UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
☒
☐
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 000-28275
PFSWEB, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
505 Millennium Drive, Allen, Texas
(Address of principal executive offices)
75-2837058
(I.R.S. Employer
Identification Number)
75013
(Zip code)
Registrant’s telephone number, including area code
972-881-2900
Securities registered pursuant to Section 12(b) of the Act: None
Securities 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 the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such fi les). 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 be
contained, 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 this
Form 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
growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the
Exchange Act.
Large accelerated filer
Non-accelerated filer
☐
☐
Accelerated filer
Smaller reporting company
Emerging Growth
☒
☒
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
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, 2018 (based on the closing price as reported by the
National Association of Securities Dealers Automated Quotation System) was $147,258,058.
There were 19,260,829 shares of the registrant’s Common Stock outstanding as of March 8, 2019.
DOCUMENTS INCORPORATED BY REFERENCE
Information 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 its 2019 annual meeting of shareholders, which is expected to be filed with the Securities and Exchange Commission by April 30, 2019.
INDEX
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART 1
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosure
PART II
Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Selected Consolidated Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosure About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors and Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
Certain Relationships and Related Transactions and Director Independence
Principal Accountant Fees and Services
PART IV
Item 15.
Item 16.
Signatures
Exhibits, Financial Statement Schedules
Form 10-K Summary
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FORWARD-LOOKING STATEMENTS CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934, including statements that involve expectations, plans or intentions (such as those relating to future business,
future results of operations or financial condition, new or planned features or services, or management strategies). You can identify these forward-looking
statements by words such as “may,” “will,” “would,” “should,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “intend,” “plan,” “potential,” “intend,”
“project,” and other similar expressions. These forward-looking statements involve risks and uncertainties, and may include assumptions as to how we may
perform in the future. Although we believe the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee these
expectations will actually be achieved. In addition, some forward-looking statements are based upon assumptions about future events that may not prove to be
accurate. Therefore, our actual results may differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties
include, among others, those discussed in “Item 1A: Risk Factors” of this Annual Report on Form 10-K, as well as in our consolidated financial statements,
related notes, and the other information appearing elsewhere in this report and our other filings with the Securities and Exchange Commission, or the SEC.
We do not intend, and undertake no obligation, to update any of our forward-looking statements after the date of this report to reflect actual results or future
events or circumstances. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
PART I
Item 1.
General
Business
Unless otherwise indicated, all references to “PFSweb,” “the Company,” “we,” “us” and “our” refer to PFSweb, Inc., a Delaware corporation, and
its subsidiaries; references to “Supplies Distributors” refer to our subsidiary, Supplies Distributors, Inc., and its subsidiaries.
PFSweb, Inc., was incorporated in 1999 in the state of Delaware and maintains its corporate headquarters in Allen, Texas. All of our services are
provided through our direct and indirect wholly-owned subsidiaries as noted above. In December 1999, PFSweb consummated an initial public offering of its
common stock and became listed for trading on The NASDAQ Exchange under the symbol “PFSW.”
PFSweb is a Global Commerce Services Company. We manage the entire customer shopping experience for major branded manufacturers and retailers
through two business segments, LiveArea Professional Services and PFS Operations. The LiveArea Professional Services segment provides services to
support or improve the digital shopping experience of shopping online, such as strategic commerce consulting, design and digital marketing services and
technology services. The PFS Operations segment provides services to support or improve the physical, post-click experience, such as logistics and
fulfillment, customer care and order to cash services including distributed order orchestration and payment services. We offer our services on an à la carte
basis or as a complete end-to-end solution. Major brands and other companies turn to us to optimize their customer experiences and enhance their traditional
and online business channels, creating commerce without compromise.
The services we offer are primarily organized into the following categories:
LiveArea Professional Services
•
•
•
Strategic Commerce Consulting Services
Design and Digital Marketing Services
Technology Services
PFS Operations
•
•
•
Order to Cash
Fulfillment
Customer Care
Our executive offices are located in Allen, Texas which is where we also maintain our primary technology operations and provide professional
services. We operate state-of-the-art contact centers in Dallas, Texas, Richmond Hill, Ontario, Canada, Liège, Belgium, and Basingstoke, United Kingdom
(“U.K.”). We lease warehouse facilities of approximately 1.6 million square feet in Memphis, Tennessee, Southaven, Mississippi, Richmond Hill, Ontario,
Canada, Liège, Belgium, and Southampton, U.K. allowing us to provide global distribution solutions. Additionally, we engage in business development
activities and provide additional professional services and/or technology services from our offices in Minnesota, New York, North Carolina, Washington,
U.K., Bulgaria and India.
GLOBAL COMMERCE SOLUTIONS
LiveArea Professional Services and PFS Operations serve 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 their business strategies, allowing them to focus on their core competencies. Leveraging our technology, expertise and
proven methodologies, we enable clients to develop and deploy new products and implement new business strategies or address new distribution channels
rapidly and efficiently through our optimized solutions. 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 infrastructure partner to provide the mission critical operations required to build and manage their business solution. Together,
we not only help our clients define new ways of doing business, but also provide them the technology, physical infrastructure and professional resources
necessary to quickly implement their business 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 wide
array of industries, including fashion apparel and accessories, fragrance and beauty products, consumer packaged goods (“CPG”), home furnishings and
housewares, coins and collectibles, and technology products. These clients turn to LiveArea Professional Services and PFS Operations for help in addressing
a variety of business needs that include strategic
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consulting, commerce creative design and development, customer satisfaction and retention, time-definite logistics, vendor managed inventory and
integration, supply chain 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 costs associated 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 optimal
customer experiences. On behalf of the brands we serve, we strive to increase and enhance sales and market growth, bolster customer satisfaction and
customer retention, and drive costs out of the business through operations and technology related efficiencies. As both a virtual and a physical infrastructure
for 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 and
take advantage of opportunities without lengthy integration and implementation efforts. We have readily available advanced technology and physical
infrastructure that is flexible in its design, which facilitates quick integration and implementation. The solution is designed to allow our clients to
deliver consistent quality service as transaction volumes grow and also to handle daily and seasonal peak periods. Through our international locations,
our clients expand the global reach of their products.
Improve the Customer Experience. We enable our clients to provide their customers with a high-touch, positive buying experience thereby
maintaining and promoting brand loyalty. Through our use of advanced technology, we can respond directly to customer inquiries by e-mail, voice or
data communication and assist them with online ordering and product information. We believe we offer our clients a “world-class” level of service,
including high-touch customer care service centers, detailed Customer Relationship Management (“CRM”) reporting and exceptional order accuracy.
We have significant experience in the development of eCommerce storefronts that allows us to recommend features and functions easily navigated and
understood by our clients’ customers. Our technology platform is designed to ensure high levels of reliability and fast response times for our clients’
customers. Because of our technology, our clients benefit from being able to offer the latest in customer communication and response conveniences to
their customers. Our fulfillment facilities are designed for efficient multi-brand operation with an emphasis on creating branded fulfillment
experiences featuring custom packaging, gift wrapping, extensive personalization options and build-to-order and build-to-stock kitting.
Minimize Investment and Improve Operating Efficiencies. One of the most significant benefits outsourcing provides is the ability to transform fixed
costs into variable costs. By eliminating the need to invest in a fixed capital infrastructure, our clients’ costs typically become more directly correlated
with volume increases or declines. Further, as volume increases drive the demand for greater infrastructure or capacity, we are able to quickly deploy
additional resources. We provide services to multiple clients, which enables us to offer our clients economies of scale and resulting cost efficiency that
they may not have 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 in levels of automation, security surveillance, quality control processes and transportation carrier interfaces that are typically
outside the scale of investment that our clients might be able to cost justify on their own. These additional capabilities can provide our clients the
benefits of enhanced operating performance 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 eCommerce
technologies together in a single, integrated, Payment Card Industry (“PCI”) certified order to cash offering. Powered by leading enterprise-class
software solutions, our order to cash platform is seamlessly integrated into a variety of eCommerce platforms and supporting technology components
and services 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 flexible
technology to control customer shopping experiences regardless of where they shop. Deploying ship from store, in-store pick up, pop-up distribution
centers, or mobile point of sale capabilities are just a few examples of how we can enable brands to create a dynamic and unique omni-channel
shopping experience.
We believe our highest value proposition is achieved when our clients engage our full end-to-end suite of services from both LiveArea Professional
Services and PFS Operations. However, we provide our clients with the opportunity to customize their solution by selecting only certain services from our
offering in à la carte fashion. We believe this flexibility and willingness to create a customized solution for each client differentiates us from our competition.
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LiveArea Professional Services
Through the LiveArea Professional Services business segment, we bring together a comprehensive portfolio of commerce-focused professional
services. Key offerings include strategic commerce consulting, design, digital marketing and technology development services. Delivering a boutique
approach and world-class capabilities, we create digital experiences that deliver tangible results.
Our strategic approach addresses the entire customer journey. From brand strategy and digital experiences to the day-to-day mechanics of digital
marketing services, we help brands stand apart from competitors, connect with customers and drive revenue. Our end-to-end, omni-channel expertise supports
a holistic marketing strategy, from awareness and attraction to conversion and optimization.
Strategic Commerce Consulting Services
Our strategic commerce consulting practice leverages our commerce business and operational capabilities along with extensive vertical expertise to
assist our clients in identifying new opportunities for channel revenue/margin growth, omni-channel alignment, digital transformation, new customer/segment
acquisition, market expansion and cost savings. We also monitor emerging technologies and trends, with an eye to measuring business impact and alignment
with our clients’ end goals. With a focus on actionable strategy, we seek to optimize clients’ commerce investments while anticipating competitive
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 for
companies looking to innovate. We work closely with client stakeholders to develop strategic and prioritization frameworks that drive change while providing
the ability to pivot as threats or opportunities are identified. In particular, our consultants focus on three key areas that enable clients to remain competitive
while taking a leadership position: commerce ecosystem management (including omni-channel alignment), digital opportunity analysis, and an agile
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 help clients
formulate strategies and tactics that work. Our consultants look to leverage existing assets, personnel, and processes wherever possible while identifying
where investment is needed. We also offer roadmaps and initiative “backlogs” prioritized for impact, including guidance on taking a phased approach. Our
recommendations balance the need for achieving timely return on investment (“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 where
or when they shop, in-store or online. We offer an array of services that help retailers meet consumer expectations across the commerce lifecycle, from
customer 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. We similarly
consult with retailers on leveraging digital tools within the store environment, whether enabling sales associates to “save the sale” in-store or enhancing
consumers’ overall experiences.
Digital Opportunity Audits. Our consultants’ help clients identify where new digital platforms, tools, and technologies can provide competitive
advantage or bridge gaps in their current operations and capabilities. Our digital opportunity audits can take into account the competitive landscape, industry
trends, digital best practices across verticals, and cost models, providing helpful benchmarks and flagging areas of opportunity. These audits may be
conducted periodically to track changes and emerging technologies and measure effectiveness.
Organizational/Operational Readiness. Many clients require organizational readiness consulting to ensure they can effectively utilize the platforms
and tools we provide. Providing readiness consulting is crucial to driving client satisfaction and confidence when adopting commerce platforms, particularly
when business users are given new capabilities and may need to adapt existing business processes. We also provide organizational design consulting, which is
often implemented in a phased approach as the client’s commerce channel grows; this may include recommendations regarding which functions to outsource
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 our
expertise implementing all market-leading solutions. We assist clients through a process matching their requirements to platform capabilities, measure their
operational ability to utilize the platforms under consideration, and provide total cost of ownership (TCO) analysis comparing initial and ongoing costs for
everything from software licensing models to ongoing maintenance and upgrades.
Design and Digital Marketing Services
Design. We conceive and design client solutions with a deliberate focus on balancing creativity and usability. We create flagship digital experiences for
global brands, offering full-service creative design and production services for a range of digital applications. Our advanced customer experience design
offerings include concept development, visual design, user experience design, copywriting, interactive development and content creation.
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User Experience. We architect fully responsive branded commerce sites and tools that eliminate transactional friction, reduce cognitive load and
improve the shopping experience. We specialize in taking advantage of platform functionality to add one-of-a-kind interactions and designing guided 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 pixel perfection.
We turn digital designs into beautiful, functioning experiences that look and behave the way they were intended across screens and devices of all types, sizes
and systems. We also use motion and interactive accents to provide users with guidance and an enhanced user experience.
Search Engine Optimization (“SEO”) & Paid Search. We seek to drive traffic by maintaining an in-depth knowledge of the ever-changing best
practices for search engine optimization. We provide insight and advice on algorithm changes, content gaps, multi-language global expansion and
competitors’ search efforts. From implementation to ongoing 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. We
can 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 to payments,
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 to
continually optimize our client’s site. By combining analytics with the capabilities of the platform, we plan and execute A/B tests, optimize onsite searches,
and create personalized experiences to maximize the impact of the marketing and merchandising efforts. From an audit of an existing site to building a
conversion optimization roadmap, we help our clients generate more revenue and provide an ever-improving customer experience that turns shoppers into
buyers.
Storefront Management. Through proven strategic merchandising methodologies, we create personalized shopping experiences that drive conversion
and increase revenue. With specialized expertise in dynamic merchandising, we can draw on each customer’s history to connect these buyers with the right
products and content at the right time. Our day-to-day storefront operations include product and category setup, sorting rules definition, promotion
configuration and price adjustment. Working within predetermined guidelines, we incorporate best practices and make strategic decisions to achieve each
client’s goals.
Email Marketing. Combining technology with proven strategies, we elevate and optimize email programs to develop personalized customer
relationships. We create custom customer journeys through dynamic email, automated remarketing, automations, and subscriber segmentation. Our data
focused approach reduces the costs of customer acquisition, inspires brand loyalty, and increases ROI through both larger basket sizes and higher customer
lifetime value.
Digital Analytics. We provide more than snapshots of user activity through the usual charts and dashboards. We mine all available data and use
advanced analysis to identify opportunities within the customer journey that will allow brands to improve the overall user experience and generate increased
business. With a focus on never-ending improvement, we use the data to continuously pinpoint actions that will strengthen customer relationships and drive
results across marketing channels.
Technology Services
LiveArea's Technology Services builds world-class commerce websites that are designed to maximize revenue opportunities. Built by a seasoned
group of professionals, we combine strategy and technology to create innovative user experiences. From high-fashion apparel to CPG, our portfolio consists
of brands 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 teams
are comprised of industry-leading professionals that bring eCommerce and web development best practices to our clients’ custom solutions. Once live, our
team 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 enable
our clients’ growth. We employ a proven development methodology, led by a highly-qualified team of solutions architects, web developers, project managers,
and quality assurance (“QA”) specialists. When paired with our strategic commerce consulting services and our design / user experience (“UX”) and digital
marketing 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 are
delivering quality services for our joint clients. We also work to achieve higher-level partner status with each provider to demonstrate our expertise and
experience for each practice.
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Managed Services. The right people, processes and tools are essential to maintaining a high-performance commerce environment. LiveArea’s
Managed Services delivers all three elements integrated into an array of services to optimize, manage, and protect commerce technology. Our work doesn't
stop when we launch a commerce site. Our Managed Services team provides real-time management and monitoring to ensure our clients’ sites are always
operating at peak 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
commerce infrastructure always available, always operating at peak performance. Our automation tools facilitate fast, accurate code deployment – whether
applying a software patch or launching new code.
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 quality
assurance 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.
PFS Operations
Through the PFS Operations business segment, we provide the operational activities required and expected of the world's leading brands. Our
solutions support direct-to-consumer (“DTC”), business-to-business (“B2B”), and retail sales channels. We have DTC and B2B experience in customizing
solutions to meet the unique nuances of our clients’ internal finance, customer care, and supply chain operations. With approximately 1.6 million square feet
of leased or managed distribution space and approximately 1,100+ contact center seats across two continents, we have the global infrastructure to meet the
operational needs of our eCommerce and traditional B2B clients.
As the operational backbone of the online and B2B shopping experience, we focus on three core actions: to deliver, to communicate, and to fulfill the
promise behind each brand we support.
The majority of our clients are the merchants of record for the orders we process through our infrastructure on their behalf. For these clients, we do not
own the inventory or the resulting accounts 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 these
arrangements, we record either product revenue or service fee revenue, may own the accounts receivable and inventory and we may be compensated for all or
a 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 our
facility. In other of these client relationships, the client retains ownership of inventory in our facility and we purchase the inventory immediately prior to each
individual customer sales transaction. In all of these cases, we seek inventory financing from our clients in the form of extended terms, working capital
programs or marketing funds to help offset the working capital requirements that follow accounts receivable and inventory ownership.
Order to Cash Service
Our order to cash service provides our clients with distributed order orchestration and payment processing. Our order to cash service features an
Oracle-based, custom, scalable Distributed Order Management System (“D-OMS”) built for DTC and B2B and order processing with a variety of fully-
integrated DTC and B2B payment processing and fraud management platforms and technologies. Our order to cash service provides interfaces that allow for
real-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 customer contact centers, allowing for the processing of orders
through shopping cart, phone, fax, mail, email, live chat and other order receipt methods. As the information backbone for our total supply chain solution, our
order to cash service can be used on a stand-alone basis or in conjunction with our other business infrastructure offerings, including contact center or order
fulfillment services. In addition, for the B2B market, our order to cash service provides a variety of order receipt methods that facilitate commerce within
various stages of the supply chain. Our service provide the ability for both our clients and their customers to track the status of orders at any time. Our
services are transparent to our clients’ customers and are seamlessly integrated with our clients’ internal system platforms and websites. By synchronizing
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 order
tracking, allocation of product based on timing of online purchase and business rules, the ratio of customer inquiries to purchases, average order
sizes and order response time;
B2B supply chain management information critical to evaluating inventory positioning, for the purpose of improving inventory turns, and
assessing product flow-through and end-user demand;
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•
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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
Technology Collaboration. We have created a suite of technology services that enable buyers and suppliers to fully automate their business
transactions within their supply chain using our order management interfaces. Our collaboration technologies operate in an open systems environment and
feature the use of industry-standard Extensible Markup Language (“XML”) and Service-Oriented Architecture (“SOA”) web services, enabling customized
eCommerce solutions with minimal changes to a client’s systems or our systems. The result is a faster implementation process. We also support information
exchange methods, such as Applicability Statement 2 (“AS2”), Secure File Transfer Protocol (“SFTP”), Electronic Data Interchange (“EDI”), Message Queue
Series (“MQ Series”), Application Link Enabling (“ALE”), and Representational State Transfer / Simple Object Access Protocol (“REST/SOAP”) over Hyper
Text Transfer Protocol Secure (“HTTPS”).
