterim periods within those fiscal years. Early adoption is permitted. ASU 2016-15 is not expected to have a material impact on the Company’s consolidatedfinancial 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 orbusinesses, ASU 2017-01 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2017, and interim periodswithin those annual periods. ASU 2017-01 is not expected to have a material impact on the Company’s 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 reportingunit’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 interimperiods therein, beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the effect of ASU 2017-04.On May 10, 2017, the FASB issued ASU No. 2017-09, “Compensation–Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU2017-09”), clarifying when a change to the terms or conditions of a stock-based payment award must be accounted for as a modification. ASU 2017-09requires modification accounting if the fair value, vesting condition or the classification of the award is not the same immediately before and after a changeto the terms and conditions of the award. ASU 2017-09 is effective for the Company on a prospective basis beginning on January 1, 2018. ASU 2017-09 isnot expected to have an impact on the Company’s consolidated financial statements as it is not the Company’s practice to change either the terms orconditions of stock-based payment awards once they are granted. 3. Acquisitions Acquisition of ConexusOn 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 through 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 as of the acquisition date), subject to apost-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 millionat December 31, 2016), 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 theoperational and financial targets so the Company did not make any payments or record any liability as of December 31, 2017 or December 31, 2016applicable to the Earn-out Payment.The transaction was accounted for using the purchase method of accounting for business combinations and, accordingly, the assets acquired andliabilities assumed, including an allocation of purchase price, and the results of operations of Conexus, including the amortization of acquired intangibleassets, have been included in the Company's consolidated financial statements since the date of acquisition, which for 2016 included $3.3 million of servicefee revenue and approximately $0.8 million of net loss. 52PFSWEB, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued) 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 Purchase price for Conexus is as follows (in thousands): Aggregate cash payments $8,515 Performance-based contingent payments (based on estimated 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. Totalgoodwill 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. Acquisition of CrossViewOn August 5, 2015, PFSweb, Inc. acquired substantially all of the assets, and assumed substantially all of the liabilities, in each case, other than certainspecified assets and liabilities, of CrossView, Inc. (“CrossView”) an ecommerce systems integrator and provider of a wide range of ecommerce services in theU.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 sheetreconciliation. In addition, the purchase agreement provides for future earn-out payments (“CrossView Earn-out Payments”) payable in 2016, 2017 and 2018based on the achievement of certain 2015, 2016 and 2017 financial targets. The CrossView Earn-out Payments have no guaranteed minimum and anaggregate maximum of $18.0 million and are subject to possible offsets for indemnification and other claims. During 2016, the Company paid an aggregateof $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 ofCompany 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 millionwas paid by the issuance of 48,173 restricted shares of Company stock. The Company will pay 15% of any 2017 CrossView Earn-out Payments in restrictedshares of Company common stock, based on its current market value at the time of issuance. As of December 31, 2017 and 2016, the Company had recorded aliability of $4.0 million and $4.1 million, respectively, applicable to the estimated CrossView Earn-out Payments, which is included in performance-basedcontingent payments in the consolidated balance sheets. The estimated performance-based contingent payment liability decreased from $4.1 million as ofDecember 31, 2016 as a result of the payment of the 2016 CrossView Earn-out Payments partially offset by an increase in the estimated 2017 CrossViewEarn-out Payments resulting from updated CrossView financial projections for the 2017 earn-out period.The transaction was accounted for using the purchase method of accounting for business combinations and, accordingly, the assets acquired andliabilities assumed, including an allocation of purchase price, and the results of operations of CrossView, including the amortization of acquired intangibleassets, have been included in the Company's consolidated financial statements since the date of acquisition, which for 2015 included $13.8 million of servicefee revenue and $0.6 million of net income.53PFSWEB, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued) 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 estimated fair value of the tangible and intangible assets acquired and liabilities assumed (in thousands):Accounts receivable $7,550 Other assets 590 Identifiable intangibles 9,050 Total assets acquired 17,190 Total liabilities assumed 2,556 Net assets acquired 14,634 Goodwill 30,221 Total purchase price $44,855 Purchase price for CrossView is as follows (in thousands, except share data and stock price): Number of shares of common stock issued 553,223 Multiplied by PFSweb, Inc.'s stock price $11.40 Share consideration $6,307 Aggregate cash payments 30,740 Performance-based contingent payments (based on estimated fair value at acquisition date) 9,195 Post-closing balance sheet reconciliation adjustment (1,387)Total purchase price $44,855 The excess of the purchase price over the fair value of the net identifiable assets acquired and liabilities assumed was allocated to goodwill. Totalgoodwill of $30.2 million, which, given the structure of the acquisition, is expected to be deductible for tax purposes over 15 years is not being amortizedand is subject to an annual impairment test using a fair-value-based approach. Acquisition of ModaOn June 11, 2015, PFSweb, Inc. acquired the outstanding capital stock of Moda, an eCommerce system integrator and consultancy that providesunique digital experiences for fashion brands and retailers through its primary operations in London, U.K. Consideration paid for the shares included aninitial £650,000 (approximately $1.0 million) cash payment and 16,116 unregistered shares of Company stock (approximately $0.2 million in value as of theacquisition date). The purchase agreement provided for earn-out payments (“Moda Earn-out Payments”) based on Moda’s achievement of certain financialtargets, subject to possible offsets for indemnification and other claims arising under the purchase agreement. Moda did not achieve the financial targets sothe Company did not make any payments or record any liability as of December 31, 2017 or December 31, 2016 applicable to the Moda Earn-out Payments.The transaction was accounted for using the purchase method of accounting for business combinations and, accordingly, the assets acquired andliabilities assumed, including an allocation of purchase price, and the results of operations of Moda, including the amortization of acquired intangible assets,have been included in the Company’s consolidated financial statements since the date of acquisition, which for 2015 included $1.2 million of service feerevenue and $0.2 million of net loss.54PFSWEB, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued) 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 estimated fair value of the tangible and intangible assets acquired and liabilities assumed (in thousands):Cash and cash equivalents $126 Accounts receivable 335 Identifiable intangibles 340 Other assets 50 Total assets acquired 851 Total liabilities assumed 658 Net assets acquired 193 Goodwill 1,287 Total purchase price $1,480 Purchase price for Moda is as follows (in thousands, except share data and stock price): Number of shares of common stock issued 16,116 Multiplied by PFSweb, Inc.'s stock price $14.60 Share consideration contingent payments $235 Aggregate cash payments 1,005 Performance-based contingent payments (based on fair value at acquisition date) 240 Total purchase price $1,480 The excess of the purchase price over the fair value of the net identifiable assets acquired and liabilities assumed was allocated to goodwill. Totalgoodwill of $1.3 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. Performance-Based Contingent Payments The following table presents the change in the acquisition related performance-based contingent payments for the years presented (in thousands): 2017 2016 2015 As of January 1, $4,083 $14,157 $5,392 Fair value at the time of acquisition - Conexus — 553 — Fair value at the time of acquisition - Moda — — 240 Fair value at the time of acquisition - CrossView — — 9,195 CrossView earn-out payments in common stock andcash (2,358) (7,941) — LAL and REV earn-out payments in common stockand cash — (3,750) (2,343)Change in fair value aggregate balances due 2,242 1,064 1,673 As of December 31, $3,967 $4,083 $14,15755PFSWEB, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued) Pro Forma Information (unaudited)The following table presents selected pro forma information, for comparative purposes, assuming the acquisition of CrossView had occurred onJanuary 1, 2014 and acquisition of Conexus had occurred on January 1, 2015 (unaudited) (in thousands, except per share amounts): Year Ended December 31, 2016 2015 Total revenues $338,271 $317,214 Net loss (2,619) (6,548)Basic and diluted net loss per share (0.14) (0.37) The unaudited pro forma total revenues and pro forma net loss are not necessarily indicative of the consolidated results of operations for future periodsor the results of operations that would have been realized had the Company consolidated CrossView and Conexus during the periods noted. Unaudited proforma results of operations assuming the Moda acquisition had taken place at the beginning of 2015 are not provided because the historical operating resultsof Moda were not significant and pro forma results would not be significantly different from reported results for the periods presented.Acquisition-Related ExpensesThe acquisitions are expected to enhance the overall product and service offering of the Company to its existing clients and customers, as well assupport anticipated growth opportunities. The Company recorded $1.5 million and $3.5 million of acquisition-related expenses during the years endedDecember 31, 2016 and 2015, which are included in selling, general and administrative expenses in the consolidated statements of operations.4. Deferred Revenues and CostsThe following summarizes the deferred implementation revenues and costs, excluding technology and development costs (in thousands): December 31, 2017 2016 Deferred implementation revenues Current$7,405 $7,156 Non-Current 4,034 4,127 $11,439 $11,283 Deferred implementation costs Current$2,703 $2,770 Non-Current 1,047 1,337 $3,750 $4,107Current deferred implementation costs are included in prepaid expenses and other current assets in the consolidated balance sheets. Non-currentdeferred implementation costs are included in other assets in the consolidated balance sheets.56PFSWEB, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued) 5. Property and EquipmentThe components of property and equipment as of December 31, 2017 and 2016 are as follows (in thousands): December, 31 Depreciable 2017 2016 Life Purchased and capitalized software costs$55,940 $52,409 2-7 yearsFurniture, fixtures and equipment 30,917 31,355 2-10 yearsComputer equipment 16,657 16,771 2-6 yearsLeasehold improvements 15,513 14,874 2-10 yearsIn-process assets 1,376 830 120,403 116,239 Less-accumulated depreciation and amortization (96,225) (85,975) Property and equipment, net$24,178 $30,264 Depreciation and amortization expense related to property and equipment, excluding capital leases, for the years ended December 31, 2017, 2016 and2015 was $8.4 million, $8.6 million and $9.5 million, respectively.The Company’s property and equipment held under capital leases amount to approximately $2.7 million and $5.4 million, net of accumulatedamortization of approximately $6.8 million and $5.1 million, at December 31, 2017 and 2016, respectively. Depreciation and amortization expense related tocapital leases for the years ended December 31, 2017, 2016 and 2015 was $3.1 million, $2.8 million and $2.4 million, respectively. 