Information Management. We have the ability to communicate with and transfer information to and from our clients through a wide variety of
technology services, including real-time web service enabled data interfaces, file transfer methods and electronic data interchange. Our distributed order
orchestration systems are designed to 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 clients are able to utilize inventory and order information for use in analyzing sales and marketing trends and
introducing new products. We also offer customized reports and data analyses based upon specific client needs to assist them in their budgeting.
Payments. Protecting our clients’ brand with secure payment processing and fraud management services is critical to a successful operation. We also
provide flexible global payment options as well as gift cards, B2B invoicing and VAT services.
Our payment services are divided into two major financial management 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 XML communications
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 web
site 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-edge
fraud protection services and risk management systems, we can offer high levels of security and reduce the level of risk for client transactions.
Fulfillment
We design advanced distribution operations that streamline our clients’ supply chain process and offer a flexible fulfillment model. Our fulfillment
team understands the value of the delivery experience by specializing in creating branded solutions with gift wrap, product personalization and other value-
added services. Our distribution centers are located in the Memphis, Tennessee area, Toronto, Canada, Basingstoke, U.K., and Liege, Belgium to provide
centrally located 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. We
receive inventory in our distribution centers, verify shipment accuracy, unpack and audit packages (a process that includes spot-checking a percentage of the
inventory to validate piece counts and check for damages that may have occurred during shipping, loading and unloading). Upon request, we inspect for other
damages or defects, which may include checking fabric, stitching and zippers for soft goods, or ‘testing’ power-up capabilities for electronic items as well as
product specifications. We generally stock for sale within one business day of unloading. We pick, pack and ship customer orders and can provide customized
packaging, customized monogramming, personalized laser engraving, high volume shrink packaging, inserts and promotional literature for distribution 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 in
product receiving processing to ensure accuracy, as well as an automated package routing and a pick-to-light paperless order fulfillment system. Our
advanced 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.
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In addition to our advanced distribution systems, our proprietary pick-to-light carts, stationary pick-to-light areas and conveyor system controls
provide real time productivity 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 of
technologies 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 optimize
transportation costs. Our facilities and systems are equipped with multi-carrier functionality, allowing us to integrate with all leading package carriers and
provide a comprehensive freight and transportation management offering.
We offer reverse logistics management services, including issuing return authorizations, return carrier shipping labels, receipt of product, crediting
customer accounts and disposition of returned product. We also leverage strategic partnerships to provide our clients with access to distributed returns centers
that collect, consolidate, report on and forward to our central facilities returned product allowing us to accelerate credits to our clients’ customers, reduce
freight costs for our client, improve customer service and reduce complexity and cost in our facilities from handling inbound returns.
Facility Operations and Management. Our facilities management service offering includes distribution facility design and optimization, business
process reengineering and ongoing staffing and management. Our expertise in supply chain management, logistics and customer-centric fulfillment operations
can provide our clients with cost reductions, process improvements and technology-driven efficiencies.
Pop-Up Distribution Centers. Temporary fulfillment centers allow our clients’ eCommerce fulfillment networks to flex during peak periods with all
the benefits of regional distribution nodes, without the long-term capital costs. We can deploy full pick-pack-ship operations within weeks that run off a
simple Wi-Fi network and our proprietary distributed order management technology. Deployed into any real estate space with Wi-Fi, this solution allows for
temporary forward stock allocation to alleviate volume from the primary fulfillment center, shorten delivery times and lower shipping costs.
Kitting and Assembly Services. Our expanded kitting and assembly services enable our clients to reduce the time and costs associated with managing
multiple 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 our distribution
facilities or co-located elsewhere. We also offer customized light manufacturing and supplier relationship management.
We work with clients to re-sequence certain supply chain activities to aid in an inventory postponement strategy. We can provide kitting and assembly
services and build-to-stock thousands of units daily to stock in a Just-in-Time (“JIT”) environment. This service, for example, can entail the procurement of
packaging materials including retail boxes, foam inserts and anti-static bags. These raw material components may be shipped to us from domestic or overseas
manufacturers, and we will build the finished SKUs to stock for the client. Also included is the custom configuration of high-end printers and servers. This
strategy allows manufacturers to make a smaller investment in base unit inventory while meeting changing customer demand for highly customizable
products.
Our standard capabilities include: build-to-order, build-to-stock, expedited orders, passive and active electrostatic discharge (“ESD”) controls, product
labeling, serial number generation, marking and/or capture, lot number generation, asset tagging, bill of materials (“BOM”) processing, SKU-level pricing
and billing, manufacturing and metrics reporting, first article approval processes and comprehensive quality controls.
Kitting and inventory hub services enable clients to collapse supply chains into the minimal steps necessary to prepare product for distribution to any
channel, including wholesale, mass merchant retail or direct to consumer. Clients no longer have to employ multiple providers or require suppliers to consign
multiple inventory caches for each channel. We offer our clients the opportunity to consolidate operations from a channel standpoint, as well as from a
geographic perspective. Our integrated, global information systems and international locations support business needs worldwide.
Customer Care
Our internal contact center operations are focused on providing essential services such as order entry, returns authorization, product inquiry and order
tracking. These operations also include our iCommerce Agent (“iCA”), a customizable web-based application featuring powerful customer service tools for
accessing 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 iCA application, our unique technology leverages the client’s website investment by
wrapping the Customer Service Application around the existing website. Using iCA, agents provide customer service functions, such as placing 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, and our order processing
system, allowing full visibility into customer history and customer trends. Through each of our customer touch-points, information can be analyzed and
processed for current or future use in business evaluation product effectiveness and positioning, and supply chain planning. Through this fully integrated
system, we are able to provide a complete customer care solution in a contact center or on a license basis to our clients’ owned or outsourced contact centers.
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Customer Assistance. An important feature of evolving commerce is the ability for the customer to communicate with a live customer service
representative. Our experience has been that many consumers tell us they visited a web location for information, but not all of those consumers chose to place
their order online. Our contact center services utilize features that integrate voice, e-mail, standard mail and live chat communications to respond to and
handle customer inquiries. Our customer care representatives answer various questions, acting as virtual representatives of our clients’ organization, regarding
order status, shipping, billing, returns and product information and availability as well as a variety of other questions. We utilize technology that allows us to
route each customer contact automatically to the appropriate customer care representative who is individually trained in the clients’ business and products.
Our contact centers are flexibly designed so that our customer care representatives can handle either several different clients and products in a shared
agent environment, thereby creating economy of scale benefits for our clients, or through a highly customized dedicated agent support model 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 the
unique quality standards of each client for each contact type. We continually monitor the quality of our customer care representatives against each client
quality standard and use the results to provide agent-level feedback to continually improve the customer care experience. Clients may participate in the
quality process by remotely listening to calls, assisting in the grading of recorded calls and providing ongoing direction to improve quality standards through
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 time
of 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 handle
high volume, low complexity calls.
INDUSTRY INFORMATION AND COMPETITIVE LANDSCAPE
Industry Overview
Business activities in the public and private sectors continue to operate in an environment of rapid technological advancement, increasing competition
and continuous pressure to improve operating and supply chain efficiency while decreasing costs. We currently see the following trends within the industry:
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Manufacturers strive to restructure their supply chains to maximize efficiency and reduce costs in both B2B and DTC markets, and to create a
variable-cost supply chain able to support the multiple, unique needs of each of their initiatives, including traditional retail and eCommerce.
Companies in a variety of industries seek outsourcing as a method to address one or more business functions that are not within their core
business competencies, to reduce operating costs or to improve the speed or cost of implementation.
Retailers, both traditional and eCommerce only, partner with providers that offer them the most flexibility both short and long-term. While the
end-to-end model is not as popular compared to 5 years ago, it is still a viable option for brands that are not selling online today in a particular
geography. However, many companies today seek to diversify their eCommerce operations across in-house capabilities and outsourced
components on an a la carte basis.
The “seamless customer experience” is a major industry trend that drives the motivation and goals of retailers and brand manufacturers. As
consumers desire a shopping experience that blends sales channels, the integration and flexibility of front and back-end systems is more critical.
Supply Chain Management Trend
As companies maintain focus on improving their businesses and balance sheet financial ratios, significant efforts and investments continue to be made
identifying ways to maximize supply chain efficiency and extend supply chain processes. Working capital financing, vendor managed inventory, supply chain
visibility software solutions, distribution channel skipping, direct-to-consumer eCommerce sales initiatives and complex upstream supply chain collaborative
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 toward
increased omni-channel business activity will impact their traditional DTC commerce business models. Ship-from-store, pick-up-in-store, return-to-store and
other omni-channel capabilities are becoming increasingly important processes to accommodate. We believe manufacturers will look to outsource their non-
core competency functions to support this modified business model. We believe companies will continue to strategically plan for the impact that 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 within eCommerce channels.
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Manufacturers, as buyers of materials, are also imposing new business practices and policies on their supplier partners to shift the normal supply chain
costs and risks associated with inventory ownership away from their own balance sheets. Through techniques like Vendor Managed Inventory or Consigned
Inventory Programs, manufacturers are asking their suppliers, as a part of the supplier selection process, to provide capabilities where the manufacturer need
not 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. To
be successful for all parties, business models such as these often require a sophisticated collection of technological capabilities that allow for complete
integration and collaboration of the information technology environments of both the buyer and supplier. For example, for an inventory unit to arrive at the
precise required moment in the manufacturing facility, it is necessary for the Manufacturing Resource Planning systems of the manufacturer to integrate with
the CRM systems of the supplier. When hundreds of supplier partners are involved, this process can become quite complex and technologically challenging.
Buyers and suppliers are seeking solutions that utilize XML based protocols and traditional EDI standards to ensure an open systems platform that promote
easier technology integration in these collaborative solutions. In addition to these traditional integration and collaboration technology environments, we are
observing the emergence of a variety of solutions utilizing blockchain technologies and we will continue to evaluate the appropriate time to include emerging
technology solutions into our service offering.
Outsourcing Trend
In response to growing competitive pressures and technological innovations, we believe many companies, both large and small, are focusing their
critical resources on the core competencies of their business and utilizing eCommerce service providers to accelerate their business plans in a cost-effective
manner and perform non-core business functions. Outsourcing can provide many key benefits, including the ability to:
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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, contact center management, credit
card processing, 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 their
internal systems. Additionally, the delivery of these multiple services must be transparent to the customer and enable the client to maintain brand recognition
and customer loyalty. Furthermore, traditional commerce outsourcers are frequently providers of domestic-only services versus international solutions. As a
result, 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 to
provide infrastructure solutions, brand name companies must find a company that can provide the same quality performance and superior experience their
customers 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.
Competition
We face competition from many different sources depending upon the type and range of services requested by a potential client. Many other
companies 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. For professional
services, we compete against Global Commerce Service Providers, and Specialists, 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 with the in-house operations of our potential clients. Occasionally, the operations departments of potential clients believe they can perform the same
services we do, at similar quality levels and costs, while others are reluctant to outsource business functions that involve direct customer contact. We cannot
be certain we will be able to compete successfully against these or other competitors in the future.
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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
of customized services, thereby eliminating any need for our clients to coordinate these services from many different providers. We believe we can
differentiate ourselves by offering our clients a very broad range of eCommerce and business process services that address, in many cases, the entire value
chain, from demand to delivery.
We also compete on the basis of many other important additional factors, including:
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experience supporting a specific product vertically;
operating performance and reliability;
ease of implementation and integration;
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 continually
evolving, and we may not be able to compete successfully against current and future competitors.
Competitive Landscape
Global Commerce Service Providers. We compete with companies providing broad strategic solutions for digital transformation along with commerce
implementation services including Accenture Digital, Capgemini/LCG, Cognizant, Deloitte Digital, HCL, IBM Global Business Services, Infosys, and
Publicis.Sapient.
Commerce Specialist Service Providers. We compete with companies providing eCommerce platform-specific services including Astound Commerce,
BORN Group, diconium, Gorilla Group/Wunderman Commerce, Isobar and Optaros.
End-to-End Commerce. In North America, we compete with full service commerce providers such as BrandShop, Branded Online, Newgistics/Pitney
Bowes, and Trade Global. In the European market, we compete with companies such as Arvato, Yoox and other geographically focused providers in Western
Europe.
Design and Digital Marketing Services. We compete with a wide range of digital agency firms, including Fluid, Huge, AKQA, and Wednesday.
Operations. We compete with eCommerce focused order fulfillment providers such as Radial and GEODIS (formerly OHL), as well as, depending on
the client’s retail and/or supply chain strategy, Saddle Creek Logistics, Excel Logistics, FedEx Supply Chain, UPS Logistics, Kuehne + Nagel, and other
“pure-play” fulfillment or contact center providers.
COMPANY INFORMATION
Clients and Marketing
Our target clients include traditional retailers, online retailers and leading technology and consumer goods brands looking to quickly and efficiently
implement or enhance business initiatives, adapt their go-to-market strategies or introduce new products, programs or geographies, without the burden of
modifying or expanding their technology, customer care, supply chain and logistics infrastructure. Our solutions are applicable to a multitude of industries
and company types and we have provided solutions for such companies as:
Procter & Gamble (consumer packaged goods), L’Oréal USA (health & beauty), ASICS (sporting goods/apparel), Thrive Causemetics (health &
beauty), Ricoh (printer supplies), Ralph Lauren (fashion), Kendo (health & beauty), Xerox (printers and printer supplies), PANDORA (jewelry), Tommy
Bahama (fashion), Anastasia Beverly Hills (health & beauty), The United States Mint (collectible coins), among many others.
We target potential clients through an extensive integrated marketing program comprised of a variety of direct marketing techniques, email marketing
initiatives, 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 and
products. We also pursue strategic marketing alliances with consulting firms, software manufacturers and other logistics providers to increase market
awareness and generate referrals and customer leads.
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Because of the highly complex nature of the solutions we provide, our clients demand significant competence and experience from a variety of
different business disciplines during the sales cycle. As such, we often utilize a member of our executive team to lead the design and proposal development of
each potential new client we choose to pursue. The executive is supported by a select group of highly experienced individuals from our professional services
group with specific industry knowledge of, or experience with, the solutions development process. We employ a team of highly trained implementation
managers whose responsibilities include the oversight and supervision of client projects and maintaining high levels of client satisfaction during the transition
process between the various stages of the sales cycle and steady state operations.
Employees
As of December 31, 2018, we had approximately 2,300 employees, of which approximately 1,500 were located in the United States. We have never
suffered 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, certain of
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 temporary
staff during peak periods for distribution and call center operations is critical to our ability to provide high quality distribution and support services. Contact
center representatives and distribution personnel receive feedback on their performance on a regular basis and, as appropriate, are recognized for superior
performance or given additional training. Generally, our clients provide specific product training for our contact center representatives and, in certain
instances, on-site client personnel to provide specific technical support. To maintain good employee relations and to minimize employee turnover, we strive to
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 Reports
Our website address is, www.pfsweb.com, Information contained on, or accessible from, our website is not incorporated by reference into this annual
report and should not be considered part of this annual report or any filing we make with the United States Securities and Exchange Commission, or SEC. We
file with, or furnish to, the SEC all our periodic filings and reports, including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, and any amendments if any, to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934). All
of our filings with the SEC are made available, free of charge, through the investor relations section of this website as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the SEC or by mailing a written request to Investor Relations at PFSweb, Inc., 505 Millennium Drive,
Allen, Texas 75013. Copies of any of our filings also can be obtained without charge from the SEC at www.sec.gov.
Government Regulation
We are subject to federal, state, local and foreign consumer protection laws, including laws protecting the privacy of our customers’ personally
identifiable information and other non-public information and regulations prohibiting unfair and deceptive trade practices. Furthermore, the growth and
demand for online commerce has and may continue to result in more stringent consumer protection laws that impose additional compliance burdens and
greater penalties on online companies. Moreover, there is a trend toward regulations requiring companies to provide consumers with greater information
regarding, 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 a
computer hacker, obtains such customer’s name and one or more of the customer’s social security number, driver’s license number, credit or debit card
number or other similar personal information. In addition, several jurisdictions, including foreign countries, have adopted privacy-related laws that restrict or
prohibit 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 laws
may become more stringent in the future and could result in substantial compliance costs and could interfere with the conduct of our business. Also, an
increasing number of countries have introduced and/or increased enforcement of comprehensive privacy laws, or are expected to do so. In Europe, the
implementation of new General Data Protection Regulations (“GDPR”) in May 2018 provides heightened rights for individuals and increased sanctions and
fines for non-compliance with regulations, including non-adherence to the core principles of processing personal data, infringement of the rights of data
subjects and the transfer of personal data to third parties or international organizations that do not ensure an adequate level of data protection.
The UK’s decision to leave the European Union (referred to as “Brexit”) may add cost and complexity to our operations and compliance efforts. The
effect of Brexit is uncertain, and, among other things, Brexit has and may continue to contribute to volatility of currency exchange rates, including of the euro
and British pound, issues with import and export controls, trade barriers, and the movement of employees. The UK is an important geography for us and we
have structured our privacy and data protection compliance program based on the GDPR. If UK and EU privacy and data protection laws and regulations
diverge, we will be required to implement alternative UK compliance measures and adapt separately to any new UK requirements.