6. Goodwill and Identifiable Intangibles, Net Goodwill acquired through acquisitions is recognized as part of the PFSweb segment. During 2017, goodwill decreased by $0.5 million due to theimpact of foreign currency translation for 2017 and prior periods. During 2016, the amount of goodwill increased by $6.4 million due to acquisitions.The Company performed its annual goodwill impairment test during the fourth quarter of 2017, 2016 and 2015 by completing a Step 0 test. Duringeach year, the Company determined that it was not more likely than not that the reporting unit’s fair value was less than its carrying value and, therefore, didnot complete the prescribed two-step goodwill impairment test and thus the Company did not record any goodwill impairment during 2017, 2016 and 2015.The following table presents the gross carrying value and accumulated amortization for identifiable intangibles (in thousands): December 31, 2017 December 31, 2016 GrossCarrying Accumulated Net Carrying GrossCarrying Accumulated Net Carrying Estimated Useful Life Value Amortization Value Value Amortization Value from Acquisition Trade names $1,250 $(1,250) $- $1,250 $(773) $477 2.25 - 2.5 yearsNon-compete agreements 571 (499) 72 575 (341) 234 1- 3.5 yearsLeasehold 45 (45) - 45 (42) 3 2.5 yearsCustomer relationships 10,154 (7,177) 2,977 10,287 (5,137) 5,150 1.6 - 9 yearsDeveloped technology 1,525 (1,219) 306 1,577 (622) 955 2.5-3 yearsOther intangibles 493 (477) 16 493 (448) 45 9 yearsTotal definite-lived identifiable intangible assets $14,038 $(10,667) $3,371 $14,227 $(7,363) $6,864 57PFSWEB, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued) Definite-Lived Identifiable Intangible Asset Amortization The changes in the net carrying values of identifiable intangible assets during 2017, 2016 and 2015 were primarily due to amortization expense of$3.4 million, $4.0 million and $3.0 million, respectively, as well as the impact of foreign currency translation. Amortization expense is included in selling,general and administrative expenses in 2017, 2016 and 2015, respectively, in the consolidated statements of operations. The estimated amortization expensefor each of the next five years is as follows (in thousands): 2018$1,565 2019 670 2020 471 2021 282 2022 197 7. Inventory FinancingSupplies Distributors has a short-term credit facility with IBM Credit LLC (“IBM Credit Facility”) to finance its purchase and distribution of Ricohproducts in the United States, providing financing for eligible Ricoh inventory and certain receivables up to $13.0 million. The agreement has no statedmaturity date and provides either party the ability to exit the facility following a 90-day notice. Given the structure of this facility and as outstandingbalances, which represent inventory purchases, are repaid within twelve months, the Company has classified the outstanding amounts under this facility,which were $7.1 million and $7.3 million as of December 31, 2017 and 2016, respectively, as trade accounts payable in the consolidated balance sheets. Asof December 31, 2017, Supplies Distributors had $0.4 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 andpayments 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 toworking 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 SuppliesDistributors, as well as a collateralized guaranty of PFSweb. Additionally, PFSweb is required to maintain a minimum Subordinated Note receivable balancefrom Supplies Distributors of $2.5 million. Borrowings under the credit facility accrue interest, after a defined free financing period, at prime rate plus 0.5%(4.75% as of December 31, 2017). The facility also includes a monthly service fee. As of December 31, 2017, the Company was in compliance with allfinancial covenants.Pursuant to IBM Credit Facility, Supplies Distributors is restricted from making any distributions to PFSweb if, after giving affect thereto, SuppliesDistributors’ would be in noncompliance with its financial covenants. Supplies Distributors has received lender approval to pay approximately $1.7 millionof dividends in 2018. Supplies Distributors paid dividends to PFSweb of $1.7 million, $1.1 million and $0.9 million in 2017, 2016 and 2015, respectively,which eliminate upon consolidation. 58PFSWEB, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued) 8. Debt and Capital Lease ObligationsOutstanding debt and capital lease obligations consist of the following (in thousands): December 31, 2017 2016 U.S. Credit Agreement: Revolving loan$13,234 $20,825 Term loan 27,000 29,438 Equipment loan 4,205 3,596 Debt issuance costs (376) (525)Master lease agreements: Capital leases 2,903 5,838 Other financing 232 439 Other 128 88 Total 47,326 59,699 Less current portion of long-term debt 9,460 7,300 Long-term debt, less current portion$37,866 $52,399U.S. Credit AgreementIn August 2015, PFSweb, Inc. and its U.S. subsidiaries entered into a credit agreement (“Credit Agreement”) with Regions Bank, as agent for itself andone or more future lenders (the “Lenders”). The Credit Agreement replaced the Company’s previously existing credit facilities with Wells Fargo Bank,National Association (“Wells Fargo”) and Comerica Bank (“Comerica”). During 2015, as contemplated by the Credit Agreement, the Credit Agreement wasexpanded to also include Bank of America N.A. and HSBC Bank USA, National Association. Under the Credit Agreement, and subject to the terms set forththerein, 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 throughAugust 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 therevolving loan facility may not exceed a borrowing base of eligible accounts receivable (as defined). As of December 31, 2017, the Company had $19.3million of available credit under the revolving loan facility. Advances under the revolving loan portion of the Credit Agreement are due and payable onAugust 5, 2020. Term loan advances amortize during the five year term of the Credit Agreement based upon scheduled percentage payments with the thenremaining outstanding balance (potentially up to 65% of the amount borrowed) due on August 5, 2020. Borrowings under the Credit Agreement accrueinterest at a variable rate based on prime rate or Libor, plus an applicable margin. As of December 31, 2017 and 2016, the weighted average interest rate onthe revolving loan facility was 4.65% and 3.25%, respectively. As of December 31, 2017 and 2016, the weighted average interest rate on the term loanfacility was 4.05% and 3.32%, respectively. In connection with the Credit Agreement, the Company paid $0.7 million of fees, which are being amortizedthrough 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 theassets 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 Agreementcontains 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 changesto capital stock ownership structure, as well as financial covenants, as defined, of a minimum consolidated fixed charge ratio and a maximum consolidatedleverage ratio. In June 2016, PFSweb also entered into a Master Agreement with Regions Bank to provide equipment loans financing for certain capitalexpenditures.Debt CovenantsTo the extent the Company or any of its subsidiaries fail to comply with its covenants applicable to its debt or inventory financing obligations,including the periodic financial covenant requirements, such as profitability and cash flow, and required level of shareholders’ equity or net worth (asdefined), the Company would be required to obtain a waiver from the lender or the lender would be entitled to accelerate the repayment of any outstandingcredit facility obligations, and exercise all other rights and remedies, including sale of collateral and enforcement of payment under the Company parentguarantee. Any acceleration of the repayment of the credit facilities may have a material adverse impact on the Company’s financial condition and results ofoperations and no assurance can be given that the Company would have the financial ability to repay all of such obligations. At December 31, 2017 and2016, the Company had restricted net assets of approximately $63.3 million and $71.6 million, respectively. As of December 31, 2017, the Company was incompliance with all debt covenants.59PFSWEB, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued) Master Lease AgreementsThe Company has various agreements that provide for leasing or financing transactions of equipment and other assets and will continue to enter intosuch arrangements as needed to finance the purchasing or leasing of certain equipment or other assets. Borrowings under these agreements, which generallyhave terms of three to five years, are generally secured by the related equipment, and in certain cases, by a Company parent guarantee.Debt and Capital Lease MaturitiesThe Company’s aggregate maturities of debt subsequent to December 31, 2017 are as follows, excluding $0.4 million in debt issuance costs thatreduce the carrying amount of the debt (in thousands): Years ended December 31, 2018$4,075 2019 3,902 2020 35,215 2021 1,034 2022 197 Total$44,423The following is a schedule of the Company’s future minimum lease payments under the capital leases, together with the present value of the netminimum lease payments as of December 31, 2017 (in thousands): Years ended December 31, 2018$2,256 2019 696 2020 80 2021 — 2022 — Total minimum lease payments$3,032 Less amount representing interest at rates ranging from 4.75% to 7.06%$(129)Present value of net minimum lease payments 2,903 Less: Current portion (2,151)Long-term capital lease obligations$752 9. Stock and Stock Options Preferred Stock Purchase RightsOn June 8, 2000, the Company’s Board of Directors declared a dividend distribution of one preferred stock purchase right (a “Right”) for each share ofthe Company’s common stock outstanding on July 6, 2000 and each share of common stock issued thereafter. Each Right entitles the registered shareholdersto purchase from the Company one one-thousandth of a share of preferred stock at an exercise price of $65, subject to adjustment. The Rights are notcurrently exercisable, but would become exercisable if certain events occurred relating to a person or group acquiring or attempting to acquire 20 percent ormore of the Company’s outstanding shares of common stock. The Rights expire 30 days after the Company’s 2018 Annual Meeting unless continuation ofthe Rights Agreement is approved by the stockholders of the Company at the 2018 Annual Meeting.Stock Compensation PlansThe Company has an Employee Stock and Incentive Plan (the “Employee Plan”), as amended and restated, under which an aggregate of 5,942,340shares of common stock have been authorized for issuance. The Employee Plan provides for the granting of incentive awards to directors, executivemanagement, key employees, and outside consultants of the Company in a variety of forms of equity-based incentive compensation, such as the award of anoption, stock appreciation right, restricted stock award, restricted stock unit, deferred stock unit, among other stock-based awards. The Company hashistorically issued service-based restricted stock and unit60PFSWEB, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued) awards, performance-based and market-based stock and unit awards (collectively “Restricted Shares”), and stock options. The Company uses newly issuedshares of common stock to satisfy awards under the Plan.The Company issues Restricted Shares to the Company’s executives and senior management, pursuant to which such employees are eligible to receivefuture grants of shares of the Company’s stock subject to various vesting and/or performance criteria. The weighted average fair value per share of RestrictedShares granted during the years ended December 31, 2017, 2016 and 2015 was $6.43, $8.73 and $10.45, respectively. The total fair value of Restricted Sharesvested under the Employee Plans was $0.5 million, $0.9 million and $3.9 million during the years ended December 31, 2017, 2016 and 2015, respectively.The underlying stock certificates for the Restricted Shares that vested December 31, 2017 are expected to be issued during the quarter ending March31, 2018. The underlying stock certificates for the Restricted Shares that vested December 31, 2016 were issued during the quarter ended March 31, 2017.Based on the Company’s 2016 financial performance, no Restricted Shares were issued under the 2016 Performance Based Share Awards.Total stock-based compensation expense was $3.3 million, $2.1 million and $4.6 million for the years ended December 31, 2017, 2016 and 2015,respectively, and was included as a component of selling, general and administrative expenses in the consolidated statements of operations. As of December31, 2017, there is $2.6 million of total unrecognized compensation costs related to non-vested share-based compensation arrangements granted under thePlan, which is expected to be recognized over a remaining weighted average period of approximately 1.5 years. This expected cost does not include theimpact of any future stock-based compensation awards.As of December 31, 2017, there were 860,256 shares available for future grants under the Plan. Each stock option or stock appreciation right awardgranted reduces the total shares available for grant by one share, while each award granted other than in the form of a stock option or stock appreciation rightreduces the shares available for grant by 1.22 shares.Stock OptionsThe rights to purchase shares under employee stock option agreements issued under the Plan typically vest over a three-year period, one-twelfth eachquarter. Stock options must be exercised within 10 years from the date of grant. Stock options are generally issued such that the exercise price is equal to themarket value of the Company’s common stock at the date of grant.The following tables summarize stock option activity under the Plans: Weighted Average Weighted Remaining Aggregate Average Contractual Intrinsic Exercise Life (in Value (in Shares Price Per Share Price years) millions) Outstanding, December 31, 2016 1,215,054 $1.01 - $15.36 $7.56 Granted 55,500 $6.69 - $8.35 $7.45 Exercised (168,823) $1.46 - $5.61 $4.56 Canceled (65,889) $1.01 - $14.66 $10.36 Outstanding, December 31, 2017 1,035,842 $1.46 - $15.36 $7.87 Exercisable, December 31, 2017 886,679 $1.46 - $15.36 $7.33 5.1 $1.5 Exercisable and expected to vest, December 31, 2017 1,027,181 $1.46 - $15.36 $7.83 5.6 $1.5 The weighted average fair value per share of options granted during the years ended December 31, 2017, 2016 and 2015 was $3.58, $5.88 and $7.91,respectively. The total intrinsic value of options exercised under the Stock Option Plans was $0.5 million, $1.9 million and $3.4 million during the yearsended December 31, 2017, 2016 and 2015, respectively.61PFSWEB, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued) The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptionsused for grants of options under the Plans: Year Ended December 31, 2017 2016 2015 Expected dividend yield — — — Expected stock price volatility46% - 50% 50% - 63% 63% - 68% Risk-free interest rate2.0% - 2.2% 1.4% - 1.9% 1.5% - 1.8% Expected life of options (years)6 6 6 The Black-Scholes option valuation model requires the input of highly subjective assumptions, including the expected life of the stock-based awardand stock-price volatility. The assumptions listed above represent management’s best estimates, but these estimates involve inherent uncertainties and theapplication of management judgment. As a result, if other assumptions had been used, the Company’s recorded and pro forma stock-based compensationexpense could have been different. In addition, the Company is required to estimate the expected forfeiture rate and only recognize expense for those sharesexpected to vest. If the Company’s actual forfeiture rate is materially different from its estimate, the share-based compensation expense could be materiallydifferent. The Company calculates the expected stock price volatility using the Company’s historical stock price during the expected term immediatelypreceding a stock option grant date. The Company has not paid dividends in the past and does not anticipate paying dividends in the future. The Companyuses the risk-free interest rates of United States Treasury securities for a comparable term as the expected life of a stock option. The expected life of optionshas been computed using the simplified method, which the Company uses as it does not believe it has established a consistent exercise pattern to accuratelyestimate the expected term of stock options.Service-Based Restricted Stock and Unit AwardsThe Company’s service-based restricted stock and unit awards are valued at the quoted market price of the Company’s common stock as of the date ofgrant and vest over a range of two to four years. Shares that do not vest on a scheduled vesting date due to a failure to satisfy vesting or performance criteriaare forfeited and do not vest in future periods.The following table summarizes the service-based restricted stock and unit award activity for the year ended December 31, 2017: Weighted Average Grant Date Shares Fair Value per Share Unvested restricted stock at December 31, 2016 14,763 $11.26 Granted 187,556 $6.46 Vested (67,546) $7.40 Canceled (22,204) $6.74 Unvested restricted stock at December 31, 2017 112,569 $6.47Performance-Based Restricted Stock and Unit AwardsPursuant to the Employee Plan, the Company grants restricted stock and unit awards that vest upon reaching certain performance targets, andindividual performance goals, which historically have been based on the Company’s financial performance, Company operating income and other financialmetrics for the current and/or future years. Such awards generally are subject to annual vesting from three to four years based upon continued employmentand the achievement of the defined performance criteria. If the target set forth in the award agreement is not met, none of the related shares will vest and anycompensation expense previously recognized will be reversed. The actual number of shares that will ultimately vest is dependent upon achieving theperformance condition or other conditions set forth in the award agreement. The Company recognizes stock-based compensation expense related toperformance awards based upon our determination of the likelihood of achieving the performance target or targets at each reporting date, net of estimatedforfeitures.62PFSWEB, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued) The following table summarizes the performance-based restricted stock and unit award activity for the year ended December 31, 2017: Weighted Average Grant Date Shares Fair Value per Share Unvested restricted stock at December 31, 2016 61,818 $6.40 Granted 226,887 $7.10 Vested — $- Canceled (223,451) $7.11 Unvested restricted stock at December 31, 2017 65,254 $6.40Market-Based Restricted Stock and Unit AwardsPursuant to the Employee Plan, the Company grants restricted stock and unit awards that vest upon the achievement of certain defined totalstockholder return targets using the companies in the Russell Micro Cap Index as a comparative group for current and/or future years. Such awards generallyare subject to annual vesting from three to four years based upon continued employment and the achievement of the defined performance criteria. The actualnumber of shares that will ultimately vest is dependent upon achieving the performance condition or other conditions set forth in the award agreement.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. The Companyreverses previously recognized compensation cost for market-based restricted stock unit awards only if the requisite service is not rendered.The following table summarized the market-based restricted stock and unit award activity for the year ended December 31, 2017: Weighted Average Grant Date Shares Fair Value per Share Unvested restricted stock at December 31, 2016 63,128 $7.83 Granted 197,880 $5.65 Vested (9,149) $5.06 Canceled (47,109) $7.37 Unvested restricted stock at December 31, 2017 204,750 $5.95 The fair value of each market-based restricted stock and unit award grant is estimated on the date of grant using a Monte-Carlo simulation with thefollowing assumptions used for grants under the Plans: Year Ended December 31, 2017 2016 2015 Expected dividend yield — — — Expected stock price volatility40.9% 34.6% 32.2% Risk-free interest rate1.4% 0.8% 1.3% Expected term (years)3 4 4 Weighted average grant date fair value$4.92-$7.65 $2.26-$5.15 $6.74-$12.87Stock UnitsEach non-employee Director of the Company’s Board of Directors (the “Board”) receives a quarterly retainer (the “Retainer”) of $25,000, payable onor about the first day of each quarter, through the issuance of an equity-based award (an “Award”) under the Employee Plan in the form of a Deferred StockUnit (a “DSU”). The number of DSUs is determined by dividing the Retainer by the immediately preceding closing price of the Common Stock. Each DSUrepresents the right to receive an equal number of shares of Common Stock upon the retirement, resignation or termination of service from the Board.The following table summarizes the DSU activity for the year ended December 31, 2017:63PFSWEB, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued) Weighted Average Grant Date Shares Fair Value per Share Unvested deferred stock at December 31, 2016 118,346 $10.77 Granted 63,960 $7.82 Vested — $- Unvested deferred stock at December 31, 2017 182,306 $9.7410. Income TaxesThe consolidated income (loss) from continuing operations before income taxes, by domestic and foreign entities, is as follows (in thousands): Year Ended December 31, 2017 2016 2015 Domestic$(2,981) $(6,362) $(9,010)Foreign 841 1,199 2,646 Total$(2,140) $(5,163) $(6,364) A reconciliation of the difference between the expected income tax expense (benefit) from continuing operations at the U.S. federal statutory corporatetax rate of 34% and the Company’s effective tax rate is as follows (in thousands): Year Ended December 31, 2017 2016 2015 Income tax benefit computed at statutory rate$(728) $(1,755) $(2,164)Foreign dividends received 591 388 193 Items not deductible for tax purposes 663 (956) 467 Change in valuation allowance (10,503) 4,285 1,940 Impact of Tax Reform Act 12,112 — — State taxes 558 568 477 Foreign exchange rate difference (102) (67) 258 Net operating loss adjustments — 183 167 Prior year return-to-provision true-up (932) (127) (21)Other 165 (152) 180 Provision for income taxes$1,824 $2,367 $1,49764PFSWEB, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued) On December 22, 2017, the United States government enacted the Tax Cuts and Jobs Act, commonly referred to as the Tax Reform Act. The TaxReform Act includes significant changes to the U.S. income tax system, including, but not limited to: a federal corporate rate reduction from 35% to 21%;limitations on the deductibility of interest expense and executive compensation; repeal of the Alternative Minimum Tax (“AMT”); full expensing provisionsrelated to business assets; creation of new minimum taxes, such as the base erosion anti-abuse tax (“BEAT”) and Global Intangible Low Taxed Income(“GILTI”) tax; and the transition of U.S. international taxation from a worldwide tax system to a modified territorial tax system, which will result in a one timeU.S. tax liability on those earnings which have not previously been repatriated to the U.S. (the “Transition Tax”). The provisional impacts of this legislationare outlined below: •Beginning January 1, 2018, the U.S. corporate income tax rate will be 21%. The Company is required to recognize the impacts of this ratechange on its deferred tax assets and liabilities in the period enacted. We remeasured certain deferred tax assets and liabilities based on therates at which they are expected to reverse in the future, which is generally 21%. However, we are still analyzing certain aspects of the TaxReform Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to newdeferred tax amounts. The provisional amount related to the remeasurement of our deferred tax balance was $12.1 million that was mostlyoffset by a change in the valuation allowance, except for a $0.6 million benefit that was recorded to our income statement related to taxamortization of goodwill. •The Transition Tax on unrepatriated foreign earnings is a tax on previously untaxed accumulated and current earnings and profits ("E&P")of the Company's foreign subsidiaries. To determine the amount of the Transition Tax, the Company must determine, among other factors,the amount of post-1986 E&P of its foreign subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. Based on theCompany’s reasonable estimate of the Transition Tax, there is no provisional Transition Tax expense. The Company has not completedaccounting for the income tax effects of the transition tax and is continuing to evaluate this provision of the Tax Reform Act. •The Tax Reform Act creates a new requirement that GILTI income earned by foreign subsidiaries must be included currently in the grossincome of the U.S. shareholder. Due to the complexity of the new GILTI tax rules, the Company is continuing to evaluate this provision ofthe Tax Reform Act. Under U.S. GAAP, the Company is permitted to make an