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Item 1A.
Risk Factors
Our business, financial condition and operating results could be adversely affected by any or all of the following factors, in which event the trading
price of our common stock could decline, and you could lose part or all of your investment.
Risks Related to Our Business
We operate with significant levels of indebtedness and are required to comply with certain financial and non-financial covenants; and we have
guaranteed certain indebtedness and obligations of our subsidiaries.
As of December 31, 2018, our total credit facilities outstanding, including debt, capital lease obligations and our vendor accounts payable related to
financing of Ricoh product inventory for a client, were approximately $46.7 million. We cannot provide assurance that our credit facilities will be renewed by
the lending parties. Additionally, these credit facilities include both financial and non-financial covenants, many of which also include cross-default
provisions applicable to other agreements. Certain of these covenants also restrict our ability to transfer funds among our various subsidiaries, which may
adversely affect the ability of our subsidiaries to operate their businesses or comply with their respective loan covenants. We cannot provide assurance that we
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 material
adverse 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.
We may experience additional costs and uncertainties from the LIBOR phase-out.
London Interbank Offered Rate (“LIBOR”) is commonly used as benchmark for rates across a wide range of financial products and instruments,
however, financial regulators are transitioning away from the use of LIBOR by the end of 2021. As a result we anticipate certain risks associated with this
transition, including market uncertainty and disruptions, particularly with our existing debt instruments and equipment financings. We will need to review and
address the potential issues in our existing debt instruments and equipment financings for substitutions, as well as revisit our accounting policies.
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, including a line of credit facility
provided by various banks that provided for an aggregate of up to approximately $60.0 million of financing as of December 31, 2018, with an accordion
feature providing for a potential of additional $20.0 million. This line of credit currently matures in November 2023 and is secured by substantially all our
assets. Our ability to maintain, renew or replace our bank, vendor and commercial financing depends upon various factors, including the availability of bank
loans and commercial credit in general, as well as our financial condition and prospects. Therefore, we cannot guarantee that these credit facilities will
continue to be available beyond their current maturities on reasonable terms or at all. Our inability to maintain, renew or replace our credit facilities or find
alternative financing would have a material adverse effect on our business, 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 be insufficient and we may need to raise additional funds either by borrowing
money or issuing additional equity or both. We cannot assure you that such resources will be adequate or available for all of our future financing needs. Our
inability to finance our growth, either internally or externally, may limit our growth potential and our ability to execute our business strategy. If we are
successful in completing an additional equity financing, this could result in further dilution 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 our
clients’ projections indicate, or if our operating, sales and marketing expenses exceed our expectations or cannot be reduced to an appropriate level, we may
not 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 our
revenue declines or grows slower than either we anticipate or our clients’ projections indicate, we may incur unnecessary or redundant costs and our operating
results could be adversely affected.
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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, our inability to grow our business or increase service fee revenue from new or existing clients, or our inability to manage expected
costs could negatively impact our operating 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 by
our 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.
If we are unable to retain existing clients or attract new clients, or if we dedicate significant resources to clients whose business does not generate revenues at
projected levels or sufficient revenues, or whose products do not generate substantial customer sales, our business may be materially adversely affected in a
number of ways.
For example, we seek to maintain sufficient capacity in our fulfillment, call center and professional services operations and computer technology
systems to support our projected existing and new client business activity, including seasonal volumes, and we currently plan on increasing capacity to
support 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 an
underutilization 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 our
services is difficult. We generally cannot reduce our labor costs as quickly as negative changes in revenue may occur. We may retain underutilized employees
to maintain scalability to meet client demand. We must maintain our operating efficiency and utilization at an appropriate rate to achieve our desired level of
profitability. If we are unable to achieve and maintain our target efficiency and utilization rates, our profitability could be adversely impacted. Further,
increases in minimum wage requirements and other competitive increases in labor costs could put upward pressure on our costs and adversely affect our
profitability if we are unable to recover these increased costs by increasing the prices for our services.
Moreover, our ability to estimate service fee revenue for future periods is substantially dependent upon our clients’ and our own projections, the
accuracy of which has been, and will continue to be, unpredictable. Therefore, our planning for client activity and targeted goals for service fee revenue and
gross margin may be materially adversely affected by incomplete, delayed or inaccurate projections. In addition, most of our service agreements with our
clients are non-exclusive and we cannot be assured that any of our clients will continue to use our services for any period of time. The loss of a significant
amount of service fee revenue due to client terminations (including terminations related to client bankruptcies) or material reductions in the services provided
to one or more clients could have a material adverse effect on our 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 such
requirements. The imposition of a substantial amount of such penalties could have a material adverse effect on our business and operations. In the event we
are 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 the
termination 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 and
retain 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 could
materially adversely affect our business. In addition, we need to attract and retain other highly-skilled, technical and managerial personnel for whom there is
intense competition. For example, if we are unable to hire or continually train our employees 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, we may 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 and retain an increasing number of professionals with
different skills and expectations than those of the professionals we have historically hired and retained. We cannot 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 retain qualified 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 temporary
increases in client activity volume related to “flash sales” and other short-term marketing programs. Any difficulty we may encounter in hiring such workers
could 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 temporary
workers, and our failure to maintain an appropriate mix of labor personnel may result in higher costs. Increases in minimum wage requirements and other
competition for labor could also substantially increase our 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 contracts provide 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 our clients.
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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 to
healthcare 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 sales
personnel in Belgium, Canada, India, Bulgaria and U.K., and we currently intend to expand our international operations. We cannot assure you we will be
successful in expanding in these or any additional international markets. In addition, we may face competition from companies that may have more
experience with operations in these countries or with international operations generally. We may also face difficulties integrating new facilities in different
countries into our existing operations, as well as integrating employees that we hire in different countries into our existing corporate culture. In addition to the
uncertainty regarding our ability to generate revenue or profits from foreign operations and expand our international presence, there are risks inherent in doing
business internationally that we have not generally faced in our U.S. operations, including:
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lack of familiarity with, and resulting risk of breach of, and/or unanticipated additional cost of compliance with, foreign laws and regulations
governing 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 impact upon our customers, international firms and global economies arising from the United Kingdom’s withdrawal from the European
Union (or “Brexit”) and surrounding uncertainty, and the political, economic and commercial responses related to such events;
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 markets requires significant management attention and financial resources. We cannot be certain that the
investments and additional resources required to establish and maintain operations in other countries will hold their value or produce desired levels of
revenues or profitability. Any negative impact from our international business efforts could negatively impact our business, results of operations and financial
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 rate
fluctuations between such local currencies and the U.S. dollar. These exchange rate fluctuations subject us to currency translation risk with respect to the
reported results of our international operations. Significant strengthening or weakening of 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 to expand our presence in India, we will have increased exposure to
fluctuations between the Indian Rupee and the U.S. dollar. In addition, we have transactions with clients, as well as inter-company transactions between our
subsidiaries, that cross currencies and expose us to foreign currency gains and losses. These types 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 our international operations. We seek to manage our exposure to changes in
foreign currency exchange rates through our normal operating and financing activities and, if deemed appropriate, we may use derivative financial
instruments. There is no assurance that we will be successful in managing or controlling foreign currency risks.
The United Kingdom’s withdrawal from the EU may adversely impact our operations in the United Kingdom and elsewhere.
The uncertainty regarding Brexit, related instability in global financial and foreign exchange markets, including volatility in the value of the British
pound and European euro, legal uncertainty and potentially divergent national laws and regulations and the absence of established trade agreements between
the UK and other EU countries may adversely affect our international operations by, among other things, increasing our costs and reducing the volume of our
client activities.
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Additionally, the UK is one of our larger markets in Europe. We currently ship products to UK customers from continental Europe, although we are
moving operations to our new facility in Southampton, UK. If Brexit results in greater restrictions on imports and exports between the UK and the EU or
increased regulatory complexity, then our operations and financial results could be negatively impacted.
We may engage in future strategic alliances or acquisitions that could dilute our existing shareholders’ ownership, cause us to incur significant expenses
or harm our business. Acquisitions can result in an increase in our operating costs, divert management's attention away from other operational matters
and 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 certain
geographic and other markets, and we may continue to seek appropriate acquisition candidates. We may not succeed in completing targeted transactions, or
achieve desired results of operations. Furthermore, we face risks in successfully integrating any businesses we acquire. Ongoing business may be disrupted
and our management's attention may be diverted by acquisitions, transition or integration activities. In addition, we might need to dedicate additional
management and other resources, and our organizational structure could make it difficult for us to efficiently integrate acquired businesses into our ongoing
operations 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 on
investment, or we may lose money. We may be adversely impacted by liabilities that we assume from a company we acquire, including from that company's
known and unknown obligations, intellectual property or other assets, terminated employees, current or former clients, or other third parties, and we may fail
to identify or adequately assess the magnitude of certain liabilities, shortcomings or other circumstances prior to acquisition, which could result in unexpected
legal or regulatory exposure, unfavorable accounting treatment, unexpected increases in taxes, or other adverse effects on our business. If we are inefficient or
unsuccessful at integrating any acquired businesses into our operations, we may not be able to achieve our planned rates of growth or improve our market
share, profitability, or competitive position in specific markets or services.
In addition, acquisitions involve further risks, such as:
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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 financial
results 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 or relationships
with third parties;
reductions in cash balances and/or increases in debt obligations to finance activities associated with a transaction, including future payments
under earn-outs and other contingent payments, which reduce the availability of cash flow for general corporate or other purposes or impact our
financial results; and
inadequacy or ineffectiveness of an acquired company’s internal financial controls, disclosure controls and procedures, and/or other policies or
practices; 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 26% of our total assets as of December 31, 2018. The carrying value of goodwill represents the fair value of an
acquired business in excess of identifiable assets and liabilities as of the acquisition date. We are required to test goodwill for impairment annually and when
factors 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 test
for impairment include financial performance indicators, such as negative or declining cash flows or a decline in actual or planned revenue or earnings, and a
sustained 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 to
exceed the fair value could cause goodwill to be considered impaired, and could result in a non-cash impairment charge in our consolidated statement of
operations.
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 a
natural disaster.
We operate a majority of our distribution facilities in the Memphis, Tennessee area and our headquarters and call center operations are centered in the
Dallas, Texas area. We also maintain facilities in Canada, Europe and India. A natural disaster or other serious disruption to our facilities due to fire, tornado,
flood, severe weather or any other cause could substantially disrupt our operations and could impair our 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 or replace 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 could adversely affect our business and profitability.
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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 able
to circumvent our security measures could misappropriate proprietary information or interrupt our operations. Any compromise or elimination of our security
could 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 our
reputation, cause us to lose clients, impact our ability to attract new clients and we could be exposed to litigation and possible liability. Our security measures
may not prevent security breaches, and failure to prevent security breaches may disrupt our operations. The failure to adequately control fraudulent
transactions on either our behalf or our client’s behalf could increase our expenses and expose us to reputational damage which would adversely affect our
business.
We may be liable for misappropriation of our customers’ and our clients’ customers’ personal information, including through cyber-attacks and the like.
Data security laws are becoming more stringent in the United States and abroad. Third parties are engaging in increased cyber-attacks against
companies doing business on the internet and individuals are increasingly subjected to identity and credit card theft on the internet. If third parties or
unauthorized employees are able to penetrate our network security or otherwise misappropriate our customers’ or our clients’ customers’ personal information
or credit card information, or if we give third parties or our employees’ improper access to customers’ personal information or credit card information, we
could be subject to liability. This liability could include claims for unauthorized purchases with credit card information, impersonation or other similar fraud
claims, as well as claims for other misuses of personal information, including unauthorized marketing purposes. Liability for misappropriation of this
information could decrease our profitability and adversely affect our business. In such circumstances, we also could be liable for failing to provide timely
notice of a data security breach affecting certain types of personal information. In addition, the Federal Trade Commission, state and international agencies
have brought numerous enforcement actions against internet companies for alleged deficiencies in those companies’ privacy and data security practices, and
they may continue to bring such actions. We could incur additional expenses if new regulations regarding the collection, use or storage of personal
information are introduced 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 sensitive
customer information such as customer credit card numbers. Advances in computer capabilities, new discoveries in the field of cryptography or other events
or developments may result in a compromise or breach of the measures that we use to protect customer transaction data. If any such compromise of security
were 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 security
measures could misappropriate proprietary information or cause interruptions in operations. We may be required to expend significant capital and other
resources to protect against such security breaches or to alleviate problems caused by such breaches. Our security measures are designed to prevent security
breaches, 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 limitations
of 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 our
contracts 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 our
clients. Although we have general liability and errors and omissions insurance coverage, this coverage may not continue to be available on terms reasonable
to 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
one or more large claims against us that are excluded from our insurance coverage or that exceed our available insurance coverage, or changes in our
insurance policies (including premium increases or the imposition of large deductible or co-insurance requirements), could have a material adverse effect on
our business, 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. The
interpretation 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 not
only to third-party transactions, but also to transfers of information between or among ourselves, our subsidiaries and other parties with which we have
commercial relations. Further, these laws continue to develop in ways 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 stored locally on servers in that jurisdiction and/or prohibit such data from being
transmitted outside of that jurisdiction, which would increase our operational costs or capital expenditures and potentially impact the performance or
availability of our services and/or our ability to use or process customer data.
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The EU’s implementation of new General Data Protection Regulations (“GDPR”) in May 2018 provides heightened rights for individuals and
increased sanctions and fines for non-compliance with regulations, including non-adherence to the core principles of processing personal data, infringement
of the rights of data subjects and the transfer of personal data to third parties or international organizations that do not ensure an adequate level of data
protection. Any imposition of fines resulting from our failure to comply with the GDPR requirements could materially and adversely affect our financial
results. The GDPR also introduces measures that will make data processing and sharing between our European-based businesses and our other businesses
more difficult. We have implemented data processing agreements and reliance on the use of model clauses with our clients and third party vendors as a
protective measure, however there can be no guarantee such will be sufficient. As such, we may face a risk of enforcement actions by data protection
authorities in the EU. Any such enforcement actions could result in substantial costs and diversion of resources, distract management 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 are infringing
their intellectual property rights, we could incur significant litigation costs, be required to pay damages, or change our business or incur licensing
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 a
result, we or our clients may be subject to intellectual property legal proceedings and claims in the ordinary course of business. We cannot predict whether
third 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 or
our clients are found to infringe, we may be required to pay monetary damages, which could include treble damages and attorneys’ fees for any infringement
that 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 result of
infringement claims either against us or our clients, we may be required, or deem it advisable, to develop non-infringing technology, which could be costly
and time consuming, or enter into costly royalty or licensing agreements. Such royalty or licensing agreements, if required, may be unavailable on terms that
are 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 monetary
damages or royalties or we are unable to develop suitable non-infringing alternatives or license the infringed or similar technology on reasonable terms on a
timely 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 our
relationship with such providers, such providers do not provide the third party services or provide them in a manner that does not meet required service
levels.
We currently, and may in the future, rely on third party providers to provide various material portions of our solution service offering. If our business
relationship 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 to
deliver the corresponding service offering to our clients, which could cause us to lose clients and future business, reducing our revenues. Under the terms of
several 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 such
third 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 or
a portion of such prepaid fees. Consequently, in the event our third party provider fails to provide the third party services in compliance with required services
levels, or otherwise breaches its obligations, or discontinues its business, whether as the result of bankruptcy, insolvency or otherwise, we may be required 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 such failure 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 adverse
effect 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 to
defend claims arising out of our infringement of third-party intellectual property rights, breach of contractual obligations and/or unlawful or otherwise
culpable 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 to
limit our total liability under such 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 is unlimited. Although in many cases our third party service providers indemnify us for their actions and omissions, such
providers may dispute or be unable to satisfy their indemnification obligation to us. In addition, our indemnification obligation to our clients may be broader
in scope, or may be subject to larger limitations of liability, than the indemnification obligation of our third party service providers to us. In most cases, the
term of the indemnity provision is perpetual. 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 may be required to expend significant resources to defend the claims, which may have a material adverse effect upon our
business, results of operations and financial condition.
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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 the
contract 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 the
contract. Termination, reduction, or delay of our services under a contract could result from factors unrelated to our work product or the progress of the
project, such as factors related to business or financial conditions of the client, changes in client strategies or the domestic or global economy generally. The
bankruptcy, early termination, reduction or substantial delay of services of any significant client, or nonrenewal of any significant client contract, or the
nonpayment of a material amount of our service fees by a significant client, if not offset by an increase in other revenue or cost reductions, could have a
material adverse effect upon our business, results of operation and financial condition.
The majority of our Supplies Distributors product revenue is generated by sales of product purchased under distributor agreements with Ricoh
Company Limited and Ricoh USA, Inc., a strategic business unit within the Ricoh Family Group of Companies (collectively hereafter referred to as “Ricoh”).
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 Ricoh
product. As a result of certain operational restructuring of its business and its discontinuance of certain product lines, Ricoh has implemented, and will
continue to implement, certain changes in the sale and distribution of Ricoh products. The changes have resulted, and are expected to continue to result, in
reduced revenues and profitability for Supplies Distributors. Further material reduction in the Ricoh business may have a material adverse effect on Supplies
Distributors’ 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 current
projected business volumes, we anticipate our service fee revenue business activity will be at its highest in our fourth quarter. We are unable to predict how
the seasonality of future clients’ business may affect our quarterly revenue and whether the seasonality may change due to modifications to a client’s
business. 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 design
client 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 transaction
volumes. When this occurs, additional stress is placed upon our network hardware and software and our ability to efficiently manage our operations, and we
cannot assure you of our ability to efficiently manage a large number of transactions. In addition, if we incorrectly design a client solution, we may incur
additional costs to operate the solution, which may result in the client solution being unprofitable or otherwise not meeting our margin targets. If we are not
able to maintain an appropriate level of operating performance, we may be in breach of our client contractual obligations, develop a negative reputation, and
impair 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 we
generally attempt to recover these costs from the client in the early stages of the client relationship, or upon contract termination if the client terminates
without 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 will
terminate 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, certain
excess costs will be expensed as incurred. Additionally, in connection with new client contracts, we may incur capital expenditures associated with assets
whose 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 our
capital costs.
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We face competition from many sources that could adversely affect our business; growth in our clients’ ecommerce business may make it more efficient
for the 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 sources
depending upon the type and range of services requested by a potential client. Our competitors include vertical outsourcers, which are companies that offer a
single function, such as call centers, public warehouses or professional services firms such as system integrators and digital agencies. We compete against
transportation logistics providers who offer product management functions as an ancillary service to their primary transportation services. We also compete
against other infrastructure service providers, who perform many similar services as us. Many of these companies have greater capabilities than we do for the
single or multiple functions they provide. In addition, we compete against other professional service firms that have substantial offshore operations with lower
labor costs, which enable them to offer lower pricing to potential clients. In many instances, our competition is the in-house operations of potential clients
themselves. The in-house operations of potential clients often believe they can perform the same services we do, while others are reluctant to outsource
business functions that involve direct customer contact. We cannot be certain we will be able to compete successfully against these or other competitors in the
future.
In addition, growth in our clients’ ecommerce businesses may cause a client to consider making the necessary investments to process their ecommerce
operations 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 is
no 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 the
client.
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 potential
client to the signing of a contract. Occasionally the sales cycle requires substantially more time. Delays in signing and executing client contracts may affect
our revenue and cause our operating results to vary widely. A potential client’s decision to purchase our services is discretionary, involves a significant
commitment 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 competitive
evaluation processes that typically accompany significant operational decisions. Additionally, the time required to finalize pending contracts and to
implement our systems and integrate a new client can range from several weeks to many months. Delays in signing and integrating new clients may affect our
revenue 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 telecommunications
equipment 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 materially
adversely affected. In addition, in the event of widespread damage or failures at our facilities, our short-term disaster recovery and contingency plans and
insurance 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
may be 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 computer
viruses 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 adversely
affected. Many of our clients’ computer systems interface with our systems. If our clients suffer interruptions in their systems, the link to our systems could be
severed and sales of the client’s products could be slowed or stopped.
We and our clients may be subject to existing, new or expanded imposition of 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 foreign
jurisdictions may seek to impose sales tax collection obligations on us and other out-of-state companies, including our clients, that engage in online
commerce, depending upon the nexus we or our clients may have with that jurisdiction and the product or services being performed. Recently, with the U.S.
Supreme Court's decision in South Dakota v. Wayfair, some states have begun to enact, and others may choose to enact in the future, new legislation and
increase enforcement efforts of existing legislation requiring online retailers to collect and remit sales tax. If unexpected sales tax obligations 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 for past 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 effective
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cost of purchasing goods from or through us increases for those residing in that state or jurisdiction. This imposition of sales tax may also be enforced on
companies providing software as a service (SaaS), information services, data processing services, and maintenance, to name a few. As we provide such
service we may become subject to sales tax in each state where we provide services.
If there is increased legislative or enforcement action, e-commerce in general could decline as increased taxation of online sales could result in online
shopping losing some of its current advantage over traditional retail models, which could diminish its appeal to consumers. A decrease in our clients’
ecommerce sales could impact our revenue. In addition, the cost of implementing new and expanded sales tax impositions by multiple taxing authorities may
adversely impact our and our clients’ profitability.
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 under
the contract, our pricing practices, our cost structure, and our compliance with applicable laws, regulations, and standards. If a government audit determines
that 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 and
administrative sanctions, including termination of the contract, suspension of payments, or disqualification from continuing to do business, or bidding on new
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, which
may 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, the
contract 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 recognized
when 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.
If our internal controls are ineffective, our operating results could be adversely affected.
Our internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of
human error, the circumvention or overriding of controls or fraud. Even effective internal controls can provide only reasonable assurance with respect to the
preparation and fair presentation of financial statements. If we fail to maintain the adequacy of our internal controls, including any failure to implement
required new or improved controls, or if we experience difficulties in their implementation, our business and operating results could be harmed and we could
fail to meet our financial reporting obligations.
We are investing in technology to manage these reporting requirements. Implementing the appropriate changes to our internal controls may distract our
officers and employees, result in substantial costs if we implement new processes or modify our existing processes and require significant time to complete.
Any difficulties or delays in implementing these controls could impact our ability to timely report our financial results. In addition, we currently rely on a
manual process in some areas which increases our exposure to human error or intervention in reporting our financial results. For these reasons, we may
encounter difficulties in the timely and accurate reporting of our financial results, which would impact our ability to provide our investors with information in
a timely manner. As a result, our investors could lose confidence in our reported financial information, and our stock price could decline.
If our estimates relating to our critical accounting policies prove to be incorrect, our operating results could be adversely affected.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base
our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances, as provided in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations.” The results of these estimates form the basis for making judgments about the
carrying values of assets, liabilities and equity, and the amount of revenue and expenses that are not readily apparent from other sources. Significant
assumptions and estimates used in preparing our consolidated financial statements include those related to revenue recognition, allowance for uncollectible
accounts receivable, inventory reserves, contingent payments under endorsement contracts, accounting for property, plant and equipment and definite-lived
assets, hedge accounting for derivatives, stock-based compensation, income taxes and other contingencies. Our operating results may be adversely affected if
our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results to fall below the expectations
of securities analysts and investors, resulting in a decline in the price of our Common Stock.
20
Risks Related to Our Industry
Our 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 underlying
network infrastructure. If we are unable to adapt to changing market conditions, client requirements or emerging industry standards, our business could be
adversely affected. The internet and eCommerce environments are characterized by rapid technological change, changes in user requirements and preferences,
frequent new product and service introductions embodying new technologies and the emergence of new industry standards and practices that could render our
technology and systems obsolete. Our success will depend, in part, on our ability to both internally develop and license leading technologies to enhance our
existing services and develop new services. We must continue to address the increasingly sophisticated and varied needs of our clients and respond to
technological advances and emerging industry standards and practices on a cost-effective and timely basis. The development of proprietary technology
involves significant technical and business risks. We may fail to develop new technologies effectively or to adapt our proprietary technology and systems to
client requirements or emerging industry standards.
Risks Related to Our Stock and/or Stockholders
Institutional shareholders hold a significant amount of our common stock and these shareholders may have conflicts of interests with the interests of our
other shareholders.
As of December 31, 2018, institutional investors (including transcosmos, Inc., our largest shareholder) own or control approximately 86% of the
voting power of our common stock. The interests of these shareholders may differ from our other shareholders in material respects. This concentration of
voting 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 our
shareholders, 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 the power
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 trading
of our common stock. In addition, stock markets have experienced extreme price and trading volume volatility in recent years. This volatility has had a
substantial effect on the market prices of securities of many technology-related companies for reasons frequently unrelated to the operating performance of
the specific companies. These broad market fluctuations may adversely affect the market price of our common stock. In addition, if our operating results
differ from our 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 such
shares, 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 to
sell 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 the
possible 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 to
acquire us, even if doing so would be beneficial to our shareholders. For example, our certificate of incorporation permits our Board of Directors to issue one
or more series of preferred stock, which may have rights and preferences superior to those of the common stock. The ability to issue preferred stock could
have the effect of delaying or preventing a third party from acquiring us. We have also adopted a shareholder rights plan. These provisions could discourage
takeover attempts and could materially adversely affect the price of our stock. In addition, because we are incorporated in Delaware, we are governed by the
provisions of Section 203 of the Delaware General Corporation Law, which may prohibit large shareholders from consummating a merger with, or acquisition
of us. These provisions may prevent a merger or acquisition that would be attractive to shareholders and could limit the price investors would be willing to
pay 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 fiduciary
duty, 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 misconduct or
a knowing violation of law, or any transaction in which a director has derived an improper personal benefit.
21
Actions of activist shareholders could be disruptive and potentially costly, and the possibility that activist shareholders may seek changes that conflict with
our 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 to
advocate corporate actions such as financial restructuring, stock repurchases or sales of assets or the entire company. Activist campaigns that contest or
conflict with our strategic direction could have an adverse effect on our results of operations and financial conditions, as responding to proxy contests and
other actions by activist shareholders can disrupt our operations, be costly and time consuming and divert the attention of our Board and senior management
from the pursuit of business strategies. These types of actions could cause significant fluctuations in our stock price based on temporary or speculative market
perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business.
Item 1B.
Unresolved Staff Comments
None.
Item 2.
Properties
Our headquarters are located in Allen, Texas, a Dallas suburb. In the U.S., we operate a distribution facility in Memphis, Tennessee, with aggregate
space of more than 440,000 square feet. We also operate four additional distribution facilities totaling an aggregate of approximately 756,000 square feet in
Southaven, 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, and distribution operations in Southampton, U.K. with approximately 54,000 square feet. We also operate
facilities in Bangalore, India, London, U.K., Basingstoke, U.K. and Sofia, Bulgaria, each of which provides primarily technology development, operations
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, Basingstoke, U.K., and Ontario, Canada. Our call center
technology permits the automatic routing of calls to available customer service representatives in several of our call centers.
Item 3.
Legal Proceedings
We 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 such
claims and lawsuits, individually or in the aggregate, will have a material adverse effect on our business.
Item 4.
Mine Safety Disclosures
Not applicable.
22
PART II
Item 5.
Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
For information regarding the securities authorized for issuance under our equity compensation plans, refer to “Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters” included in Part III, Item 12 of this report.
Common Stock
Our common stock is listed, and currently trades, on the NASDAQ Capital Market under the symbol “PFSW.” The following table sets forth for the
periods indicated the high and low sale price for the common stock as reported by NASDAQ:
Year Ended December 31, 2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year Ended December 31, 2018
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Price
High
Low
$
$
$
$
$
$
$
$
8.69 $
8.28 $
8.40 $
8.88 $
9.06 $
11.86 $
10.57 $
7.77 $
6.28
5.83
7.21
5.90
6.93
8.37
6.84
4.84
As of March 8, 2019, there were 101 record holders of the common stock.
Dividend Policy
We have never declared or paid cash dividends on our common stock and do not anticipate the payment of cash dividends on our common stock in the
foreseeable future. We are also restricted from paying dividends under our debt agreements without the prior approval of our lenders. The payment of any
future cash dividends will be at the discretion of our Board of Directors and will depend upon, among other things, future earnings, operations, capital
requirements, the general financial condition of the Company and general business conditions and the approval of our lenders. See “Management’s
Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”
Item 6.
Selected Consolidated Financial Data
Not applicable.
23
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
We believe the following discussion and analysis provides information that is relevant to an assessment and understanding of our consolidated results
of operations and financial condition. The discussion and analysis should be read in conjunction with the consolidated financial statements and related 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 2018 and 2017;
Our financial structure, including our historical financial presentation;
Our results of operations for the previous two 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 Information
We have made forward-looking statements in this Report on Form 10-K. These statements are subject to risks and uncertainties, and there can be no
guarantee that these statements will prove to be correct. Forward-looking statements include assumptions as to how we may perform in the future. When we
use 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, in
addition 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 our
forward-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, transaction volumes, product sales, and financial liquidity;
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 our operating costs and 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;
24
•
•
•
•
•
•
data privacy regulations;
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 based
upon assumptions as to future events that may not prove to be accurate. Therefore, actual outcomes and results may differ materially from what is expected or
forecasted in such forward-looking statements. We undertake no obligation to update publicly any forward-looking statement for any reason, even if new
information 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 presently
known. In evaluating these statements, you should consider various factors, including the risks set forth in the section entitled “Risk Factors.”
Key Transactions and Events
We were impacted by the following key transactions and events in 2018 that may affect comparability of our results to 2017 and other periods:
Year ended December 31, 2018:
•
•
Effective January 1, 2018, we changed our organizational structure in an effort to create more effective and efficient operations and to improve
client and service focus. As a result, beginning January 1, 2018, we report our financial performance based on our new reportable segments
PFS Operations and LiveArea Professional Services. All prior period segment information has been restated to conform with the 2018
presentation. The changes in the reportable segments have no effect on the consolidated balance sheets, statements of operations and
comprehensive income (loss) or cash flows for the periods presented.
We adopted Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (“ASC 606”) on January 1, 2018. We
used the modified retrospective method for the transition. Under the modified retrospective method, the cumulative effect of applying the new
standard was recorded at January 1, 2018 for open contracts. Therefore, results for the years ended December 31, 2018 and 2017 may not be
comparable.
Overview
We are a global commerce solutions company. We manage the entire customer shopping experience for major branded manufacturers and retailers
through two business segments, LiveArea Professional Services and PFS Operations. The LiveArea Professional Services segment provides services to
support and improve the digital shopping experience of shopping online, such as strategic commerce consulting, strategy, design and digital marketing
services and technology services. The PFS Operations segment provides services to support and improve the physical experience, such as order management,
order fulfillment, customer care and payment services. We offer our services on an a la carte basis or as a complete end-to-end solution.
Service Fee Model. We refer to our standard seller services financial model as the Service Fee model. In this model, our clients own the inventory and
are the merchants of record and engage us to provide various infrastructure, technology and digital agency services in support of their business operations. We
offer our services as an integrated solution, which enables our clients to outsource their complete eCommerce needs to a single source and to focus on their
core competencies, though clients are also able to select individual or groupings of our various service offerings on an à la carte basis. We currently provide
services to clients that operate in a range of vertical markets, including technology manufacturing, computer products, cosmetics, fragile goods, coins and
collectibles, apparel, telecommunications, consumer electronics and consumer packaged goods, among others.
In the Service Fee model, we typically charge for our services on time and material basis, a cost-plus basis, a percent of shipped revenue basis, a time
and materials, project or retainer basis for our professional services or a per transaction basis, such as a per labor hour basis for web-enabled customer contact
center services and a per-item basis for fulfillment services. Additional fees are billed for other services. We price our services based on a variety of factors,
including the depth and complexity of the services provided, the amount of capital expenditures or systems customization required, the length of contract and
other factors.
Many of our service fee contracts involve third-party vendors who provide additional services, such as package delivery. The costs we are charged by
these third-party vendors for these services are often passed on to our clients. Our billings for reimbursements of these costs and other ‘out-of-pocket’
expenses include travel, shipping and handling costs and telecommunication charges and are included in pass-through revenue.
25
Agent (Flash) Model. In our PFS Operations business unit, as an additional service, we offer the Agent, or Flash, financial model, in which our clients
maintain ownership of the product inventory stored at our locations as in the Service Fee model. When a customer orders the product from our clients, a
“flash” sale transaction passes product ownership to us for each order and we in turn immediately re-sell the product to the customer. The “flash” ownership
exchange establishes us as the merchant of record, which enables us to use our existing merchant infrastructure to process sales to end customers, removing
the need for the clients to establish these business processes internally, but permitting them to control the sales process to end customers. In this model, based
on the terms of our current client arrangements, we record product revenue net of cost of product revenue as a component of service fee revenue in our
consolidated statement of operations.
Retail Model. Our PFS Operations business unit also provides a Retail model which allows us to purchase inventory from the client. We place the
initial and replenishment purchase orders with the client and take ownership of the product either upon shipment to or delivery to our facility. In this model,
depending on the terms of our client arrangements, we may own the inventory and the accounts receivable arising from our product sales. Under the Retail
model, depending upon the product category and sales characteristics, we may require the client to provide product price protection as well as product
purchase payment terms, right of return, and obsolescence protection appropriate to the product sales profile. Depending on the terms of our client
arrangements in the Retail model, we record in our consolidated statement of operations either: 1) product revenue as a component of product revenue, or 2)
product revenue net of cost of product revenue as a component of service fee revenue. In general, we seek to structure client relationships in our Retail model
under the net revenue approach to more closely align with our service fee revenue financial presentation and mitigate inventory ownership risk, although we
have one client still operating under the gross revenue approach. Freight costs billed to customers are reflected as components of product revenue. This
business model generally requires significant working capital, for which we have credit available either through credit terms provided by our clients or under
senior credit facilities.
Currently, we are targeting growth within our Retail model to be through relationships with clients under which we can record service fee revenue in
our consolidated statement of operations. These relationships are often driven by the sales and marketing efforts of the manufacturers and third party sales
partners. In addition, as a result of certain operational restructuring of its business, our primary client relationship operating in the Retail model, Ricoh, has
implemented, and will continue to implement, certain changes in the sale and distribution of Ricoh products. The changes have resulted, and are expected to
continue to result, in reduced product revenues and profitability under our Retail model.
Growth is a key element to achieving our future goals, including achieving and maintaining sustainable profitability. Growth in our company is driven
by two main elements: new client relationships and organic growth from existing clients. Within our LiveArea Professional Services segment, we focus our
sales efforts on engaging with brands, retailers and manufacturers to perform discrete projects such as website design, platform selection and platform
implementation and system integration projects. We also focus our LiveArea sales efforts on engaging with brands, retailers and manufacturers to provide
ongoing services such as digital marketing retainers and technology managed services engagements. Within our PFS Operations segment, we focus our sales
efforts on larger contracts with brand-name companies within four primary target markets, health and beauty, home goods and collectibles, fashion, and
consumer packaged goods. Consumer packaged goods require a longer duration to close but also have the potential to be higher quality and longer duration
engagements. Within both segments, we focus our sales efforts on both new clients and also on existing clients where we believe opportunity exists to expand
a client relationship to include additional services within the segment, across segments and/or across multiple geographies. We continue to monitor and
control our costs to focus on profitability. While we are targeting our new service fee contracts to yield incremental gross profit, we also expect to incur
incremental investments in technology development, operational and support management and sales and marketing expenses to help generate growth.
Our expenses comprise primarily four categories: 1) cost of service fee revenue, 2) cost of product revenue, 3) cost of pass-through revenue and 4)
selling, general and administrative expenses.