accounting policy election to either treat taxes due on futureinclusions in U.S. taxable income related to GILTI as a current period expense when incurred or to factor such amounts into the Company'smeasurement of its deferred taxes. The Company has not yet completed its analysis of the GILTI tax rules and is not yet able to reasonablyestimate the effect of this provision of the Tax Reform Act or make an accounting policy election for the accounting treatment whether torecord deferred taxes attributable to the GILTI tax. The Company has not recorded any amounts related to potential GILTI tax in theCompany’s consolidated financial statements.The income tax effects recorded in the Company’s consolidated financial statements as a result of the Tax Reform Act are provisional in accordancewith the Securities and Exchange Commission’s Staff Accounting Bulletin number 118 (“SAB 118”) as the Company has not yet completed its evaluation ofthe impact of the new law. SAB 118 allows for a measurement period of up to one year after the enactment date of the Tax Reform Act to finalize therecording of the related tax impacts. The preliminary net tax effects recorded may differ in the future due to changes in the interpretations of the Tax Reform Act, legislative action, andchanges to estimates we have utilized to calculate the tax impact. We expect to finalize the tax analysis related to the Tax Reform Act with the filing of ourtax return and record any differences between the final and provisional amounts in the 2018 fourth quarter at that time, if any. 65PFSWEB, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued) Current and deferred income tax expense (benefit) is summarized as follows (in thousands): December 31, 2017 2016 2015 Current Domestic$3 $19 $27 State 558 568 479 Foreign 1,537 957 933 Total Current 2,098 1,544 1,439 Deferred Domestic 127 824 — State 12 3 3 Foreign (413) (4) 55 Total Deferred (274) 823 58 Provision for income taxes$1,824 $2,367 $1,497 The components of the deferred tax asset (liability) are as follows (in thousands): Year Ended December 31, 2017 2016 Deferred tax assets: Allowance for doubtful accounts$77 $606 Inventory reserve 100 185 Property and equipment 708 244 Accrued expenses 1,353 1,803 Net operating loss carryforwards 14,608 23,883 Other 5,994 6,182 22,840 32,903 Less - Valuation allowance 22,222 32,725 Total deferred tax assets 618 178 Deferred tax liabilities: Other (951) (824)Total deferred tax liabilities (951) (824)Deferred tax assets (liabilities), net$(333) $(646) Management believes that PFSweb has not established a sufficient history of earnings, on a stand-alone basis, to support the more likely than notrealization of certain deferred tax assets in excess of existing taxable temporary differences. A valuation allowance has been provided for the majority ofthese net deferred income tax assets as of December 31, 2017 and 2016. The remaining net deferred tax assets at both December 31, 2017 and 2016 primarilyrelate to the Company’s European operations and certain state tax benefits and are included in other non-current and current assets on the consolidatedbalance sheets. At December 31, 2017, net operating loss (“NOL”) carryforwards relate to taxable losses of PFSweb’s Canadian subsidiary totalingapproximately $3.6 million and PFSweb’s U.S. subsidiaries totaling approximately $61.2 million that expire at various dates from 2019 through 2036. TheU.S. NOL also includes approximately $4.4 million of NOL created before February 2006 subject to annual limits of $1.4 million, and $0.2 million acquiredSeptember 2014 subject to annual limits of $0.1 million under IRS Section 382.The Company evaluates its tax positions for potential liabilities associated with unrecognized tax benefits. The Company does not expect to recordunrecognized tax benefits in the next twelve months.For federal income tax purposes, tax years that remain subject to examination include years 2014 through 2017. However, the utilization of netoperating loss carryforwards that arose prior to 2014 remains subject to examination through the years such carryforwards are utilized. For Europe, tax yearsthat remain subject to examination include years 2015 to 2017. For Canada, tax years that remain subject to examination include years 2009 to 2017,depending on the subsidiary. For state income tax purposes, the tax years that remain subject to examination include years 2013 to 2017, depending uponthe jurisdiction in which the Company files tax returns. The Company and its subsidiaries have various income tax returns in the process of examination. TheCompany does not expect these examinations will result in unrecognized tax benefits.66PFSWEB, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued) 11. Earnings Per ShareBasic and diluted net loss per share are computed by dividing net loss by the weighted-average number of common shares outstanding for thereporting period. The following equity awards have been excluded from the calculation of diluted net loss per share as their effect would be anti-dilutive: 1.0million, 1.2 million and 1.3 million stock options for the years ended December 31, 2017, 2016 and 2015, respectively; 0.4 million, 0.2 million and 0.7million performance shares and restricted stock units for the years ended December 31, 2017, 2016 and 2015, respectively; and 0.2 million, 0.1 million and0.1 million deferred stock units for the years ended December 31, 2017, 2016 and 2015, respectively. 12. Commitments and ContingenciesThe Company leases facilities, warehouse and office space and transportation and other equipment under operating leases expiring in various yearsthrough 2026. In most cases, management expects that, in the normal course of business, leases will be renewed or replaced by other similar leases. TheCompany’s facility leases generally contain one or more renewal options.Minimum future annual rental payments under non-cancelable operating leases having original terms in excess of one year are as follows (inthousands): Operating Lease Payments Year ended December 31, 2018$10,217 2019 9,730 2020 9,168 2021 8,261 2022 7,496 Thereafter 13,888 Total$58,760 Total rental expense under operating leases approximated $11.3 million, $11.2 million and $8.2 million for the years ended December 31, 2017, 2016and 2015, respectively. The Company received municipal tax abatements in certain locations. In prior years, the Company received notice from a municipality that it did notsatisfy certain criteria necessary to maintain the abatements and that the municipal authority planned to make an adjustment to the Company’s taxabatement. The Company disputed the adjustment and such dispute has been settled with the municipality. However, the amount of additional property taxesto be assessed against the Company and the timing of the related payments has not been finalized. As of December 31, 2017, the Company believes it hasadequately accrued for the expected assessment.In April 2010, a sales employee of eCOST.com, Inc. (“eCOST”, the former name of Retail Connect) was charged with violating various federal criminalstatutes in connection with the sales of eCOST products to certain customers, and approximately $0.6 million held in an eCOST deposit account was seizedand turned over to the Office of the U.S. Attorney in connection with such activity. In August 2012, the employee pleaded guilty to a misdemeanor. Neitherthe Company nor eCOST were charged with any criminal activity. During 2015, the matter was settled, and $0.2 million of the subject funds were released tothe Company. The Company recorded a $0.4 million expense, included as a component of selling, general and administrative expenses in the consolidatedstatements of operations, to properly reflect the settlement.The Company is subject to claims in the ordinary course of business, including claims of alleged infringement by the Company or its subsidiaries ofthe patents, trademarks and other intellectual property rights of third parties. PFS is generally required to indemnify its service fee clients against any thirdparty claims asserted against such clients alleging infringement by PFS of the patents, trademarks and other intellectual property rights of third parties. In theopinion of management, any liabilities resulting from these claims, would not have a material adverse effect on the Company’s financial position or results ofoperations. 13. Segment and Geographic InformationThe Company is currently organized into two primary operating segments, which generally align with the corporate organization structure. In the firstsegment, PFSweb is a global provider of various infrastructure, technology and digital agency67PFSWEB, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued) solutions and operates as a service fee business. In the second operating segment, Business and Retail Connect, subsidiaries of the Company purchaseinventory from clients and resell the inventory to client customers. In this segment, the Company generally recognizes product revenue. Goodwill acquiredthrough acquisitions is recognized as part of the PFSweb segment. Year Ended December 31, 2017 2016 2015 Revenues (in thousands): PFSweb$283,270 $284,331 $228,504 Business and Retail Connect 63,060 68,097 76,142 Eliminations (19,505) (17,785) (16,377) $326,825 $334,643 $288,269 Income (loss) from operations (in thousands): PFSweb$(2,127) $(5,730) $(6,338)Business and Retail Connect 2,725 2,890 1,731 $598 $(2,840) $(4,607)Depreciation and amortization (in thousands): PFSweb$14,883 $15,355 $14,763 Business and Retail Connect 16 22 68 $14,899 $15,377 $14,831 Capital expenditures (in thousands): PFSweb$4,652 $8,683 $4,489 Business and Retail Connect — 30 — $4,652 $8,713 $4,489 December 31, 2017 2016 Assets (in thousands): PFSweb$157,585 $167,152 Business and Retail Connect 40,851 55,559 Eliminations (12,649) (11,375) $185,787 $211,336 68PFSWEB, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued) Geographic areas in which the Company operates include the United States, Europe (primarily Belgium and U.K.), Canada and India. Substantially allof the services performed in India support client arrangements in the United States, where the resulting revenue is reported. The following is geographicinformation by area. Revenues are attributed based on the Company’s domicile. Year Ended December 31, 2017 2016 2015 Revenues (in thousands): United States$265,144 $280,323 $243,745 Europe 55,943 47,739 42,438 Canada 5,847 7,511 6,306 India 8,747 6,260 3,311 Inter-segment Eliminations (8,856) (7,190) (7,531) $326,825 $334,643 $288,269 December 31, 2017 2016 Long-lived assets (in thousands): United States$62,257 $70,313 Europe 10,425 11,182 Canada 170 202 India 4,256 4,095 $77,108 $85,792 14. Employee Savings PlanThe Company has a defined contribution employee savings plan under Section 401(k) of the Internal Revenue Code. Substantially all full-time andpart-time U.S. employees are eligible to participate in the plan. The Company, at its discretion, may match employee contributions to the plan and also makean additional matching contribution in the form of profit sharing in recognition of the Company’s performance. The Company contributed approximately$0.5 million $0.4 million and $0.3 million during the years ended December 31, 2017, 2016 and 2015, respectively, to match an approved percentage ofemployee contributions. 15. Quarterly Data – Seasonality (Unaudited)The seasonality of the Company’s business is dependent upon the seasonality of its clients’ business and their sale of products. Management believesthat with the Company’s current client mix and their clients’ business volumes, the Company’s service fee revenue business activity and pass-throughrevenue is at its highest in the quarter ended December 31 subject to transactional volumes of its clients. Supplier Distributors’ product revenue businessactivity is generally expected to be more evenly distributed throughout the year. The Company’s fourth quarter accounted for 28.4% and 30.6% of its netrevenues for the years ended December 31, 2017 and 2016, respectively. The estimated performance-based liability related to the CrossView acquisition wasincreased by $3.7 million during the three months ended December 31, 2016 based on CrossView’s 2016 financial performance and updated projections for2017.69PFSWEB, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued) Unaudited quarterly results of operations for the years ended December 31, 2017 and 2016 were as follows (amounts in thousands, except per sharedata): Quarter Ended March 31, June 30, September 30, December 31, Year Ended 2017 Total revenues$78,768 $78,066 $77,318 $92,673 (Loss) income from operations (3,444) (1,570) 1,167 4,445 Net (loss) income (4,856) (2,596) (98) 3,586 Basic (loss) earnings per common share$(0.26) $(0.14) $(0.01) $0.19 Diluted (loss) earnings per common share$(0.26) $(0.14) $(0.01) $0.19 Quarter Ended March 31, June 30, September 30, December 31, Year Ended 2016 Total revenues$75,080 $77,199 $79,910 $102,454 Income (loss) from operations 198 (1,385) (6) (1,647)Net loss (752) (2,182) (1,039) (3,557)Basic and diluted loss per common share$(0.04) $(0.12) $(0.06) $(0.19) 16. Subsequent EventsIn January 2018, Supplies Distributors entered into Amendment No. 19 to the IBM Credit Facility. The Amended IBM Credit Facility adjusts theminimum borrowing under the facility from $13.0 million to $11.0 million and lowers the minimum PFS Subordinated Note receivable PFSweb is required tomaintain from $2.5 million to $1.0 million. 70 Item 9.Changes in and Disagreements With Accountants on Accounting and Financial DisclosureNone.Item 9A.Controls And ProceduresEvaluation of Disclosure Controls and ProceduresWe maintain a comprehensive set of disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities ExchangeAct of 1934 (the “Exchange Act”). As of December 31, 2017, an evaluation of the effectiveness of our disclosure controls and procedures was carried outunder the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based upon thatevaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, these disclosurecontrols and procedures were effective.Changes in Internal Control Over Financial ReportingDuring the period that ended on December 31, 2017, there was no change in internal control over financial reporting (as defined in Rule 13a-15(f) orRule 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.Management’s Report on Internal Control Over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) underthe Exchange Act. Our internal control over financial reporting is designed, under the supervision of our principle executive and principle financial officers,and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting andthe preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America(GAAP). Our internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonabledetail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessaryto permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance withauthorizations of our management and Board of Directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use or disposition of our assets that could have a material effect on the financial statements.We conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2017. This evaluation was basedon the framework in “Internal Control—Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)in 2013. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective canprovide only reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes inaccordance with GAAP. Also, projections of any evaluation of the effectiveness of internal control over financial reporting to future periods are subject to therisk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures maydeteriorate.Based on our evaluation under the framework in Internal Control—Integrated Framework, our Chief Executive Officer and Chief Financial Officerconcluded that internal control over financial reporting was effective as of December 31, 2017. BDO USA, LLP, an independent registered public accountingfirm, has audited the effectiveness of our internal control over financial reporting as of December 31, 2017, as stated in their report, which is included herein.71 Report of Independent Registered Public Accounting FirmShareholders and Board of Directors PFSweb, Inc.505 Millennium Dr.Allen, TX 75013Opinion on Internal Control over Financial ReportingWe have audited PFSweb, Inc. (the “Company’s”) internal control over financial reporting as of December 31, 2017, based on criteria established inInternal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). Inour opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on theCOSO criteria.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), theconsolidated balance sheets of the Company and subsidiaries as of December 31, 2017 and 2016, the related consolidated statements of operations andcomprehensive loss, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017, and the related notes andschedule, and our report dated March 16, 2018 expressed an unqualified opinion thereon.Basis for OpinionThe Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management’s Report on Internal Control over FinancialReporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a publicaccounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities lawsand the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that weplan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all materialrespects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, andtesting and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such otherprocedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.Definition and Limitations of Internal Control over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of thecompany are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on thefinancial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degreeof compliance with the policies or procedures may deteriorate./s/ BDO USA, LLPDallas, TexasMarch 16, 2018 72 Item 9B.Other InformationNone. PART IIIItem 10.Directors and Executive Officers and Corporate GovernanceInformation required by Part III, Item 10, is incorporated herein by reference to the Company’s Proxy Statement for its 2018 Annual Meeting ofShareholders (the “Proxy Statement”).Item 11.Executive CompensationInformation required by Part III, Item 11, set forth in our Proxy Statement, is incorporated herein by reference.Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersInformation required by Part III, Item 12, set forth in our Proxy Statement, is incorporated herein by reference.The following table summarizes information with respect to equity compensation plans under which equity securities of the Company are authorizedfor issuance as of December 31, 2017: (a)Number ofsecurities to be issued uponexercise ofoutstandingoptions, warrantsand rights (b)Weighted-averageexercise priceof outstandingoptions,warrants andrights (2) (c)Number ofsecuritiesremaining availablefor future issuanceunder equity compensation plans(excludingsecurities reflected in column (a) Plan category (1) Equity compensation plans approved by shareholders 1,674,027 $7.33 860,256 Equity compensation plans not approved by shareholders— —(1)See Note 9 to the Consolidated Financial Statements for more detailed information regarding the Company’s equity compensation plans.(2)Excludes 176,726 service-based restricted stock units, 279,153 performance-based and market-based restricted stock units, and 182,306 deferred stockunits. Item 13.Certain Relationships and Related Transactions and Director IndependenceInformation regarding certain of our relationships and related transactions will be included in our Proxy Statement and is incorporated herein byreference.Item 14.Principal Accounting Fees and ServicesInformation required by Part III, Item 14, set forth in our Proxy Statement, is incorporated herein by reference. 73 PART IV Item 15.Exhibits, Financial Statement Schedules (a)The following documents are filed as part of this report: 1.Financial StatementsPFSweb, Inc. and SubsidiariesReport of Independent Registered Public Accounting FirmConsolidated Balance SheetsConsolidated Statements of Operations and Comprehensive LossConsolidated Statements of Shareholders’ EquityConsolidated Statements of Cash FlowsNotes to Consolidated Financial StatementsFinancial Statement SchedulesSchedule I – Condensed Financial Information of RegistrantSchedule II – Valuation and Qualifying AccountsAll other schedules are omitted because the required information is not present in amounts sufficient to require submission of the schedule orbecause the information required is included in the financial statements or notes thereto. 2.Exhibits ExhibitNumber Description of Exhibits 3.1 (1) Amended and Restated Certificate of Incorporation of PFSweb, Inc. 3.1.1 (12) Certificate of Amendment to Amended and Restated Certificate of Incorporation of PFSweb, Inc. 3.1.2 (20) Certificate of Amendment to Certificate of Incorporation of PFSweb, Inc. 3.1.3 (23) Certificate of Amendment to Amended and Restated Certificate of Incorporation of PFSweb, Inc. 3.1.4 (32) Certificate of Amendment to Amended and Restated Certificate of Incorporation of PFSweb, Inc. 3.1.5 (15) Amendment to the Amended and Restated By-Laws of PFSweb, Inc. 3.1.6 (26) Amendment to the Amended and Restated By-Laws of PFSweb, Inc. 3.2 (1) Amended and Restated Bylaws. 3.2.3 (32) Amendment to the Amended and Restated By-Laws of PFSweb, Inc. 4.1 (18) Rights Agreement, dated as of June 8, 2000, between the Company and ChaseMellon Shareholder Services, LLC. 4.1 (19) Amendment No. 1 to Rights Agreement, dated as of May 30, 2008 between the Company and Mellon Investor Services LLC, assuccessor to ChaseMellon Shareholder Services, L.L.C., as rights agent. 4.1 (25) Amendment No. 2 to Rights Agreement, dated as of May 24, 2010 between the Company and Mellon Investor Services LLC, assuccessor to ChaseMellon Shareholder Services, L.L.C., as rights agent. 4.1 (26) Amendment No. 3 to Rights Agreement, dated as of July 2, 2010 between the Company and Mellon Investor Services LLC, as successorto ChaseMellon Shareholder Services, L.L.C., as rights agent. 4.1 (29) Amendment No. 4 to Rights Agreement, dated as of May 15, 2013 between the Company and Computershare Shareowner Services LLC(formerly known as Mellon Investor Services LLC,) as successor to ChaseMellon Shareholder Services, L.L.C., as rights agent. 4.1 (37) Amendment No. 5 to Rights Agreement, dated as of June 18, 2015 between the Company and Computershare, Inc., successor toComputershare Shareowner Services LLC (formerly known as Mellon Investor Services LLC,) as successor to ChaseMellon ShareholderServices, L.L.C., as rights agent.74 ExhibitNumber Description of Exhibits 4.1 (38) Amendment No. 6 to Rights Agreement, dated as of July 30, 2015 between the Company and Computershare, Inc., ComputershareShareowner Services LLC (formerly known as Mellon Investor Services LLC,) as successor to ChaseMellon Shareholder Services, L.L.C.,as rights agent. 10.1 (11) Amendment 6 to Agreement for Inventory Financing. 10.2 (10) Amendment 5 to Amended and Restated Platinum Plan Agreement. 10.3 (10) Agreement for IBM Global Financing Platinum Plan Invoice Discounting Schedule. 10.4 (10) Amendment No. 5 to Agreement for Inventory Financing. 10.5 (1) Industrial Lease Agreement between Shelby Drive Corporation and Priority Fulfillment Services, Inc. 10.6 (1) Lease Contract between Transports Weerts and Priority Fulfillment Services Europe B.V. 10.7 (2) Form of Change of Control Agreement between the Company and certain of its executive officers. 10.8 (3) Agreement for Inventory Financing by and among Business Supplies Distributors Holdings, LLC, Supplies Distributors, Inc., PriorityFulfillment Services, Inc., PFSweb, Inc., Inventory Financing Partners, LLC and IBM Credit Corporation. 10.9 (3) Amended and Restated Collateralized Guaranty by and between Priority Fulfillment Services, Inc. and IBM Credit Corporation. 10.10 (3) Amended and Restated Guaranty to IBM Credit Corporation by PFSweb, Inc. 10.11 (3) Subordinated Demand Note by and between Supplies Distributors, Inc. and Priority Fulfillment Services, Inc. 10.12 (4) Form of Executive Severance Agreement between the Company and certain of its executive officers. 10.12.1 (21) Form of Amendment to Executive Severance Agreement. 10.12.2 (21) Form of Amendment to Change in Control Severance Agreement. 10.13 (5) Amendment to Agreement for Inventory Financing by and among Business Supplies Distributors Holdings, LLC, Supplies Distributors,Inc., Priority Fulfillment Services, Inc., PFSweb, Inc., Inventory Financing Partners, LLC and IBM Credit Corporation. 10.14 (6) Amendment to Agreement for Inventory Financing by and among Business Supplies Distributors Holdings, LLC, Supplies Distributors,Inc., Priority Fulfillment Services, Inc., PFSweb, Inc., and IBM Credit LLC. 10.15 (7) Second Amendment to Industrial Lease Agreement between ProLogis North Carolina Limited Partnership and Priority FulfillmentServices, Inc. 10.16 (7) Modification, Ratification and Extension of Lease between Shelby Drive Corporation and Priority Fulfillment Services, Inc. 10.17 (8) Amendment 4 to Agreement for Inventory Financing by and among Business Supplies Distributors Holdings, LLC, SuppliesDistributors, Inc., Priority Fulfillment Services, Inc., PFSweb, Inc., and IBM Credit LLC. 10.18 (8) Form of Modification to Executive Severance Agreement. 