Cost of service fee revenue – consists primarily of compensation and related expenses for our web-enabled customer contact center services,
international fulfillment and distribution services and professional, digital agency and technology services, and other fixed and variable expenses directly
related to providing services under the terms of fee based contracts, including certain occupancy and information technology costs and depreciation and
amortization expenses.
Cost of product revenue – consists of the purchase price of product sold and freight costs, which are reduced by certain reimbursable expenses. These
reimbursable expenses include pass-through customer marketing programs, direct costs incurred in passing on any price decreases offered by vendors to cover
price protection and certain special bids, the cost of products provided to replace defective product returned by customers and certain other expenses as
defined under the distributor agreements.
Cost of pass-through revenue – the related reimbursable costs for pass-through expenditures are reflected as cost of pass-through revenue.
Selling, General and Administrative expenses – consist of expenses such as compensation and related expenses for sales and marketing staff,
distribution costs (excluding freight) applicable to the Agent and the Retail model, executive, management and administrative personnel and other overhead
costs, including certain occupancy and information technology costs, and depreciation and amortization expenses and acquisition related, restructuring and
other costs.
26
Monitoring and controlling our available cash balances and our expenses continues to be a primary focus. Our cash and liquidity positions are
important components of our financing of both current operations and our targeted growth.
Operating Results
The following table discloses certain financial information for the periods presented, expressed in terms of dollars, dollar change, percentage change
and as a percentage of total revenues (in thousands, except percentages):
2018
2017
$
%
Change
% of Net Revenues
2018
2017
Revenues
Service fee revenue
Product revenue, net
Pass-through revenue
Total revenues
Cost of Revenues
Cost of service fee revenue
Cost of product revenue
Pass-through cost of revenue
Total costs of revenues
Service fee gross profit
Product revenue gross profit
Pass-through gross profit
Total gross profit
Selling General and Administrative expenses
Income from operations
Interest expense, net
Income (loss) from operations before income
taxes
Income tax expense, net
Net income (loss)
$
$
230,484
34,350
61,326
326,160
146,827
32,710
61,326
240,863
83,657
1,640
—
85,297
78,800
6,497
2,499
3,998
2,770
1,228
$
$
$
233,580
40,663
52,582
326,825
155,160
38,504
52,582
246,246
78,420
2,159
—
80,579
79,981
598
2,738
(2,140)
1,824
(3,964)
$
(3,096)
(6,313)
8,744
(665)
(8,333)
(5,794)
8,744
(5,383)
5,237
(519)
—
4,718
(1,181)
5,899
(239)
6,138
946
5,192
(1.3)%
(15.5)%
16.6%
(0.2)%
(5.4)%
(15.0)%
16.6%
(2.2)%
6.7%
(24.0)%
—
5.9%
(1.5)%
986.5%
(8.7)%
(286.8)%
51.9%
(131.0)%
70.7%
10.5%
18.8%
100.0%
63.7% (1)
95.2% (2)
100.0% (3)
73.8%
36.3% (1)
4.8% (2)
(3)
—
26.2%
24.2%
2.0%
0.8%
1.2%
0.8%
0.4%
(1)
(2)
(3)
Represents the measure as a percent of Service fee revenue.
Represents the measure as a percent of Product revenue, net.
Represents the measure as a percent of Pass-through revenue.
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
Segment Operating Data
PFS Operations (in thousands, except percentages)
Revenues:
Service fee revenue
Product revenue, net
Pass-through revenue
Total revenues
Costs of revenues:
Cost of service fee revenue
Cost of product revenue
Cost of pass-through revenue
Total costs of revenues
Gross profit
Direct operating expenses
Direct contribution
Year Ended December 31,
2018
2017
Change
Change, %
$
$
$
$
$
$
$
$
$
$
$
148,072
34,350
59,314
241,736
105,155
32,710
59,314
197,179
44,557
16,979
27,578
27
145,667
40,663
50,478
236,808
110,617
38,504
50,478
199,599
37,209
12,038
25,171
$
$
$
$
$
$
2,405
(6,313)
8,836
4,928
(5,462)
(5,794)
8,836
(2,420)
7,348
4,941
2,407
71.5%
12.4%
16.0%
100.0%
66.4%
94.7%
100.0%
75.3%
33.6%
5.3%
—
24.7%
24.5%
0.2%
0.8%
(0.7)%
0.6%
(1.2)%
2%
(16)%
18%
2%
(5)%
(15)%
18%
(1)%
20%
41%
10%
PFS Operations total revenues for the twelve months ended December 31, 2018 increased by $4.9 million compared with the corresponding period in
2017. Service fee revenue increased by $2.4 million due to new and expanded client relationships, partially offset by the impact of client terminations,
including the termination of certain lower-margin engagements. Product revenue, net, decreased by $6.3 million due to the revenue stream being primarily
dependent on one client, which restructured its operations and discontinued certain product lines which has resulted, and is expected to continue to result, in
reduced product revenue activity. Pass-through revenue increased primarily as a result of freight related activity.
PFS Operations gross margin improved to 18.4% for the twelve months ended December 31, 2018 as compared to 15.7% in the same period of the
prior year primarily due to improved operational efficiency through enhanced warehouse technology capabilities, focus on higher margin service offerings,
including project work, and the termination of certain lower margin client engagements, which did not meet our profitability objectives and were
discontinued.
Direct operating expenses increased by $4.9 million for the twelve months ended December 31, 2018 compared to the corresponding period in 2017.
The increase was primarily due to higher personnel and facility related costs.
LiveArea Professional Services (in thousands, except percentages)
Revenues:
Service fee revenue
Pass-through revenue
Total revenues
Costs of revenues:
Cost of service fee revenue
Cost of pass-through revenue
Total costs of revenues
Gross profit
Direct operating expenses
Direct contribution
Year Ended December 31,
2018
2017
Change
Change, %
$
$
$
$
$
82,413
2,011
84,424
41,669
2,011
43,680
40,744
27,401
13,343
$
$
$
$
$
$
87,913
2,104
90,017
44,543
2,104
46,647
43,370
31,612
11,758
$
$
$
$
$
$
(5,500)
(93)
(5,593)
(2,874)
(93)
(2,967)
(2,626)
(4,211)
1,585
(6)%
(4)%
(6)%
(6)%
(4)%
(6)%
(6)%
(13)%
13%
LiveArea Professional Services revenues for the twelve months ended December 31, 2018 decreased by $5.6 million compared with the corresponding
period in 2017. The decreases in revenues are primarily due to reduced technology services project activity for certain clients, as well as client terminations.
LiveArea Professional Services gross margin increased slightly to 48.3% from 48.2% for the twelve months ended December 31, 2018 compared with
the corresponding period in 2017.
Direct operating expenses decreased by $4.2 million for the twelve months ended December 31, 2018 compared to the corresponding period in 2017.
The decreases were primarily due to lower personnel costs attributable to our cost reduction efforts in response to lower revenues as well as reduced
amortization of intangible assets of $1.8 million. Excluding the decrease in amortization of intangible assets, direct contribution decreased by $0.2 million.
Corporate (in thousands, except percentages)
Year Ended December 31,
2018
2017
Change
Change, %
Unallocated corporate expenses
$
34,424
$
36,331
$
(1,907)
(5)%
Unallocated corporate expenses decreased by $1.9 million for the twelve months ended December 31, 2018 compared to the corresponding period in
2017. The decrease was primarily due to a $2.1 million decrease in earnout expense related to our final performance-based contingent payment applicable to
our 2015 acquisition of CrossView, Inc. as well as reduced severance costs of $0.8 million, partially offset by an increase in stock-based compensation
expenses of $0.7 million. Excluding these expenses, unallocated corporate expenses increased by $0.3 million.
Income Taxes
During the twelve months ended December 31, 2018, we recorded a tax provision comprised primarily of $1.7 million related to the majority of our
international operations, $0.6 million related to state income taxes, and $0.5 million associated with the tax amortization of goodwill relation to our
CrossView acquisition. A valuation allowance has been provided for the majority of our domestic net deferred tax assets, which are primarily related to our
net operating loss carryforwards, and for certain foreign deferred tax assets.
28
On December 22, 2017, the United States government enacted the Tax Cuts and Jobs Act, commonly referred to as the Tax Reform Act. The Tax
Reform Act included 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 provisions
related 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 resulted in a one-time
U.S. tax liability on those earnings which have not previously been repatriated to the U.S. (the “Transition Tax”). The impacts of this legislation are outlined
below:
•
•
•
Beginning January 1, 2018, the U.S. corporate income tax rate is 21%. The Company is required to recognize the impacts of this rate change on
its deferred tax assets and liabilities in the period enacted. At December 31, 2017, 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%. The amount related to the remeasurement of our
deferred tax balance was $12.1 million that was mostly offset by a change in the valuation allowance, except for a $0.6 million benefit that was
recorded to our statement of operations related to tax amortization of goodwill for the period ended December 31, 2017.
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 the
Company’s analysis of the transition tax, there were no provisional amounts recorded for the year ended December 31, 2017. The Company
concluded the Transition tax analysis in the fourth quarter of 2018 and concluded no measurement period adjustments were required.
The Tax Reform Act creates a new requirement that Global Intangible Low Tax Income (“GILTI”) earned by foreign subsidiaries must be
included currently in the gross income of the U.S. shareholder. Due to the complexity of the new GILTI tax rules, the Company is continuing to
evaluate this provision of the Tax Reform Act. Under U.S. GAAP, the Company is permitted to make an accounting policy election to either
treat taxes due on future inclusions in U.S. taxable income related to GILTI as a current period expense when incurred or to factor such amounts
into the Company's measurement of its deferred taxes. The Company has a GILTI inclusion in taxable income of $0.6 million which has been
considered in the tax provision for the period ended December 31, 2018.
Liquidity and Capital Resources
We currently believe our cash position, financing available under our credit facilities and funds generated from operations will satisfy our presently
known operating cash needs, our working capital and capital expenditure requirements, our current debt and lease obligations, and additional loans to our
subsidiaries, if necessary, for at least the next twelve months.
To obtain additional financing in the future, in addition to our current cash position, we plan to evaluate various financing alternatives including the
sale of equity, utilizing capital or operating leases, borrowing under our credit facilities, expanding our current credit facilities or entering into new debt
agreements. No assurances can be given we will be successful in obtaining any additional financing or the terms thereof.
Our cash position decreased in 2018 primarily due to payments made applicable to capital expenditures, acquisition-related contingencies and debt
obligations, all of which combined exceeded our cash generated from operations.
Cash Flows from Operating Activities
During 2018, cash provided from operations was $11.6 million, compared to $11.1 million in 2017. Cash flow from operating activities increased
primarily due to improvements in net income for the year ended December 31, 2018 as compared to the same period in 2017.
Cash Flows from Investing Activities
Cash used in investing activities included capital expenditures of $4.9 million and $4.6 million in the years ended December 31, 2018 and 2017,
respectively, exclusive of property and equipment acquired under debt and capital lease financing, which consisted primarily of capitalized software costs and
equipment purchases.
Capital expenditures have historically consisted of additions to upgrade our management information systems, development of customized technology
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 activity and our targeted
growth plans, we anticipate our total investment in upgrades and additions to facilities and information technology solutions and services for the upcoming
twelve months, including costs to implement new clients, will be approximately $7.0 million to $10.0 million, although additional capital expenditures may
be necessary to support the infrastructure requirements of new clients. To maintain our current operating cash position, a portion of these expenditures may be
financed through client reimbursements, debt, operating or capital leases or additional equity. We may elect to
29
modify or defer a portion of such anticipated investments in the event that we do not obtain the financing results necessary to support such investments.
Cash Flows from Financing Activities
During 2018, cash used in financing activities was $9.9 million, compared to $14.7 million in 2017. In both years, the cash used in financing activity
was primarily related to the paydown of debt and capital lease obligations as well as the payout of performance-based contingent payments related to our
prior year acquisitions.
Working Capital
During 2018, our working capital increased to $22.9 million from $13.7 million at December 31, 2017, primarily related to income generated from
operations before working capital changes, the refinancing of our U.S. Credit Agreement, which decreased the current portion of our long-term debt, and the
reduction of our performance based contingent payment partially offset by capital expenditures and the reductions of our capital lease obligations.
Inventory Financing
To 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 $11.0 million. We have provided a collateralized guarantee to secure the
repayment 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.
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 by
PFSweb, Inc.), provide guarantees, make investments and loans, pledge assets, make changes to capital stock ownership structure and pay dividends, as well
as financial covenants, such as annualized revenue to working capital, net profit after tax to revenue and total liabilities to tangible net worth, as defined, and
are secured by all of the assets of Supplies Distributors, as well as a collateralized guaranty of PFSweb. Additionally, we are required to maintain a
subordinated loan to Supplies Distributors of no less than $1.0 million, not maintain restricted cash of more than $5.0 million, are restricted with regard to
transactions with related parties, indebtedness and changes to capital stock ownership. Furthermore, we are obligated to repay any over-advance made to
Supplies Distributors or its subsidiaries under these facilities if they are unable to do so. We have also provided a guarantee of substantially all of the
obligations of Supplies Distributors and its subsidiaries to IBM and Ricoh.
Debt and Capital Lease Obligations
U.S. Credit Agreement. In August 2015, we entered into a credit agreement (“Credit Agreement”) with Regions Bank, as agent for itself and one or
more future lenders (the “Lenders”). Under the Credit Agreement, and subject to the terms set forth therein, the Lenders provided us with a revolving loan
facility for up to $32.5 million and a term loan facility for up to $30 million. Borrowings under the Credit Agreement accrued interest at a variable rate based
on prime rate or Libor, plus an applicable margin.
On November 1, 2018, we entered into Amendment No.1 to our credit agreement with Regions Bank (the “Amended Facility”). The Amended
Facility provides for an increase in availability of our revolving loans to $60.0 million, with the ability for a further increase of $20.0 million to $80.0 million,
and the elimination of the term loan. Amounts outstanding under the term loan were reconstituted as revolving loans. The Amended Facility also extends the
maturity date to November 1, 2023.
In accordance with ASC 470, Debt (“ASC 470”), we recorded a $0.1 million loss on early extinguishment of debt in 2018 related to the Amended
Facility.
As of December 31, 2018 and 2017, the weighted average interest rate on the revolving loan facility was 4.57% and 4.65%, respectively. As of
December 31, 2017, the weighted average interest rate on the term loan facility was 4.05%. In connection with the Amended Facility, the Company paid $0.3
million of fees, which are being amortized through the life of the Amended Facility and are reflected as a net reduction in debt. The Amended Facility is
secured by a lien on substantially all of the operating assets of the US entities and a pledge of 65% of the shares of certain of our foreign subsidiaries. The
Amended Facility contains cross default provisions, various restrictions upon the Company’s ability to, among other things, merge, consolidate, sell assets,
incur indebtedness, make loans and payments to subsidiaries, affiliates and related parties, make capital expenditures, make investments and loans, pledge
assets, make changes to capital stock ownership structure, as well as financial covenants, as defined, of a minimum consolidated fixed charge ratio and a
maximum consolidated leverage ratio.
Master Lease Agreements. The Company has various agreements that provide for leasing or financing transactions of equipment and other assets and
will continue to enter into such arrangements as needed to finance the purchasing or leasing of certain equipment or other assets. Borrowings under these
agreements, which generally have terms of three to five years, are generally secured by the related equipment, and in certain cases, by a Company parent
guarantee.
Other than our capital and operating lease commitments, we do not have any other material financial commitments, although future client contracts
may require capital expenditures and lease commitments to support the services provided to such clients.
30
Debt Covenants
Certain of our credit facilities contain various financial and non-financial covenants, including covenants that restrict our ability to incur additional
indebtedness, create or permit liens on assets, engage in mergers or consolidations, and place restrictions on the transfer of assets or the payment of dividends
between us and our subsidiaries.
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, the
lenders would be entitled to accelerate the repayment of any outstanding credit facility obligations, and exercise all other rights and remedies, including sale
of collateral. An acceleration of the repayment of our credit facility obligations may have a material adverse impact on our financial condition and results of
operations. We can provide no assurance we will have the financial ability to repay all such obligations. As of December 31, 2018, we were in compliance
with all debt covenants. Further, non-renewal of any of our credit facilities may have a material adverse impact on our business and financial condition.
Off-Balance Sheet Arrangements
There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
New Accounting Pronouncements
See Note 2 “Significant Accounting Policies” to the consolidated financial statements for our discussion about new accounting pronouncements
adopted and those pending.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of
America. These accounting principles require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of our
financial statements and the reported amounts of revenues and expenses during the reporting period. While we do not believe the reported amounts would be
materially 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 to our
business, operating results and financial condition. We evaluate our estimates and assumptions on an ongoing basis. We base our estimates on experience and
on various other assumptions that we believe to be reasonable under the circumstances. All of our significant accounting policies are disclosed in the notes 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 and
requires us to make difficult, subjective or complex judgments or estimates about matters that are uncertain. During the past two years, we have not made any
material changes in accounting methodology used to establish the critical accounting estimates discussed below. The following represent certain critical
accounting policies that require us to exercise our business judgment or make significant estimates. In addition, there are other items within our consolidated
financial statements that require estimation but are not deemed critical as defined above.
Revenue Recognition
We derive revenue primarily from services provided under contractual arrangements with our clients or from the sale of products under our distributor
agreements. We recognize revenue in accordance with ASC 606, when control of the promised goods or services is transferred to our clients and customers, in
an amount that reflects the consideration that we expect to receive in exchange for those goods or services.
We will often enter into contracts with clients and customers that contain multiple promises to transfer control of multiple products and/or services. To
the extent a contract includes provisioning multiple products or services, we apply judgment to determine whether promised deliverables are capable of being
distinct and are distinct in the context of the contract. If these criteria are not met, sales of different products or services are accounted for as a combined
performance obligation. For arrangements with multiple distinct performance obligations, we allocate consideration among the performance obligations based
on their relative standalone selling price. Standalone selling price is the price at which we would sell a promised good or service separately to our client and
customers.