10.19 (9) Industrial Lease Agreement by and between Industrial Developments International, Inc. and Priority Fulfillment Services, Inc. 10.20 (9) Guaranty by PFSweb, Inc. in favor of Industrial Developments International, Inc. 10.21 (13) Amendment 7 to Agreement for Inventory Financing. 10.22 (13) Amendment 6 to Amended and Restated Platinum Plan Agreement. 10.23 (13) Agreement for IBM Global Financing Platinum Plan Invoice Discounting Schedule. 10.24 (14) Amendment 8 to Agreement for Inventory Financing.75 ExhibitNumber Description of Exhibits 10.25 (14) Amendment 7 to Amended and Restated Platinum Plan Agreement. 10.26 (14) Agreement for IBM Global Financing Platinum Plan Invoice Discounting Schedule. 10.27 (16) Second Amendment to Industrial Lease Agreement by and between Industrial Property Fund VI, LLC and Priority Fulfillment Services,Inc. 10.28 (17) Amendment 9 to Agreement for Inventory Financing. 10.29 (17) Amendment 8 to Amended and Restated Platinum Plan Agreement. 10.30 (17) Agreement for IBM Global Financing Platinum Plan Invoice Discounting Schedule. 10.31 (22) Amendment 10 to Agreement for Inventory Financing. 10.32 (22) Amendment 9 to Amended and Restated Platinum Plan Agreement. 10.33 (22) Agreement for IBM Global Financing Platinum Plan Invoice Discounting Schedule. 10.34 (23) Amended and Restated 2005 Employee Stock and Incentive Plan of PFSweb, Inc. 10.35 (24) Eighth Amended and Restated Notes Payable Subordination Agreement by and between Priority Fulfillment Services, Inc., SuppliesDistributors, Inc. and IBM Credit Corporation. 10.36 (24) Amendment 11 to Agreement for Inventory Financing. 10.37 (24) Amendment 10 to Amended and Restated Platinum Plan Agreement. 10.38 (24) Agreement for IBM Global Financing Platinum Plan Invoice Discounting Schedule. 10.39 (27) Amendment 12 to Agreement for Inventory Financing. 10.40 (27) Amendment 11 to Amended and Restated Platinum Plan Agreement. 10.41 (27) Agreement for IBM Global Financing Platinum Plan Invoice Discounting Schedule. 10.42 (28) Lease agreement by and between Binyan Realty LP and Priority Fulfillment Services, Inc. 10.43 (28) Lease Guaranty by PFSweb, Inc. in favor of Binyan Realty LP. 10.44 (28) Lease Agreement dated December 8, 2011, between CCI-Millennium, L.P. and Priority Fulfillment Services, Inc. 10.45 (28) Guaranty of PFSweb, Inc. to CCI-Millennium, L.P. 10.46 (28) Amendment 13 to Agreement for Inventory Financing. 10.47 (30) First Amendment to Industrial Lease Agreement dated May 7, 2013 by and between US Industrial REIT II and Priority FulfillmentServices, Inc. 10.48 (31) Agreement, dated as of May 15, 2013, by and among PFSweb, Inc. and Privet Fund LP, Privet Fund Management LLC, Ryan Levensonand Benjamin Rosenzweig. 10.49 (32) Modification, Ratification and Extension of Lease dated February 28, 2014 between Southpark Distribution Center Inc., (successor-in-interest to Shelby Drive Corporation) and Priority Fulfillment Services, Inc. 10.50 (34) Amendment 15 to Agreement for Inventory Financing dated March 28, 2014 by and among Business Supplies Distributors Holdings,LLC, Supplies Distributors, Inc., Priority Fulfillment Services, Inc., PFSweb, Inc., and IBM Credit LLC. 10.51 (35) Ninth Amended and Restated Notes Payable Subordination Agreement by and between Priority Fulfillment Services, Inc., SuppliesDistributors, Inc. and IBM Credit Corporation. 10.52 (36) Form of 2015 Company Performance-Based Restricted Stock Unit Award Agreement. 10.53 (36) Form of 2015 Individual Performance-Based Restricted Stock Unit Award Agreement. 10.54 (36) Form of 2015 Performance Shares Award Agreement.76 ExhibitNumber Description of Exhibits 10.55 (37) Credit Agreement dated August 5, 2015 by and among Priority Fulfillment Services, Inc., PFSweb, Inc., and certain Subsidiaries andAffiliates, Incremental Commitment Lenders and Regions Bank. 10.56 (37) Asset Purchase Agreement by and among CrossView, Inc., Cardinal Asset Acquisition Corp., PFSweb, Inc., and Shareholders ofCrossView, Inc. 10.57 (37) Amendment 16 to Agreement for Inventory Financing by and among IBM Credit LLC and Business Supplies Distributors Holdings,LLC, Supplies Distributors, Inc., Priority Fulfillment Services Inc., and PFSweb, Inc. 10.58 (38) First Incremental Loan Commitment Increase Agreement dated August 21, 2015 by and among Priority Fulfillment Services, Inc.,PFSweb, Inc., and certain Subsidiaries and Affiliates, Incremental Commitment Lenders and Regions Bank. 10.59 (38) Second Incremental Loan Commitment Increase Agreement dated August 21, 2015 by and among Priority Fulfillment Services, Inc.,PFSweb, Inc., and certain Subsidiaries and Affiliates, Incremental Commitment Lenders and Regions Bank. 10.60 (39) Lease agreement dated March 17, 2016 by and between Stateline J, LLC and Priority Fulfillment Services, Inc. 10.61 (39) Guaranty dated March 21, 2016 by PFSweb, Inc., in favor of Stateline J, LLC. 10.62 (39) Deed of Sub-Lease dated December 31, 2015 by and between Milestone Buildcon Private Limited and PFSweb Global Services PrivateLimited. 10.63 (40) Lease agreement dated June 30, 2016 by and between US Industrial Reit III – Midwest and Priority Fulfillment Services, Inc. 10.64 (41) Second Amendment to Lease agreement dated October 20, 2016 by and between Stateline J, LLC and Priority Fulfillment Services, Inc. 10.65 (41) Lease Extension and Amending agreement dated May 31, 2016 by and between M&R Commercial Properties, Inc. and PriorityFulfillment Services of Canada, Inc. 10.66 (41) First Amendment to Lease agreement dated September 16, 2016 by and between Binyan Realty, LP and Priority Fulfillment Services,Inc. 10.67 (41) Second Amendment to Lease agreement dated September 16, 2016 by and between Binyan Realty, LP and Priority Fulfillment Services,Inc.10.68 (42) Expansion Agreement and Amendment to Lease agreement dated June 20, 2016 by and between 2145312 Ontario, Inc. and PriorityFulfillment Services, Inc.10.69 (42) Settlement and Release Agreement between Priority Fulfillment Services, Inc. and Cindy Almond.10.70 (43) Form of 2017 STI Company Performance Based Cash Award.10.71 (43) Form of 2017 STI Company Performance Based Share Award.10.72 (43) Form of 2017 LTI Time Based Restricted Stock Unit Award.10.73 (43) Form of 2017 LTI Non- Executive Time and Performance Based Restricted Stock Unit Award.10.74 (43) Form of 2017 LTI TSR Executive Performance Based Share Award.10.75 (46) Sixth Amendment to Lease Agreement by and between Western B. South MS, LLC and Priority Fulfillment Services, Inc. dated August14, 2017.10.76 (46) Amendment to Lease by and between GPT Stateline Road Owner LLC and Priority Fulfillment Services, Inc. dated September 12, 2017.10.77 (47) Amendment 19 to Agreement for Inventory Financing. 21 (47) Subsidiary Listing. 23.1 (47) Consent of BDO USA, LLP, Independent Registered Public Accounting Firm. 31.1 (47) Certifications of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350.77 ExhibitNumber Description of Exhibits 31.2 (47) Certifications of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350. 32.1 (47) Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS (47) XBRL Instance Document. 101.SCH (47) XBRL Taxonomy Extension Schema. 101.CAL (47) XBRL Taxonomy Extension Calculation Linkbase. 101.DEF (47) XBRL Taxonomy Extension Definition Linkbase. 101.LAB (47) XBRL Taxonomy Extension Label Linkbase. 101.PRE (47) XBRL Taxonomy Extension Presentation Linkbase. (1)Incorporated by reference from PFSweb, Inc. Registration Statement on Form S-1 (Commission File No. 333-87657).(2)Incorporated by reference from PFSweb, Inc. Form 10-K for the fiscal year ended March 31, 2001.(3)Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended March 31, 2002.(4)Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended June 30, 2002.(5)Incorporated by reference from PFSweb, Inc. Form 10-K for the year ended December 31, 2002.(6)Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended March 31, 2003.(7)Incorporated by reference from PFSweb, Inc. Form 10-K for the year ended December 31, 2003.(8)Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended March 31, 2004.(9)Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended September 30, 2004.(10)Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended March 31, 2005.(11)Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended June 30, 2005.(12)Incorporated by reference from PFSweb, Inc. Form 10-K for the year ended December 31, 2005.(13)Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended March 31, 2006.(14)Incorporated by reference from PFSweb, Inc. Form 10-K for the year ended December 31, 2006.(15)Incorporated by reference from PFSweb, Inc. Report on Form 8-K filed on November 13, 2007.(16)Incorporated by reference from PFSweb, Inc. Form 10-K for the year ended December 31, 2007.(17)Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended March 31, 2008.(18)Incorporated by reference from PFSweb, Inc. Registration Statement on Form 8-A filed on June 14, 2000.(19)Incorporated by reference from PFSweb, Inc. Report on Form 8-K filed on May 30, 2008.(20)Incorporated by reference from PFSweb, Inc. Report on Form 8-K filed on June 2, 2008.(21)Incorporated by reference from PFSweb, Inc. Report on Form 8-K filed on January 6, 2009.(22)Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended March 31, 2008.(23)Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended June 30, 2009.(24)Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended March 31, 2010.(25)Incorporated by reference from PFSweb, Inc. Report on Form 8-K filed on May 25, 2010.(26)Incorporated by reference from PFSweb, Inc. Report on Form 8-K filed on July 2, 2010.(27)Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended March 31, 2011.(28)Incorporated by reference from PFSweb, Inc. Form 10-K for the year ended December 31, 2011.(29)Incorporated by reference from PFSweb, Inc. Report on Form 8-K filed on May 15, 2013.(30)Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended March 31, 2013.(31)Incorporated by reference from PFSweb, Inc. Report on Form 8-K filed on May 20, 2013.(32)Incorporated by reference from PFSweb, Inc. Report on Form 8-K filed on July 18, 2013.(33)Incorporated by reference from PFSweb, Inc. Form 10-K for the year ended December 31, 2013.(34)Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended March 31, 2014.(35)Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended June 30, 2014.(36)Incorporated by reference from PFSweb, Inc. Report on Form 8-K filed on April 6, 2015.(37)Incorporated by reference from PFSweb, Inc. Report on Form 8-K filed on June 19, 2015.(38)Incorporated by reference from PFSweb, Inc. Report on Form 8-K filed on July 30, 2015.(39)Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended June 30, 2015.(40)Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended September 30, 2015.(41)Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended March 31, 2016.(42)Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended June 30, 2016.78 (43)Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended September 30, 2016.(44)Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended March 31, 2017.(45)Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended June 30, 2017.(46)Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended September 30, 2017.