Our service fee revenue primarily relates to our order to cash, fulfillment, customer care, consulting, design, digital marketing and technology services.
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 retainer
basis for our professional services, or a per transaction basis, such as a per item basis for fulfillment services or a per labor hour basis for web-enabled
customer contact center services. Additional fees are billed for other services. For technology and digital agency services, we typically charge on a fixed cost
basis based on an estimated maximum number of professional service labor hours or bill for each professional labor hour at a per hour price.
31
Within our PFS Operations unit, our performance obligations typically consist of standing ready to provide a service over a contract term. As such, our
performance obligations within service fee revenue across the company are generally transferred to clients over time. A time-elapsed output measure is used
to determine progress, with individual time increments representing a single series performance obligation. Variable consideration charged within these
contracts is allocated to the individual reporting period in which the service was provided. Within our LiveArea Professional Services unit, our contracts are
structured so that the amount the Company has a right to invoice corresponds directly with the value of our performance to date, we will elect the ‘as-
invoiced’ practical expedient and recognize revenue as we have a right to invoice. If our contract is not structured such that it meets the criteria for this
practical expedient, then we use an input measure of progress based on labor hours incurred to date to measure our progress to completion. The Company has
determined that the above methods provide a faithful depiction of the transfer of services to the customer.
We perform set-up and integration services to support our fulfillment activities. When we determine these set-up and integration services do not meet
the criteria for recognition as a separate performance obligation, any start up fees received represent a non-refundable up-front fee and are allocated to the
other performance obligations within that contract. The Company recognizes revenue for non-refundable upfront implementation fees on a straight-line basis
over the period between the initiation of the services through the end of the contract term. Related costs are capitalized as costs to fulfill the contract and are
recognized over the expected performance period.
For contracts recognized over time, we recognize the estimated loss to the extent the project has been completed based on actual hours incurred
compared to the total estimated hours. A loss is recognized when the current estimate of the consideration we expect to receive, modified to include any
variable consideration, is less than the current estimate of total costs for the contract.
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 the
transaction and net of costs when we are acting as an agent between the customer or client and the vendor. Whether we are the principal or agent in the
transaction is determined by whether we control the service being provided.
Depending on the terms of the customer arrangement, product revenue is recognized at a point in time when control transfers to the customer. This is
either upon shipment of the product or when the customer receives the product. Product revenue is reported net of estimated variable consideration related to
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 than estimated by management, additional expense may be incurred.
Allowance for Doubtful Accounts
The determination of the collectability of amounts due from our clients and customers requires us to use estimates and make judgments regarding
future events and trends, including monitoring our clients’ and customers’ payment history and current credit worthiness to determine that collectability is
reasonably assured, as well as consideration of the overall business climate in which our clients and customers operate. Inherently, these uncertainties require
us to make frequent judgments and estimates regarding our clients and customers’ ability to pay amounts due us to determine the appropriate amount of
valuation allowances required for doubtful accounts. Provisions for doubtful accounts are recorded when it becomes evident the client or customer will not
make the required 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 the amount due.
In our Retail model, we also maintain an allowance for uncollectible vendor receivables, which arise from inventory returns to vendors, vendor
rebates, price protections and other promotions. We determine the sufficiency of the vendor receivable allowance based upon various factors, including
payment history and vendor communication. Amounts received from vendors may vary from amounts recorded because of potential non-compliance with
certain elements of vendor programs. If our estimated allowances for uncollectible accounts or vendor receivables subsequently prove insufficient, an
additional allowance may be required.
We believe our allowances for doubtful accounts are adequate to cover anticipated losses under current conditions; however, uncertainties regarding
changes in the financial condition of our clients and customers, either adverse or positive, could impact the amount and timing of any additional provisions
for doubtful accounts that may be required.
Inventory Reserves
Inventories (merchandise, held for resale, all of which are finished goods) are stated at the lower of weighted average cost or net realizable value.
Under the Retail model, we assume responsibility for slow-moving inventory under certain distributor agreements, subject to certain termination rights, but
have the right to return product rendered obsolete by engineering changes, as defined. We review inventories for impairment on a periodic 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 the inventory. This requires
us to record provisions and maintain reserves for excess or obsolete inventory. If write-downs of inventories are necessary, the cost basis of that inventory is
adjusted. To determine these reserve amounts, we regularly review inventory quantities on hand and compare them to estimates of future product demand and
market conditions. These estimates and forecasts inherently include uncertainties and require us to make judgments regarding potential outcomes. We believe
our reserves are adequate to cover anticipated losses under current conditions; however, significant or unanticipated changes to our estimates and forecasts,
either adverse or positive, could impact the amount and timing of any additional provisions for excess or obsolete inventory that may be required.
32
Stock Compensation
We utilize our Employee Stock and Incentive Plan (the “Employee Plan”) to help attract, retain and incentivize qualified executives, key employees
and non-employee directors to increase our shareholder value and help build and sustain growth. The Employee Plan provides for the granting of incentive
awards in a variety of forms, such as the award of an option, stock appreciation right, restricted stock award, restricted stock unit, deferred stock unit, among
other 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 have a
market condition, we estimate the compensation cost using a Monte-Carlo simulation. The estimated fair value for awards involves assumptions for expected
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 these
input assumptions is prescribed by authoritative guidance, and, therefore, should be used to estimate expected volatility or expected term, the fair value
calculated for our stock-based compensation could change significantly.
Income Taxes
The liability method is used for determining our income taxes, under which current and deferred tax liabilities and assets are recorded in accordance
with 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 tax
rate expected to be in effect when taxes are actually paid or recovered. Valuation allowances are established to reduce deferred tax assets to their net realizable
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 valuation allowances,
we have considered and made judgments and estimates regarding estimated future taxable income. These estimates and judgments include some degree of
uncertainty and changes in these estimates and assumptions could require us to adjust the valuation allowances for our deferred tax assets. The ultimate
realization of our deferred tax assets depends on the generation of sufficient taxable income in the applicable taxing jurisdictions. Although we believe 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 taxable
income in any jurisdiction requires the interpretation of the related tax laws and regulations and the use of estimates and assumptions regarding significant
future events such as the amount, timing and character of deductions, permissible revenue recognition methods under the tax law and the sources and
character of income and tax credits. Changes in tax laws, regulations, foreign currency exchange restrictions or our level of operations or profitability in each
taxing jurisdiction could have an impact on the amount of income taxes that we provide during any given year.
Business Combinations
We account for business combinations under the acquisition method of accounting, which requires the assets and liabilities to be recorded at their
respective fair values as of the acquisition date in the consolidated financial statements. The determination of estimated fair value may require us to make
significant estimates and assumptions, including estimates of future financial performance of the acquired entity. The purchase price is the fair value of the
total consideration conveyed to the seller and the excess of the purchase price over the fair value of the acquired identifiable net assets, where applicable, is
recorded 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 Assets
Long-lived assets include property, intangible assets, goodwill and certain other assets. We make judgments and estimates in conjunction with the
carrying 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 review
goodwill for impairment at least annually, during the fourth quarter. We record impairment losses in the period in which we determine the carrying amount is
not recoverable. 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
to be 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
subject to review.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
33
Item 8.
Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PFSweb, Inc. and Subsidiaries
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Income (Loss)
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
34
Page
35
36
37
38
39
40
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 Statements
We have audited the accompanying consolidated balance sheets of PFSweb, Inc. (the “Company”) and subsidiaries as of December 31, 2018 and
2017, the related consolidated statements of operations and comprehensive income (loss), shareholders’ equity, and cash flows for the years then ended, and
the related notes (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 the Company and subsidiaries at December 31, 2018 and 2017, and the results of their operations and their cash
flows for the years then ended, 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's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 18, 2019 expressed an
unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the
Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission 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
reasonable assurance 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 disclosures in 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, LLP
We have served as the Company's auditor since 2015.
Dallas, Texas
March 18, 2019
35
PFSWEB, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31
(In thousands, except share data)
CURRENT ASSETS:
ASSETS
Cash and cash equivalents
Restricted cash
Accounts receivable, net of allowance for doubtful accounts of $585 and $373 at
December 31, 2018 and December 31, 2017, respectively
Inventories, net of reserves of $298 and $342 at December 31, 2018 and
December 31, 2017, respectively
Other receivables
Prepaid expenses and other current assets
Total current assets
PROPERTY AND EQUIPMENT, net
IDENTIFIABLE INTANGIBLES, net
GOODWILL
OTHER ASSETS
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Trade accounts payable
Accrued expenses
Current portion of long-term debt and capital lease obligations
Deferred revenue
Performance-based contingent payments
Total current liabilities
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, less current portion
DEFERRED REVENUE, less current portion
DEFERRED RENT
OTHER LIABILITIES
Total liabilities
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; 19,294,296 and
19,058,685 shares issued at December 31, 2018 and December 31, 2017,
respectively; and 19,260,829 and 19,025,218 outstanding at December 31, 2018
and December 31, 2017, respectively
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive income (loss)
Treasury stock at cost, 33,467 shares
Total shareholders’ equity
Total liabilities and shareholders’ equity
2018
2017
15,419 $
207
72,415
6,090
4,014
6,943
105,088
21,496
1,803
45,185
3,501
177,073 $
47,580 $
24,623
2,610
7,328
—
82,141
39,348
1,927
4,625
2,449
130,490
19,078
214
72,062
5,326
5,366
6,633
108,679
24,178
3,371
45,698
3,861
185,787
45,070
29,074
9,460
7,405
3,967
94,976
37,866
4,034
5,464
2,150
144,490
—
—
19
155,455
(107,773)
(993)
(125)
46,583
177,073 $
19
150,614
(109,281)
70
(125)
41,297
185,787
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
36
PFSWEB, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31
(In thousands, except per share data)
REVENUES:
Service fee revenue
Product revenue, net
Pass-through revenue
Total revenues
COSTS OF REVENUES:
Cost of service fee revenue
Cost of product revenue
Cost of pass-through revenue
Total costs of revenues
Gross profit
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Income from operations
INTEREST EXPENSE, net
Income (loss) from operations before income taxes
INCOME TAX EXPENSE
NET INCOME (LOSS)
NET INCOME (LOSS) PER SHARE:
Basic
Diluted
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic
Diluted
COMPREHENSIVE INCOME (LOSS):
Net income (loss)
Foreign currency translation adjustment, net of taxes
TOTAL COMPREHENSIVE INCOME (LOSS)
2018
2017
230,484 $
34,350
61,326
326,160
146,827
32,710
61,326
240,863
85,297
78,800
6,497
2,499
3,998
2,770
1,228 $
0.06 $
0.06 $
19,203
19,826
1,228 $
(1,063)
165 $
233,580
40,663
52,582
326,825
155,160
38,504
52,582
246,246
80,579
79,981
598
2,738
(2,140)
1,824
(3,964)
(0.21)
(0.21)
18,933
18,933
(3,964)
650
(3,314)
$
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
37
PFSWEB, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands, except share data)
Common Stock
Additional
Paid-In
Shares
Amount
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
Treasury Stock
Shares
Amount
Total
Shareholders'
Equity
Balance, December 31, 2016
18,768,567 $
Net loss
Stock-based compensation expense
Exercise of stock options
Issuance of restricted stock
Tax withholding on restricted stock
Non-cash compensation expense
Shares issued related to acquisitions
Foreign currency translation adjustment,
net of taxes
Balance, December 31, 2017
Net income
Impact of the adoption of new accounting
pronouncement
Stock-based compensation expense
Exercise of stock options
Issuance of restricted stock
Tax withholding on restricted stock
Shares issued related to acquisitions
Foreign currency translation adjustment,
net of taxes
—
—
168,823
73,122
—
48,173
19 $ 146,286 $ (105,317) $
—
—
—
—
—
—
—
—
(3,964)
—
—
—
—
—
—
3,333
770
—
(256)
128
353
(580) 33,467 $ (125) $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
19,058,685
—
—
19 150,614
—
—
—
(109,281)
1,228
—
650
70 33,467
—
—
—
—
—
—
—
—
—
4,032
350
(363)
822
280
—
—
—
—
—
68,698
89,915
76,998
—
—
—
—
—
—
—
—
—
—
—
—
—
(125)
—
—
—
—
—
—
—
40,283
(3,964)
3,333
770
—
(256)
128
353
650
41,297
1,228
280
4,032
350
—
(363)
822
Balance, December 31, 2018
19,294,296 $
—
—
—
19 $ 155,455 $ (107,773) $
(1,063)
—
—
(993) 33,467 $ (125) $
(1,063)
46,583
The accompanying notes are an integral part of these consolidated financial statements.
38
PFSWEB, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
2018
2017
$
1,228
$
Depreciation and amortization
Amortization of debt issuance costs
Provision for doubtful accounts
Provision for excess and obsolete inventory
Loss on disposition of fixed assets
Loss on early extinguishment of debt
Deferred income taxes
Stock-based compensation expense
Non-cash compensation expense
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses, other receivables and other assets
Deferred rent
Trade accounts payable, deferred revenue, accrued expenses and other liabilities
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment
Proceeds from sale of property and equipment
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock
Taxes paid on behalf of employees for withheld shares
Payments on performance-based contingent payments
Payments on capital lease obligations
Payments on term loan
Payments on revolving loan
Borrowings on revolving loan
Debt issuance costs
Payments on other debt
Borrowings on other debt
Net cash used in financing activities
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
NET DECREASE IN CASH AND CASH EQUIVALENTS
Cash and cash equivalents, beginning of period
Restricted cash, beginning of period
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period
Cash and cash equivalents, end of period
Restricted cash, end of period
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, end of period
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes
Cash paid for interest
Non-cash investing and financing activities:
Property and equipment acquired under long-term debt and capital leases
Performance-based contingent payments through stock issuance
$
$
11,367
144
154
123
62
144
244
4,032
—
(1,525)
(890)
1,294
(742)
(4,070)
11,565
(4,936)
54
(4,882)
350
(363)
(849)
(2,505)
(27,000)
(126,743)
149,010
(283)
(1,556)
—
(9,939)
(410)
(3,666)
19,078
214
19,292
15,419
207
15,626
$
2,641 $
2,237
2,590
822
The accompanying notes are an integral part of these consolidated financial statements.
39
(3,964)
14,899
149
(26)
58
159
—
(274)
3,333
128
10,595
1,266
2,036
(14)
(17,292)
11,053
(4,652)
65
(4,587)
770
(256)
(2,004)
(3,064)
(2,438)
(97,846)
89,989
—
(1,219)
1,353
(14,715)
2,902
(5,347)
24,425
215
24,640
19,078
214
19,292
2,131
2,496
374
353
PFSWEB, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Overview
PFSweb, Inc. and its subsidiaries are collectively referred to as the “Company”, “us”, “we” or “our”; “Supplies Distributors” collectively refers to
Supplies Distributors, Inc. and its subsidiaries; “CrossView” refers to CrossView, LLC.; and “PFSweb” refers to PFSweb, Inc. and its subsidiaries, excluding
Supplies Distributors.
PFSweb is a global provider of omni-channel commerce solutions, including a broad range of technology, infrastructure and professional services, to
major brand name companies and others seeking to optimize their supply chain and to enhance their online and traditional business channels and initiatives in
the United States, Canada, and Europe. PFSweb’s service offerings include website design, creation and integration, digital agency and marketing,
eCommerce technologies, order management, customer care, logistics and fulfillment, financial management and professional consulting.
Supplies Distributors and PFSweb operate under distributor agreements with Ricoh Company Limited and Ricoh USA Inc., a strategic business unit
within the Ricoh Family Group of Companies (collectively hereafter referred to as “Ricoh”), under which Supplies Distributors acts as a distributor of various
Ricoh products. Supplies Distributors sells its products in the United States, Canada and Europe. Pursuant to agreements between PFSweb and Supplies
Distributors, 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 are
subject to periodic renewals, Ricoh sells product to Supplies Distributors and reimburses Supplies Distributors for certain freight costs, direct costs incurred
in passing on any price decreases offered by Ricoh to Supplies Distributors or its customers to cover price protection and certain special bids, the cost of
products provided to replace defective product returned by customers and other certain expenses, as defined. Supplies Distributors can return to Ricoh product
rendered obsolete by Ricoh engineering changes after customer demand ends. Ricoh determines when a product is obsolete. Ricoh and Supplies Distributors
also have agreements under which Ricoh reimburses or collects from Supplies Distributors amounts calculated in certain inventory cost adjustments. Supplies
Distributors passes through to customers marketing programs specified by Ricoh and administers such programs according to Ricoh guidelines.
Supplies Distributors also maintains agreements with certain additional clients where it operates as an agent for the resale of product between the
client and the customer, and records product revenue net of cost of product revenue as a component of service fee revenue.
2. Significant Accounting Policies
Principles of Consolidation
All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United
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, general and
administrative expenses in these consolidated financial statements also require management estimates and assumptions.
Estimates and assumptions about future events and their effects cannot be determined with certainty. The Company bases its estimates on historical
experience and various other assumptions believed to be applicable and reasonable under the circumstances. These estimates may change as new events
occur, as additional information is obtained and as the operating environment changes. These changes have been included in the consolidated financial
statements as soon as they became known. In addition, management is periodically faced with uncertainties, the outcomes of which are not within its control
and will not be known for prolonged periods of time. Based on a critical assessment of accounting policies and the underlying judgments and uncertainties
affecting the application of those policies, management believes the Company’s consolidated financial statements are fairly stated in accordance with
US GAAP, and provide a fair presentation of the Company’s financial position and results of operations.
Revenue and Cost Recognition
The Company derives revenue primarily from services provided under contractual arrangements with our clients or from the sale of products under our
distributor agreements. The majority of our revenue is derived from contracts and projects that can span from a few months to three to five years.