(47)Filed herewith.79 SCHEDULE IPFSWEB, INC. AND SUBSIDIARIESCONDENSED FINANCIAL INFORMATION OF REGISTRANTBALANCE SHEETS – PARENT COMPANY ONLY(In thousands) December 31, December 31, 2017 2016 ASSETS: Cash and cash equivalents$618 $144 Total current assets 618 144 Investment in subsidiaries 54,981 52,725 Total assets$55,599 $52,869 LIABILITIES: Performance-based contingent payments$3,967 $2,405 Total current liabilities 3,967 2,405 Performance-based contingent payments, less current portion — 1,678 Payable to subsidiaries 10,335 8,503 Total liabilities 14,302 12,586 SHAREHOLDERS’ EQUITY: Preferred stock— — Common stock 19 19 Additional paid-in capital 150,614 146,286 Accumulated deficit (109,281) (105,317)Accumulated other comprehensive income 70 (580)Treasury stock (125) (125)Total shareholders’ equity 41,297 40,283 Total liabilities and shareholders’ equity$55,599 $52,869 The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto. 80 SCHEDULE IPFSWEB, INC. AND SUBSIDIARIESCONDENSED FINANCIAL INFORMATION OF REGISTRANTSTATEMENTS OF OPERATIONS – PARENT COMPANY ONLYFOR THE YEARS ENDED DECEMBER 31(In thousands) 2017 2016 2015 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and administrative expenses$5,451 $3,008 $5,594 Equity in net (income) loss of consolidated subsidiaries (1,611) 4,408 2,130 Total operating expenses 3,840 7,416 7,724 Interest expense 124 114 137 NET LOSS$(3,964) $(7,530) $(7,861)The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto. 81 SCHEDULE IPFSWEB, INC. AND SUBSIDIARIESCONDENSED FINANCIAL INFORMATION OF REGISTRANTSTATEMENTS OF CASH FLOWS – PARENT COMPANY ONLYFOR THE YEARS ENDED DECEMBER 31(In thousands) 2017 2016 2015 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss$(3,964) $(7,530) $(7,861)Adjustments to reconcile net loss to net cash used in operating activities: Stock-based compensation expense 3,333 2,111 4,637 Non-cash compensation expense 128 — — Change in performance-based contingent payments 2,242 1,011 891 Equity in net (income) loss of consolidated subsidiaries (1,611) 4,408 2,130 Net cash provided by (used) in operating activities 128 — (203)CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions, net of cash acquired — (8,359) (31,619)Net cash used in investing activities — (8,359) (31,619)CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock 770 1,203 1,483 Payments on performance-based contingent payments (2,004) (6,354) — Increase in payable from subsidiaries, net 1,580 13,349 30,089 Net cash provided by financing activities 346 8,198 31,572 NET INCREASE (DECREASE) IN CASH 474 (161) (250)CASH AND CASH EQUIVALENTS, beginning of period 144 305 555 CASH AND CASH EQUIVALENTS, end of period$618 $144 $305The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto. 82 SCHEDULE IIPFSWEB, INC. AND SUBSIDIARIESVALUATION AND QUALIFYING ACCOUNTSFOR THE YEARS ENDED DECEMBER 31(Amounts in thousands) Additions Balance at Charges to Charges to Balance Beginning Cost and Other at end of Period Expenses Accounts Deductions of Period Year Ended December 31, 2017: Allowance for doubtful accounts$494 $(26) $— $(95) $373 Reserve for excess and obsolete inventory$568 $58 $— $(284) $342 Year Ended December 31, 2016: Allowance for doubtful accounts$600 $4 $— $(110) $494 Reserve for excess and obsolete inventory$739 $57 $— $(228) $568 Year Ended December 31, 2015: Allowance for doubtful accounts$447 $187 $— $(34) $600 Reserve for excess and obsolete inventory$768 $93 $— $(122) $739 Item 16. Form 10-K Summary None. 83 SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed onits behalf by the undersigned, thereunto duly authorized. By:/s/Thomas J. Madden Thomas J. Madden,Executive Vice President and Chief Financial and AccountingOfficer POWER OF ATTORNEYKNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints MichaelWilloughby and Thomas J. Madden, and each of them, either of whom may act without the joinder of the other, as his true and lawful attorneys-in-fact and agents with full power of substitution and re-substitution, for him or her and in his or her name, place and stead, in any and all capacities,to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and all documents in connectiontherewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power andauthority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents andpurposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or his or theirsubstitute or substitutes, may lawfully do or cause to be done or by virtue hereof.Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theRegistrant and in the capacities and on the dates indicated. Signature Title Date /s/Michael WilloughbyMichael Willoughby Chief Executive Officer (Principal Executive Officer) March 16, 2018 /s/Thomas J. MaddenThomas J. Madden Executive Vice President and Chief Financial and Accounting Officer(Principal Financial and Accounting Officer) March 16, 2018 /s/James F. Reilly Chairman of the Board March 16, 2018James F. Reilly /s/Monica Luechtefeld Director March 16, 2018Monica Luechtefeld /s/David I. Beatson Director March 16, 2018David I. Beatson /s/Benjamin Rosenzweig Director March 16, 2018Benjamin Rosenzweig /s/Shinichi Nagakura Director March 16, 2018Shinichi Nagakura /s/Peter J. Stein Director March 16, 2018Peter J. Stein 84 Exhibit 10.77 AMENDMENT NO. 19TOAGREEMENT FOR INVENTORY FINANCING This Amendment No. 19 ("Amendment") to the Agreement for Inventory Financing is made as of January 24, 2018 byand among IBM Credit LLC, a Delaware limited liability company ("IBM Credit"), Business Supplies Distributors Holdings, LLC, a limitedliability company duly organized under the laws of the state of Delaware (“Holdings”), Supplies Distributors, Inc., a corporation duly organizedunder the laws of the state of Delaware ("Borrower"), Priority Fulfillment Services, Inc., a corporation duly organized under the laws of the stateof Delaware (“PFS”) and PFSweb, Inc., a corporation duly organized under the laws of the state of Delaware (“PFSweb”) (Borrower, Holdings, PFS,PFSweb, and any other entity that executes this Agreement or any Other Document, including without limitation all Guarantors, are eachindividually referred to as a “Loan Party” and collectively referred to as “Loan Parties”). RECITALS: A.Each Loan Party and IBM Credit have entered into that certain Agreement for Inventory Financing dated as of March 29,2002 (as amended, modified, restated or supplemented from time to time, the "Agreement"); and B.The parties have agreed to modify the Agreement as more specifically set forth below, upon and subject to the terms andconditions set forth herein. AGREEMENT NOW THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which ishereby acknowledged, Borrower, the other Loan Parties and IBM Credit hereby agree as follows: Section 1. Definitions.All capitalized terms not otherwise defined herein shall have the respective meanings set forth in the Agreement. Section 2. Amendment. A.Section 8.14 of the Agreement is hereby amended by amending this Section to read in its entirety as follows: “8.14. Loans. Neither Borrower nor Holdings will make any loans, advances, contributions or payments of money or goods to any Subsidiary,Affiliate or parent company or to any officer, director or stockholder of such Loan Party or of any such company (except for compensation forpersonal services actually rendered), except for transactions which comply with the terms of this Agreement and short term loans not to exceed$2,000,000.00 from Borrower to PFS”. B.Attachment A to the Agreement is hereby amended by deleting such Attachment A in its entirety and substituting, in lieu thereof, theAttachment A attached hereto. Such new Attachment A shall be effective as of the date specified in the new Attachment A. The changescontained in the new Attachment A include, without limitation, the following: (i) Section II. Fees, Rates and Repayment Terms, subsection (A) is amended and restated in its entirety to read as follows: (A)Credit Line: Eleven Million Dollars ($11,000,000.00); SDIAmend19 Page of 01_23_18  Exhibit 10.77 (ii) Section II. Fees, Rates and Repayment Terms, subsection (E) is amended and restated in its entirety to read as follows: (E)Collateral Insurance Amount: Eleven Million Dollars ($11,000,000.00) Section 3. Conditions of Effectiveness of Amendment. This Amendment shall become effective upon the receipt by IBM Credit of: (i) thisAmendment which shall have been authorized, executed and deliveredby each of the parties hereto and IBM Credit shall have received a copy of a fully executed Amendment, and (ii) a subordinated demand noteissued in favor of IBM Credit, in form and substance satisfactory to IBM Credit, in the amount of One Million Dollars ($1,000,000.00). Section 3.1 Representations and Warranties. Each Loan Party makes to IBM Credit the following representations and warranties all of whichare material and are made to induce IBM Credit to enter into this Amendment. Section 3.2 Accuracy and Completeness of Warranties and Representations. All representations made by the Loan Party in the Agreementwere true and accurate and complete in every respect as of the date made, and, as amended by this Amendment, all representations made by theLoan Party in the Agreement are true, accurate and complete in every material respect as of the date hereof, and do not fail to disclose anymaterial fact necessary to make representations not misleading. Section 3.3 Violation of Other Agreements and Consent. The execution and delivery of this Amendment and the performance and observanceof the covenants to be performed and observed hereunder (a) do not violate or cause any Loan Party not to be in compliance with the terms of anyagreement to which such Loan Party is a party, and (b) require the consent of any Person. Section 3.4 Litigation. Except as has been disclosed by the Loan Parties to IBM Credit in writing, there is no litigation, proceeding, investigationor labor dispute pending or threatened against any Loan Party, which, if adversely determined, would materially adversely affect the Loan Party'sability to perform such Loan Party's obligations under the Agreement and the other documents, instruments and agreements executed inconnection therewith or pursuant hereto. Section 3.5 Enforceability of Amendment. This Amendment has been duly authorized, executed and delivered by each Loan Party and isenforceable against each Loan Party in accordance with its terms. Section 4. Ratification of Agreement. Except as specifically amended hereby, all of the provisions of the Agreement shall remain unamendedand in full force and effect. Each Loan Party hereby ratifies, confirms and agrees that the Agreement, as amended hereby, represents a valid andenforceable obligation of such Loan Party, and is not subject to any claims, offsets or defenses. Section 5. Ratification of Guaranty and Notes Payable Subordination Agreement. Each of Holdings, PFSweb and PFS hereby ratify andconfirm their respective guaranties in favor of IBM Credit and agree that such guaranties remain in full force and effect and that the term“Liabilities”, as used therein include, without limitation the indebtedness liabilities and obligations of the Borrower under the Agreement as amendedhereby. Section 6. Governing Law. This Amendment shall be governed by and interpreted in accordance with the laws which govern the Agreement. Section 7.Counterparts and Electronic Copies. This Amendment may be executed in any number of counterparts, each of which shallbe an original and all of which shall constitute one agreement. Customer acknowledges that IBM Credit may maintain a copy of this Amendment inelectronic form and agrees that a copy reproduced from such electronic form or any other reliable means (for example, photocopy, image orfacsimile) shall in all respects be considered equivalent to an original. SDIAmend19 Page of 01_23_18  Exhibit 10.77 IN WITNESS WHEREOF, each Loan Party has read this entire Amendment, and has caused its authorized representatives to executethis Amendment and has caused its corporate seal, if any, to be affixed hereto as of the date first written above. IBM Credit LLCSupplies Distributors, Inc. By: /s/ Leticia Campos______________________ By: /s/ Thomas J. Madden___________________ Print Name: Leticia Campos_________________ Print Name: Thomas J. Madden______________ Title: Commercial Financing Operations Manager Title: Chief Financial Officer__________________ Business Supplies Distributors Holdings, LLC Priority Fulfillment Services, Inc. By: __________________ as Managing Member By: /s/ Thomas J. Madden___________________ By: /s/ Thomas J. Madden___________________ Print Name: Thomas J. Madden______________ Print Name: Thomas J. Madden______________ Title: Chief Financial Officer__________________ Title: Chief Financial Officer__________________ PFSweb, Inc. By: /s/ Thomas J. Madden___________________ Print Name: Thomas J. Madden______________ Title: Chief Financial Officer__________________ SDIAmend19 Page of 01_23_18  Exhibit 10.77 Attachment A (“Attachment A") TOAGREEMENT FOR INVENTORY FINANCINGDATED MARCH 29, 2002 EFFECTIVE DATE OF THIS ATTACHMENT A: January 24, 2018 SECTION I. BORROWER/LOAN PARTIES: (A) BORROWER: ORGANIZATION NO. (Assigned byState of Org). Supplies Distributors, Inc. 3416326 (B) ADDITIONAL LOAN PARTIES: Business Supplies Distributors Holdings, LLC3410894 Priority Fulfillment Services, Inc. 2606094 PFSweb,Inc.3062550 SECTION II. FEES, RATES AND REPAYMENT TERMS: (A)Credit Line: Eleven Million Dollars ($11,000,000.00); (B)Borrowing Base: (i) 100% of the Borrower's inventory in the Borrower's possession as of the date ofdetermination as reflected in the Borrower's most recent Collateral Management Reportconstituting Products (other than service parts) financed through a Product Advance by IBMCredit, so long as (1) IBM Credit has a first priority security interest in such Products and (2)such Products are in new and un-opened boxes; (ii) 80% of price protection payments, credits, discounts, incentive payments, rebated andrefunds relating to IBM Products (“Accounts”) in the aggregate not to exceed Two Million FiveHundred Thousand Dollars ($2,500,000.00) provided that (i) Borrower obtains (and provides toIBM Credit along with the monthly Collateral Management Report required under Section 7.1(O)) from IBM written confirmation (a) acknowledging the obligation of IBM to pay such amountor that they have received the billing from the Borrower, (b) stating the date the amount is dueto be paid and (c) IBM waiving its right to setoff such amounts owed to Borrower with anyamount Borrower may owe to IBM, (ii) such Accounts do not remain unpaid for more than sixty(60) days from the date the obligation of IBM occurred; and (iii) such Accounts are delivereddirectly to IBM Credit. (C)Product Financing Charge: Prime Rate plus 0.50% (D)Product Financing Period: 90 days (E)Collateral Insurance Amount: Eleven Million Dollars ($11,000,000.00) (F)PRO Finance Charge: Prime Rate plus 0.50% (G)Delinquency Fee Rate: Prime Rate plus 6.500% (H)Free Financing Period Exclusion Fee: Product Advance multiplied by 0.25% (I)Other Charges: (i) Monthly Service Fee: $1,000.00 SECTION III. FINANCIAL COVENANTS: SDIAmend19 Page of 01_23_18  Exhibit 10.77 (A) Definitions: The following terms shall have the following respective meanings in this Attachment. All amounts shall be determined inaccordance with generally accepted accounting principles (GAAP). “Consolidated Net Income” shall mean, for any period, the net income (or loss), after taxes, of Borrower on a consolidated basis forsuch period determined in accordance with GAAP. “Current” shall mean within the ongoing twelve month period. “Current Assets” shall mean assets that are cash, restricted cash applicable to cash received into a lockbox from collections of tradeaccounts receivable or expected to become cash within the ongoing twelve months. “Current Liabilities” shall mean payment obligations resulting from past or current transactions that require settlement within the ongoingtwelve month period. All indebtedness to IBM Credit and Congress shall be considered a Current Liability for purposes of determiningcompliance with the Financial Covenants. All subordinated indebtedness shall not be considered current liabilities. “EBITDA” shall mean, for any period (determined on a consolidated basis in accordance with GAAP), (a) the Consolidated Net Incomeof Borrower for such period, plus (b) each of the following to the extent reflected as an expense in the determination of suchConsolidated Net Income: (i) the Borrower's provisions for taxes based on income for such period; (ii) Interest Expense for such period;and (iii) depreciation and amortization of tangible and intangible assets of Borrower for such period. “Fixed Charges” shall mean, for any period, an amount equal to the sum, without duplication, of the amounts for such as determined forthe Borrower on a consolidated basis, of (i) scheduled repayments of principal of all Indebtedness (as reduced by repayments thereonpreviously made), (ii) Interest Expense, (iii) capital expenditures (iv) dividends, (v) leasehold improvement expenditures and (vi) allprovisions for U.S. and non U.S. Federal, state and local taxes. “Fixed Charge Coverage Ratio” shall mean the ratio as of the last day of any fiscal period of (i) EBITDA as of the last day of such fiscalperiod to (ii) Fixed Charges. “Interest Expense” shall mean, for any period, the aggregate consolidated interest expense of Borrower during such period in respect ofIndebtedness determined on a consolidated basis in accordance with GAAP, including, without limitation, amortization of original issuediscount on any Indebtedness and of all fees payable in connection with the incurrence of such Indebtedness (to the extent included ininterest expense), the interest portion of any deferred payment obligation and the interest component of any capital lease obligations. “Long Term” shall mean beyond the ongoing twelve month period. “Long Term Assets” shall mean assets that take longer than a year to be converted to cash. They are divided into four categories:tangible assets, investments, intangibles and other. “Long Term Debt” shall mean payment obligations of indebtedness which mature more than twelve months from the date ofdetermination, or mature within twelve months from such date but are renewable or extendible at the option of the debtor to a date morethan twelve months from the date of determination. “Net Profit after Tax” shall mean Revenue plus all other income, minus all costs, including applicable taxes. SDIAmend19 Page of 01_23_18  Exhibit 10.77 “Revenue” shall mean the monetary expression of the aggregate of products or services transferred by an enterprise to its customersfor which said customers have paid or are obligated to pay, plus other income as allowed. “Subordinated Debt” shall mean Borrower's indebtedness to third parties as evidenced by an executed Notes Payable SubordinationAgreement in favor of IBM Credit. “Tangible Net Worth” shall mean Total Net Worth minus goodwill. “Total Assets” shall mean the total of Current Assets and Long Term Assets. For the purpose of calculating Total Assets for Borrower, the accumulated earnings and foreign currency translation adjustments applicable to Borrower’sCanadian and European subsidiaries are excluded. “Total Liabilities” shall mean the Current Liabilities and Long Term Debt less Subordinated Debt, resulting from past or currenttransactions, that require settlement in the future. “Total Net Worth” (the amount of owner's or stockholder's ownership in an enterprise) is equal to Total Assets minus TotalLiabilities. For the purpose of calculating Total Net Worth of Borrower, following shall be excluded (i) accumulated earnings andunrealized foreign currency translation adjustments applicable to Borrower’s Canadian and European subsidiaries and (ii) all income andlosses applicable to foreign currency adjustments for each period but not excluding such foreign currency adjustments for annualperiods that must comply with GAAP. “Working Capital” shall mean Current Assets minus Current Liabilities. (B) 1. Borrower will be required to maintain the following financial ratios, percentages and amounts as of the last day of the fiscal periodunder review (quarterly, annually) by IBM Credit: Covenant Covenant Requirement(i)Revenue on an Annual Basis* (i.e. the currentfiscal year-to-date Revenue annualized)to Working CapitalGreater than Zero andEqual to or Less than 37.0:1.0 * Annualized Revenue from intercompany sales areexcluded from this calculation. (ii)Net Profit after Tax to Revenue**Equal to or Greater than0.10 percent **Excluding all income and losses applicable to (a)100% ownership in Canadian and Europeansubsidiaries and (b) foreign currency adjustmentsfor each period but not excluding such foreigncurrency adjustments for annual periods that mustcomply with GAAP and excluding revenue fromintercompany sales. (iii)Total Liabilities to Tangible Net Worth***Greater than Zero andEqual to or Less than 7.0:1.0 ***Accumulated earnings and unrealized foreigncurrency translation adjustments applicable toBorrower’s Canadian and European subsidiaries areexcluded from calculation of Borrower’s TotalAssets and Total Net Worth. SDIAmend19 Page of 01_23_18  Exhibit 10.77 2.Business Supplies Distributors Holdings, LLC will be required to maintain the following financial ratios, percentages and amounts as ofthe last day of the fiscal period under review (quarterly, annually) by IBM Credit: Covenant Covenant Requirement(i)Revenue on an Annual Basis (i.e. the currentfiscal year-to-date Revenue annualized)to Working CapitalGreater than Zero andEqual to or Less than 37.0:1.0(ii)Net Profit after Tax to Revenue* *Excluding all (a) income and losses applicable toforeign currency adjustments for each period butnot excluding such foreign currency adjustmentsfor annual periods that must comply with GAAPand (b) revenue from intercompany sales.Equal to or Greater than0.10 percent(iii)Total Liabilities to Tangible Net WorthGreater than Zero andEqual to or Less than 7.0:1.0 SDIAmend19 Page of 01_23_18 Exhibit 21 NameJurisdictionPriority Fulfillment Services, Inc.DelawarePriority Fulfillment Services of Canada, Inc.OntarioPFSweb BV SPRLBelgiumPFSweb Bulgaria EOODBulgariaPFSweb GmbHGermanyPFSweb Global Services Private LimitedIndiaBusiness Supplies Distributors Holdings, LLCDelawareSupplies Distributors, Inc.DelawareSupplies Distributors of Canada, Inc.OntarioSupplies Distributors S.A.BelgiumPFSweb Retail Connect, Inc.,DelawareLiveAreaLabs, Inc.WashingtonREV Solutions Inc.DelawareREVTECH Solutions India Private LimitedIndiaCrossView, Inc.Conexus, LimitedDelawareEnglandModa Superbe LimitedEngland  Exhibit 23.1Consent of Independent Registered Public Accounting FirmPFSweb, Inc.Allen, TexasWe hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-201674) and Form S-8 (Nos. 333-201675 and 333-164973) of PFSweb, Inc. and Subsidiaries of our reports dated March 16, 2018, relating to the consolidated financial statements and financial statementschedules, and the effectiveness of PFSweb, Inc.'s internal control over financial reporting, which appear in this Form 10-K for the year ended December 31,2017. /s/ BDO USA, LLPDallas, TexasMarch 16, 2018  Exhibit 31.1CERTIFICATIONS OF PRINCIPAL EXECUTIVE OFFICERPURSUANT TO 18 U.S.C. SECTION 1350I, Michael Willoughby, certify that:1. I have reviewed this annual report on Form 10-K of PFSweb, Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrantand have:a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensurethat material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared;b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles;c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectivenessof the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant’s internal control over financial reporting; and5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likelyto adversely affect the registrant’s ability to record, process, summarize, and report financial information; andb)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control overfinancial reporting. Date: March 16, 2018 By: /s/ MICHAEL WILLOUGHBY Chief Executive Officer  Exhibit 31.2CERTIFICATIONS OF PRINCIPAL FINANCIAL OFFICERPURSUANT TO 18 U.S.C. SECTION 1350I, Thomas Madden, certify that:1. I have reviewed this annual report on Form 10-K of PFSweb, Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrantand have:a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensurethat material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared;b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles;c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectivenessof the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant’s internal control over financial reporting; and5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likelyto adversely affect the registrant’s ability to record, process, summarize, and report financial information; andb)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control overfinancial reporting. Date: March 16, 2018 By: /s/ THOMAS J. MADDEN Chief Financial Officer  Exhibit 32.1CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF2002Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), eachof the undersigned officers of PFSweb, Inc. (the “Company”), does hereby certify that:The Annual Report on Form 10-K for the year ended December 31, 2017 (the “Form 10-K”) of the Company fully complies with the requirements ofSection 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and the information contained in the Form 10-K fairly presents, in all materialrespects, the financial condition and results of operations of the Company as of, and for, the periods presented in the Form 10-K. March 16, 2018 /s/ Michael Willoughby Michael Willoughby Chief Executive Officer March 16, 2018 /s/ Thomas J. Madden Thomas J. Madden Chief Financial OfficerThe foregoing certification is being furnished as an exhibit to the Form 10-K pursuant to Item 601(b)(32) of Regulation S-K and Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and, accordingly, is not being filed as part of theForm 10-K for purposes of Section 18 of the Securities Exchange Act of 1934, as whether made before or after the date hereof, regardless of any generalincorporation language in such filing.A signed original of this written statement required by Section 906 has been provided to PFSweb, Inc. and will be retained by PFSweb, Inc. and furnished tothe Securities and Exchange Commission or its staff upon request. 

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