40
The Company recognizes revenue when control of the promised goods or services is transferred to its customers, in an amount that reflects the
consideration that we expect to receive in exchange for those goods or services. Control is transferred to a client or customer when, or as, the client or
customer obtains control over that asset. The transaction price includes fixed and, in certain contracts, variable consideration.
Variable consideration contained within our contracts includes discounts, rebates, incentives, penalties and other similar items. When a contract
includes variable consideration, the Company estimates the variable consideration to determine whether any of it needs to be constrained. The Company
includes the variable consideration in the transaction price only to the extent that it is probable that a significant reversal of the amount of cumulative revenue
recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. We estimate variable consideration and
constraints based on our review of the contract terms and conditions. Variable consideration and constraint amounts are the most likely amounts based on our
history with the customer. If no history is available, then we will recognize the most likely amount based on the range of possible consideration amounts.
Variable consideration was not significant for the year ended December 31, 2018 or any other reporting period presented. Variable consideration and
constraints are updated at each reporting date.
The Company’s billings for reimbursement of out-of-pocket expenses related to our Service Fee Revenues, consisting primarily of freight and shipping
supplies, are included in pass-through revenues. Other items included in pass-through revenues include travel and certain third-party vendor expenses such as
telecommunication charges. These other pass-through revenues are not deemed a material percentage of total revenues. In certain of our contracts, our clients
elect to handle shipping related costs. Therefore, we present pass-through revenues separately, as we believe it provides better transparency to our core
services.
Incremental costs to obtain a contract (such as sales commissions) are expensed when incurred when the amortization period is one year or less;
otherwise, incremental contract costs are expensed over time as promised goods and services are transferred to a customer. Recurring operating costs for
contracts with customers are recognized as incurred. Certain eligible, nonrecurring costs incurred in the initial phases of our contracts are capitalized when
such costs (1) relate directly to the contract, (2) generate or enhance resources that will be used in satisfying the performance obligation in the future, and (3)
are expected to be recovered. Capitalized amounts are monitored regularly for impairment.
The Company enters into contracts with customers that contain multiple promises to transfer control of multiple products and/or services. To the extent
a contract includes provisioning multiple products or services, judgment is applied to determine whether promised deliverables are distinct and are distinct in
the context of the contract. If this criteria is not met, sales of different products or services are accounted for as a combined performance obligation. For
arrangements with multiple distinct performance obligations, consideration is allocated among the performance obligations based on their relative standalone
selling price. Standalone selling price is the price at which we would sell a promised good or service separately to the customer. Our warranties generally
provide a customer with assurance that the related deliverable will function as the parties intended because it complies with agreed-upon specifications and is
therefore not considered an additional performance obligation in the contract.
For contracts recognized over time, we recognize the estimated loss to the extent the project has been completed based on actual hours incurred
compared to the total estimated hours. A loss is recognized when the current estimate of the consideration we expect to receive, modified to include any
variable consideration, is less than the current estimate of total costs for the contract.
Service Fee Revenue
The Company’s service fee revenue primarily relates to our order to cash, fulfillment, customer care, consulting, design, digital marketing and
technology services. The Company typically charges its service fee revenue on either a time and materials, fixed price, cost-plus a margin, a percent of
shipped revenue, or retainer basis for professional services, or a per transaction basis, such as a per item basis for fulfillment services or a per labor hour basis
for customer contact center services. Additional fees are billed for other services.
Product Revenue
Depending on the terms of the customer arrangement, product revenue and product cost is recognized at the point the customer gains control of the
asset. The specific point in time when control transfers depends on the contract with the customer. Typically, our terms are Freight on Board (“FOB”)
Shipping point, which we believe to be indicative of when control is transferred. We permit our customers to return product. Product revenue is reported net
of projected future returns. Future returns are estimated based on historical return information. Management also considers any other current information and
trends in making estimates.
Gross versus Net Revenue
In instances where revenue is derived from product sales from a third-party, we record revenue on a gross basis when we are a principal to the
transaction and net of costs when we are acting as an agent between the customer or client and the vendor. We are the principal and therefore record revenue
on a gross basis if we control a promised good or service before transferring that good or service to the customer. We are an agent and record revenue on a net
basis for what we retain for agency services if our role is to arrange for another entity to control the promised goods or services.
41
Practical expedients
The standard allows entities to use several practical expedients, including the as-invoiced practical expedient, determining whether a significant
financing component exists, treatment of sales and usage-based taxes, and the recognition of certain incremental costs of obtaining a contract with a client or
customer. Contracts of less than a year with a financing component will be expensed in that period as a practical expedient. Our current contracts do not have
a financing component. Commissions on contracts of less than one year will be expensed as a practical expedient. Commissions will be capitalized on
contracts over one year. As of December 31, 2018, we did not have any material commissions on contracts in excess of one year. We also present our
revenues net of sales and usage-based tax as a practical expedient.
Contract modifications
Contract modifications are routine in our industry. For each modification, the Company assesses whether the modification changes the scope and or
price of the original agreement, and whether those changes are commensurate with stand-alone selling price. Based on the results of this assessment, the
Company either accounts for the modification as a separate contract, as a change in the original contract, or as a termination of the old contract and creation of
a new contract in accordance with Accounting Standards Codification (“ASC”) 606-10-25-12.
Concentration of Business and Credit Risk
During 2018, one product customer or service fee client relationships represented more than 10% of the Company’s consolidated total net revenues.
During 2017, no product customer or service fee client relationships represented more than 10% of the Company’s consolidated total net revenues. As of
December 31, 2018, one client exceeded 10% of the Company’s total accounts receivable. As of December 31, 2017, no client exceeded 10% of the
Company’s total accounts receivable.
Cash and Cash Equivalents
Cash equivalents are defined as short-term highly liquid investments with original maturities, when acquired, of three months or less. At times, the
Company has cash balances in domestic bank accounts that exceed Federal Deposit Insurance Corporation insured limits. The Company has not experienced
any losses related to these cash concentrations.
Accounts Receivable
The Company recognizes revenue and records trade accounts receivable, pursuant to the methods described above, when collectability is reasonably
assured. Collectability is evaluated in the aggregate and on an individual customer or client basis taking into consideration payment due date, historical
payment trends, current financial position, results of independent credit evaluations and payment terms. Related reserves are determined by either using
percentages applied to certain aged receivable categories based on historical results, reevaluated and adjusted as additional information is received, or a
specific identification method. After all attempts to collect a receivable have failed, the receivable is written off against the allowance for doubtful accounts.
Other Receivables
Other receivables primarily include amounts due from Ricoh for costs incurred by the Company under the distributor agreements and value added tax
receivables.
Inventories
Inventories (all of which are finished goods) are stated at the lower of weighted average cost and net realizable value. The Company establishes
inventory reserves based upon estimates of declines in values due to inventories that are slow moving or obsolete, excess levels of inventory or values
assessed 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 the
distributor agreements, the agreements provide for the parties to mutually agree on a plan of disposition of Supplies Distributors’ then existing inventory.
Property and Equipment
The 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 the
estimated 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 expected
future undiscounted cash flows from the asset are estimated and compared with the carrying amount of the asset. If the sum of the estimated undiscounted
cash 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 the
asset with its carrying amount. Fair value is generally determined based on discounted cash flows or appraised values, as appropriate.
42
Business Combinations
The Company accounts for business combinations under the acquisition method of accounting, which requires the assets and liabilities to be recorded
at their respective fair values as of the acquisition date in the consolidated financial statements. The determination of estimated fair value may require
management to make significant estimates and assumptions. The purchase price is the fair value of the total consideration conveyed to the seller and the
excess of the purchase price over the fair value of the acquired identifiable net assets, where applicable, is recorded as goodwill. The results of operations of
an acquired business are included in the Company’s consolidated financial statements from the date of acquisition. Costs associated with the acquisition of a
business 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 and
developed technology.
Definite-lived intangible assets are amortized over their estimated useful life and only tested for impairment whenever events or circumstances
indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when the carrying amount of the asset exceeds
the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition. The impairment loss to be recorded
would 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 valuation
technique.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the identifiable net assets acquired. Goodwill and other intangible assets
with indefinite lives are not amortized to operations, but instead are reviewed for impairment at least annually in the fourth quarter, or more frequently when
there is an indicator of impairment. Goodwill impairment exists when a reporting unit’s goodwill carrying value exceeds its implied fair value. The Company
has no intangible asset with indefinite useful lives, other than goodwill.
Accounting Standards Update (“ASU”) Topic 350: Testing Goodwill for Impairment (“ASU Topic 350”) permits an entity to make a qualitative
assessment of whether it is more likely than 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 is referred to as “Step 0.” When performing Step 0, an entity evaluates relevant events and circumstances,
including but not limited to, macroeconomic conditions, industry and market conditions, overall financial performance, reporting unit specific events and
entity specific events. If, after completing Step 0, 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 and
the 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 the
reporting 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 the
reporting 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 unit
goodwill. 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 accepted
valuation techniques, including discounted cash flows and market multiple analyses. These types of analyses contain uncertainties because they require
management 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 historical
experience and projections of future operating performance. If these assumptions differ materially from future results, the Company may record impairment
charges in the future.
Foreign Currency Translation and Transactions
The functional currency of each of the Company’s foreign subsidiaries is local currency. Assets and liabilities are translated at exchange rates in effect
at the end of the period, and income and expense items are translated at the average exchange rates on a monthly basis. Translation adjustments are
accumulated and reported as a component of accumulated other comprehensive income in the consolidated statements of shareholders’ equity.
The Company includes currency gains and losses on short-term intercompany advances in the determination of net income and loss. The Company
reports gains and losses on intercompany foreign currency transactions that are of a long-term investment nature as a component of accumulated other
comprehensive income in the consolidated statements of shareholders’ equity.
43
Stock-Based Compensation
The Company uses stock-based compensation, including stock options, deferred stock units and other market and performance stock-based awards to
provide long-term performance incentives for its executives, key employees and non-employee directors. From the service inception date to the grant date, the
Company recognizes compensation cost for all share-based payments based on the reporting date fair value of the award. After the grant date, compensation
cost is measured based on the grant date fair value. 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. The Company records compensation cost as a
component 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 the
compensation cost for certain of the awards that have a market condition using a Monte-Carlo simulation. The estimated fair value for awards involves
assumptions for expected dividend yield, stock price volatility, risk-free interest rates and the expected life of the award.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary
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 and
recognizes tax benefits only when management believes the relevant tax positions would more likely than not be sustained upon examination.
Fair Value of Financial Instruments
In accordance with ASC 825, Financial Instruments, fair value is determined utilizing a hierarchy of valuation techniques. The three levels of the fair
value 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 for
similar 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, other receivables, trade
accounts payable, debt, and capital lease obligations, approximate their fair values at December 31, 2018 and 2017 based on short terms to maturity or current
market prices and interest rates or observable inputs such as quoted prices in active markets.
Nonrecurring Fair Value Measurements
The purchase price of business acquisitions is allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their
estimated fair values on the acquisition dates, with any excess recorded as goodwill. The Company utilizes Level 3 inputs in the determination of the initial
fair value of assets and liabilities. Non-financial assets such as goodwill, intangible assets, software development costs and property and equipment are
subsequently 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 Standards
Pronouncements Recently Adopted
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASC 606, “Revenue from Contracts with Customers”, which replaces
numerous requirements in U.S. GAAP, including industry-specific requirements, provides companies with a single revenue recognition model for recognizing
revenue from contracts with clients and customers and significantly expands the disclosure requirements for revenue arrangements. The new standard, as
amended, became effective for us for interim and annual reporting periods beginning on January 1, 2018.
44
On January 1, 2018, we adopted ASC 606 using the modified retrospective method applied to the contracts that were not completed as of January 1,
2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to
be reported in accordance with our historic accounting under ASC 605, “Revenue Recognition”.
We recorded a net increase to opening retained earnings of $0.3 million as of January 1, 2018 due to the cumulative impact of adopting ASC 606, with
the impact primarily related to our adjustments to deferred revenues and costs. We recorded a reduction of $0.7 million to deferred revenue, a reduction of
$0.4 million to deferred costs, and a contract liability of $0.1 million.
The impact of applying ASC 606 for the year ended December 31, 2018 was immaterial to revenues and operating profits.
In August 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of
Certain Cash Receipts and Cash Payments - a consensus of the Emerging Issues Task Force” (“ASU 2016-15”). ASU 2016-15 is intended to reduce diversity
in practice in how certain transactions are classified in the statement of cash flows. Certain issues addressed in this guidance include debt payments or debt
extinguishment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, distributions
received from equity method investments and beneficial interests in securitization transactions. ASU 2016-15 is effective retrospectively for fiscal years
beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. Adoption of ASU 2016-15 as of January 1,
2018 changed the classification for certain contingent consideration payments from cash used in financing activities to cash provided by operating activities.
In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”). ASU 2016-18
amends the presentation of restricted cash within the consolidated statements of cash flows, requiring that restricted cash be added to cash and cash
equivalents on the consolidated statements of cash flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, and interim periods
within those fiscal years, with early adoption permitted. We adopted ASU 2016-18 in the three-month period ended March 31, 2018 on a retrospective basis
with no impact to our consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business” (“ASU 2017-
01”). ASU 2017-01 clarifies the definition of a business when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets
or businesses, ASU 2017-01 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2017. Adoption of ASU
2017-01 did not have an impact on our consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, “Compensation–Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU
2017-09”), clarifying when a change to the terms or conditions of a stock-based payment award must be accounted for as a modification. ASU 2017-09
requires modification accounting if the fair value, vesting condition or the classification of the award is not the same immediately before and after a change to
the terms and conditions of the award. ASU 2017-09 is effective for us on a prospective basis beginning on January 1, 2018. Adoption of ASU 2017-09 did
not have an impact on our consolidated financial statements as it is not our general practice to change either the terms or conditions of stock-based payment
awards once they are granted.
In March 2018, the FASB issued ASU 2018-05, “Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118” (“ASU 2018-
05”), which was effective immediately. The amendments in ASU 2018-05 provide guidance on when to record and disclose provisional amounts for certain
income tax effects of the Tax Cuts and Jobs Act (“Tax Reform Act”). The amendments also require any provisional amounts or subsequent adjustments to be
included in net income. Additionally, ASU 2018-05 discusses required disclosures that an entity must make with regard to the Tax Reform Act. The
accounting for the enactment of the Tax Reform Act is complete as of December 31, 2018. No material adjustments were recorded.
Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU No. 2016-02, “Leases” (“ASU 2016-02”). ASU 2016-02 establishes a right-of-use (“ROU”) model that
requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as
either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for fiscal years
beginning after December 15, 2018, including interim periods within those fiscal years. In July 2018, the FASB issued ASU No. 2018-11, which provides the
option of an additional transition method that allows entities to initially apply the new lease guidance at the adoption date and recognize a cumulative-effect
adjustment to the opening balance of retained earnings in the period of adoption.
We are in the process of implementing a leasing software application that help automate the accounting for our leases in accordance with the new
guidance. The most significant impact will be the recognition of ROU assets and lease liabilities for operating leases, while our accounting for capital leases
remains substantially unchanged. We will adopt the guidance for financial statements periods beginning January 1, 2019 using the modified retrospective
transition method and initially apply the transition provisions at January 1, 2019, which allows us to continue to apply the legacy guidance in ASC 840 for
periods prior to 2019. We will
45
elect the package of transition practical expedients, which, among other things, allows us to keep the historical lease classifications and not have
to reassess the lease classification for any existing leases as of the date of adoption. We will also make an accounting policy election to apply the short-term
lease exception, which allows us to keep leases with an initial term of twelve months or less off the balance sheet. While we are continuing to assess all
potential impacts of the standard, we expect to recognize right-of-use assets and lease liabilities for operating leases of approximately $41 million and $46
million as of January 1, 2019, respectively. The new guidance will not have a material impact on our consolidated statements of operations.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill impairment”
(“ASU 2017-04”), which removes Step 2 of the goodwill impairment test. A goodwill impairment will now be determined by the amount by which a
reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for annual reporting periods,
and interim periods therein, beginning after December 15, 2019, with early adoption permitted. We do not expect the adoption of ASU 2017-04 to have a
material impact on our consolidated financial statements.
In March 2018, the FASB issued ASU No. 2018-15 "Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement
That Is a Service Contract; Disclosures for Implementation Costs Incurred for Internal-Use Software and Cloud Computing Arrangements" (“ASU 2018-
15”), which aligns the accounting for implementation costs incurred in a hosting arrangement that is a service contract with the accounting for implementation
costs incurred to develop or obtain internal-use software under ASC 350-40, in order to determine which costs to capitalize and recognize as an asset. ASU
2018-15 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2019, and can be applied either
prospectively to implementation costs incurred after the date of adoption or retrospectively to all arrangements. We are currently in the process of evaluating
the impact of the adoption of ASU 2018-15 on our consolidated financial statements.
3. Acquisition
On August 5, 2015, we acquired substantially all of the assets, and assumed substantially all of the liabilities, in each case, other than certain specified
assets and liabilities, of CrossView an eCommerce systems integrator and provider of a wide range of eCommerce services in the U.S. and Canada.
Consideration paid by us included an initial cash payment of $30.7 million and 553,223 unregistered shares of our common stock. In addition, the purchase
agreement provided for future earn-out payments (“CrossView Earn-out Payments”) payable in 2016, 2017 and 2018 based on the achievement of certain
2015, 2016 and 2017 financial targets. During the year ended December 31, 2017, we paid an aggregate of $2.4 million in settlement of the 2016 CrossView
Earn-out Payments, of which $0.4 million was paid by the issuance of 48,173 restricted shares of our stock. During the year ended December 31, 2018, we
paid an aggregate of $4.1 million in settlement of the 2017 CrossView Earn-out Payments, of which $0.8 million was paid by the issuance of 76,998 restricted
shares of our stock. Fair value of performance-based contingent payments are based on the annual forecast for the acquired entity. As of December 31, 2017,
we had recorded a liability $4.0 million applicable to the estimated CrossView Earn-out Payments, which is included in performance-based contingent
payments in the consolidated balance sheet. As of December 31, 2018, we have no further liability for the CrossView Earn-out Payments. For the years
ended December 31, 2018 and 2017, we recognized $0.1 million and $2.2 million of additional expense related to the change in estimated fair value of the
performance-based contingent payments liability. For the year ended December 31, 2018, we paid $2.4 million of cash in excess of the original estimate for
performance-based contingent payment liability at acquisition date for the Cross-View Earn-out Payment. This payment is shown under changes in trade
accounts payable, deferred revenue, accrued expenses and other liabilities within operating activities of our consolidated statements of cash flows.
4. Revenue from Contracts with Clients and Customers
Performance Obligations and Revenue Recognition Timing
A performance obligation is a promise in a contract to transfer a distinct good or service to the client or customer and is the unit of account in ASC
606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is
satisfied.
Our performance obligations for the PFS Operations segment (“PFS Operations”), includes order to cash, fulfillment and customer care services, and
for the LiveArea Professional Services segment (“LiveArea”), include consulting, design, digital marketing and technology services. For arrangements with
multiple distinct performance obligations, we allocate consideration among the performance obligations based on their relative standalone selling price.
Standalone selling price is the price at which we would sell a promised good or service separately to our client and customers.
We typically price our professional services contracts on either a time and materials, fixed-price or a cost-plus margin basis.
For fixed-price arrangements, we typically recognize revenue based on the input method, as we believe that hours expended over time proportionately,
based on actual hours to budgeted hours during the period, provides the most relevant measure of progress for these contracts. For time and materials
contracts, we recognize revenue monthly based on the actual hours worked at the labor rates by job category, and cost of materials plus margin. We
recognize revenue for a performance obligation satisfied over time only if we can reasonably measure our progress toward complete satisfaction of the
performance obligation. In some circumstances (for
46
example, in the early stages of a contract), we may not be able to reasonably measure the outcome of a performance obligation, but we expect to recover the
costs incurred in satisfying the performance obligation. In those circumstances, we shall recognize revenue only to the extent of the costs incurred until such
time that we can reasonably measure the outcome of the performance obligation.
Contracts that are billed on a time and materials basis typically are structured such that the amount the company bills at each point in time corresponds
directly with the value of our performance to date. We have elected the ‘as-invoiced’ practical expedient for these contracts.
In addition, PFS Operations has certain product revenue where it acts as a reseller in which we have determined we do not have ultimate control of the
provisioning of the performance obligation. For these agreements, we recognize net revenue at a point in time when control transfers to the customer,
typically at FOB shipping point.
Remaining performance obligations represent the transaction price of firm orders for which work has not yet been performed. This amount does not
include 1) contracts that are less than one year in duration, 2) contracts for which we recognize revenue based on the right to invoice for services performed,
or 3) variable consideration allocated entirely to a wholly unsatisfied performance obligation. Much of our revenue qualifies for one of these exemptions. As
of December 31, 2018, the aggregate amount of the transaction price allocated to remaining performance obligations for contracts with an original expected
duration of one year or more was $25.0 million. We expect to recognize revenue on approximately 77% of the remaining performance obligations in 2019,
95% through 2020, and the remaining recognized thereafter.
Contract Assets and Contract Liabilities
Contract assets primarily relate to our rights to consideration for work completed but not billed at the reporting date and costs to fulfill assets
capitalized for PFS Operations implementation services. The contract assets are reclassified as receivables when the rights become unconditional. Costs to
Fulfill assets related to deferred costs, which are included within other current assets, other assets, and to software development costs, which are included
within property and equipment in our consolidated balance sheets. The contract liabilities primarily relate to the advance consideration received from clients
for contracts, including amounts received for implementation services which are not distinct performance obligations.
Our payment terms vary by the type and location of our clients and the type of services offered. The term between invoicing and when payment is due
is generally not significant.
Contract balances consisted of the following (in thousands):
Contract Assets
Trade Accounts Receivable, net
Unbilled Accounts Receivable
Costs to Fulfill
Total Contract Assets
Contract Liabilities
Accrued Contract Liabilities
Deferred Revenue
Total Contract Liabilities
December 31,
2018
January 1,
2018
$
$
$
$
72,180
235
5,214
77,629
535
9,255
9,790
$
$
$
$
70,923
172
6,397
77,492
583
10,697
11,280
Changes in costs to fulfill contract assets during the period was a decrease of $1.2 million from January 1, 2018 to December 31, 2018, primarily due
to an increase of approximately $4.6 million from new projects, offset by approximately $5.8 million of amortization and recognition of costs in the year
ended December 31, 2018.
Changes in contract liabilities during the period was a decrease of $1.5 million in our contract liabilities from January 1, 2018 to December 31, 2018,
primarily due to an increase of approximately $8.1 million from new projects, offset by approximately $9.6 million of amortization and recognition of
revenue in the year ended December 31, 2018. We recognized a $0.2 million contract loss for the year ended December 31, 2018.
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables, and customer advances and
deposits (contract liabilities) on the consolidated balance sheet.
Changes in the contract asset and liability balances during the year ended December 31, 2018 were not materially impacted by any other factors.
47
The following table presents our revenues, excluding sales and usage-based taxes, disaggregated by revenue source (in thousands):
Revenues:
Service fee revenue
Product revenue, net
Pass-through revenue
Total revenues
PFS
Operations
Year Ended December 31, 2018
LiveArea
Professional
Services
$
$
148,071
34,350
59,315
241,736
$
$
82,413
—
2,011
84,424
$
$
Total
230,484
34,350
61,326
326,160
The following table presents our revenues, excluding sales and usage-based taxes, disaggregated by timing of revenue recognition (in thousands):
Revenues:
Over time
Point-in-time
Total revenues
PFS
Operations
Year Ended December 31, 2018
LiveArea
Professional
Services
Total
$
$
207,385
34,351
241,736
$
$
84,274
150
84,424
$
$
291,659
34,501
326,160
The following table presents our revenues, excluding sales and usage-based taxes, disaggregated by region (in thousands):
Revenues by region:
North America
Europe
Total revenues
5. Property and Equipment
PFS
Operations
Year Ended December 31, 2018
LiveArea
Professional
Services
Total
$
$
194,496
47,240
241,736
$
$
73,653
10,771
84,424
$
$
268,149
58,011
326,160
The components of property and equipment as of December 31, 2018 and 2017 are as follows (in thousands):
Purchased and capitalized software costs
Furniture, fixtures and equipment
Computer equipment
Leasehold improvements
In-process assets
Less-accumulated depreciation and amortization
Property and equipment, net
December, 31
2018
2017
$
$
36,894
28,749
15,265
14,939
1,897
97,744
(76,248)
21,496
$
$
55,940
30,917
16,657
15,513
1,376
120,403
(96,225)
24,178
Depreciable
Life
2-7 years
2-10 years
2-6 years
2-10 years
Depreciation and amortization expense related to property and equipment, excluding capital leases, for the years ended December 31, 2018, and 2017
was $7.6 million, and $8.4 million, respectively.
The Company’s property and equipment held under capital leases amount to approximately $2.9 million and $2.7 million, net of accumulated
amortization of approximately $2.8 million and $6.8 million, at December 31, 2018 and 2017, respectively. Depreciation and amortization expense related to
capital leases for the years ended December 31, 2018, and 2017 was $2.2 million, and $3.1 million, respectively.
48
6. Goodwill and Identifiable Intangibles, Net
During 2018 and 2017, goodwill decreased by $0.5 million for each period due to the impact of foreign currency translation. The Company performed
its annual goodwill impairment test during the fourth quarter of 2018 and 2017 by completing a Step 0 test. During each 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, did not complete the prescribed two-step
goodwill impairment test and thus the Company did not record any goodwill impairment during 2018 and 2017. The Company’s goodwill by reportable
segment was $23.0 million for our LiveArea Professional Services segment and $22.2 million for our PFS Operations segment at December 31, 2018.
The following table presents the gross carrying value and accumulated amortization for identifiable intangibles (in thousands):
Trade names
Non-compete
agreements
Leasehold
Customer relationships
Developed technology
Other intangibles
Total definite-lived
identifiable
intangible assets
Gross Carrying
December 31, 2018
Accumulated
Net Carrying
Gross Carrying
December 31, 2017
Accumulated
Net Carrying
Estimated Useful Life
Value
Amortization
Value
Value
Amortization
Value
$
1,250 $
(1,250) $
— $
1,250 $
(1,250) $
from Acquisition
2.25 - 2.5 years
—
569
45
10,071
1,487
493
(569)
(45)
(8,278)
(1,487)
(483)
—
—
1,793
—
10
571
45
10,154
1,525
493
(499)
(45)
(7,177)
(1,219)
(477)
72
—
2,977
306
16
1- 3.5 years
2.5 years
1.6 - 9 years
2.5-3 years
9 years
$
13,915 $
(12,112) $
1,803 $
14,038 $
(10,667) $
3,371
Definite-Lived Identifiable Intangible Asset Amortization
The changes in the net carrying values of identifiable intangible assets during 2018 and 2017 were primarily due to amortization expense of $1.6
million and $3.4 million, respectively, as well as the impact of foreign currency translation. Amortization expense is included in selling, general and
administrative expenses in 2018 and 2017, respectively, in the consolidated statements of operations. The estimated amortization expense for each of the next
six years is as follows (in thousands):
2019
2020
2021
2022
2023
2024
7. Inventory Financing
$
668
470
282
197
138
48
Supplies Distributors has a short-term credit facility with IBM Credit LLC (“IBM Credit Facility”) to finance its purchase and distribution of Ricoh
products in the United States, providing financing for eligible Ricoh inventory and certain receivables up to $11.0 million, as per amended agreement. The
agreement has no stated maturity date and provides either party the ability to exit the facility following a 90-day notice.
Given the structure of this facility and as outstanding balances, which represent inventory purchases, are repaid within twelve months, we have
classified the outstanding amounts under this facility, which were $4.7 million and $7.1 million as of December 31, 2018 and December 31, 2017,
respectively, as trade accounts payable in the consolidated balance sheets. As of December 31, 2018, Supplies Distributors had $1.3 million of available credit
under this facility. The credit facility contains cross default provisions, various restrictions upon the ability of Supplies Distributors to, among other things,
merge, consolidate, sell assets, incur indebtedness, make loans and payments to related parties (including entities directly or indirectly owned by PFSweb,
Inc.), provide guarantees, make investments and loans, pledge assets, make changes to capital stock ownership structure and pay dividends. The credit facility
also contains financial covenants, such as annualized revenue to working capital, net profit after tax to revenue, and total liabilities to tangible net worth, as
defined, and is secured by certain of the assets of Supplies Distributors, as well as a collateralized guaranty of PFSweb. Additionally, PFSweb is required to
maintain a minimum Subordinated Note receivable balance from Supplies Distributors of $1.0 million, as per amended agreement. Borrowings under the
credit facility accrue interest, after a defined free financing period, at prime rate plus 0.5%, which resulted in a weighted average interest rate of 5.75% and
4.75% as of December 31, 2018 and December 31, 2017, respectively. The facility also includes a monthly service fee. As of December 31, 2018, the
Company was in compliance with all financial covenants.
49
Pursuant to IBM Credit Facility, Supplies Distributors is restricted from making any distributions to PFSweb if, after giving affect thereto, Supplies
Distributors’ would be in noncompliance with its financial covenants. Supplies Distributors has received lender approval to pay approximately $2.8 million of
dividends in 2019. Supplies Distributors paid dividends to PFSweb of $1.7 million in both 2018 and 2017, respectively, which eliminate upon consolidation.
8. Debt and Capital Lease Obligations
Outstanding debt and capital lease obligations consist of the following (in thousands):
U.S. Credit Agreement:
Revolving loan
Term loan
Equipment loan
Debt issuance costs
Master lease agreements:
Capital leases
Other financing
Other
Total
Less current portion of long-term debt
Long-term debt, less current portion
U.S. Credit Agreement
December 31,
2018
2017
$
$
35,500
—
3,263
(382)
3,495
82
—
41,958
2,610
39,348
$
$
13,234
27,000
4,205
(376)
2,903
232
128
47,326
9,460
37,866
In August 2015, PFSweb, Inc. and its U.S. subsidiaries entered into a credit agreement (“Credit Agreement”) with Regions Bank, as agent for itself
and one or more future lenders (the “Lenders”). Under the Credit Agreement, and subject to the terms set forth therein, the Lenders provided us with a
revolving loan facility for up to $32.5 million and a term loan facility for up to $30 million. Borrowings under the Credit Agreement accrued interest at a
variable rate based on prime rate or Libor, plus an applicable margin.
On November 1, 2018, we entered into Amendment No.1 to our Credit Agreement with Regions Bank (the “Amended Facility”). The Amended
Facility provides for an increase in availability of our revolving loans to $60.0 million, with the ability for a further increase of $20.0 million to $80.0 million
and the elimination of the term loan. Amounts outstanding under the term loan were reconstituted as revolving loans. The Amended Facility also extends the
maturity date to November 1, 2023.
In accordance with ASC 470, Debt (“ASC 470”), we recorded a $0.1 million loss on early extinguishment of debt in 2018 related to the Amended
Facility.
As of December 31, 2018, we had $24.5 million of available credit under the Amended Facility. As of December 31, 2018 and 2017, the weighted
average interest rate on the revolving loan facility was 4.56% and 4.65%, respectively. As of December 31, 2017, the weighted average interest rate on the
term loan facility was 4.05%. In connection with the Amended Facility, the Company paid $0.3 million of fees, which are being amortized through the life of
the Amended Facility and are reflected as a net reduction in debt. The Amended Facility is secured by a lien on substantially all of the assets of Company and
its U.S. subsidiaries and a pledge of 65% of the shares of certain of our foreign subsidiaries. The Amended Facility contains cross default provisions, various
restrictions upon the Company’s ability to, among other things, merge, consolidate, sell assets, incur indebtedness, make loans and payments to subsidiaries,
affiliates and related parties, make capital expenditures, make investments and loans, pledge assets, make changes to capital stock ownership structure, as
well as financial covenants, as defined, of a minimum consolidated fixed charge ratio and a maximum consolidated leverage ratio.
Debt Covenants
To 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 (as
defined), the Company would be required to obtain a waiver from the lender or the lender would be entitled to accelerate the repayment of any outstanding
credit facility obligations, and exercise all other rights and remedies, including sale of collateral and enforcement of payment under the Company parent
guarantee. Any acceleration of the repayment of the credit facilities may have a material adverse impact on the Company’s financial condition and results of
operations and no assurance can be given that the Company would have the financial ability to repay all of such obligations. As of December 31, 2018, the
Company was in compliance with all debt covenants.
50
Master Lease Agreements
The Company has various agreements that provide for leasing or financing transactions of equipment and other assets and will continue to enter into
such arrangements as needed to finance the purchasing or leasing of certain equipment or other assets. Borrowings under these agreements, which generally
have terms of three to five years, are generally secured by the related equipment, and in certain cases, by a Company parent guarantee.
Debt and Capital Lease Maturities
The Company’s aggregate maturities of debt subsequent to December 31, 2018 are as follows, excluding $0.4 million in debt issuance costs that
reduce the carrying amount of the debt (in thousands):
Years ended December 31,
2019
2020
2021
2022
2023
Total
$
$
959
992
960
118
35,434
38,463
The following is a schedule of the Company’s future minimum lease payments under the capital leases, together with the present value of the net
minimum lease payments as of December 31, 2018 (in thousands):
Years ended December 31,
2019
2020
2021
2022
2023
Total minimum lease payments
Less amount representing interest at rates ranging from 0% to 7.47%
Present value of net minimum lease payments
Less: Current portion
Long-term capital lease obligations
9. Stock and Stock Options
Preferred Stock Purchase Rights
$
$
$
$
1,811
1,169
725
55
—
3,760
(265)
3,495
(1,651)
1,844
On June 8, 2000, the Company’s Board of Directors declared a dividend distribution of one preferred stock purchase right (a “Right”) for each share of
the Company’s common stock outstanding on July 6, 2000 and each share of common stock issued thereafter. Each Right entitles the registered shareholders
to 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 not
currently exercisable, but would become exercisable if certain events occurred relating to a person or group acquiring or attempting to acquire 20 percent or
more of the Company’s outstanding shares of common stock. The Rights Agreement expires 30 days after the Company’s 2021 Annual Meeting unless
continuation of the Rights Agreement is approved by the stockholders of the Company at the 2021 Annual Meeting.
Stock Compensation Plans
The Company has an Employee Stock and Incentive Plan (the “Employee Plan”), as amended and restated, under which an aggregate of 6,949,787
shares of common stock have been authorized for issuance. The Employee Plan provides for the granting of incentive awards to directors, executive
management, key employees, and outside consultants of the Company in a variety of forms of equity-based incentive compensation, such as the award of an
option, stock appreciation right, restricted stock award, restricted stock unit, deferred stock unit, among other stock-based awards. The Company has
historically issued service-based restricted stock and unit awards, performance-based and market-based stock and unit awards (collectively “Restricted
Shares”), and stock options. The Company uses newly issued shares of common stock to satisfy awards under the Plan.
51
The Company issues Restricted Shares to the Company’s executives and senior management, pursuant to which such employees are eligible to receive
future grants of shares of the Company’s stock subject to various vesting and/or performance criteria. The weighted average fair value per share of Restricted
Shares granted during the years ended December 31, 2018 and 2017 was $8.53 and $6.43, respectively. The total fair value of Restricted Shares vested under
the Employee Plans was $2.0 million and $0.5 million during the years ended December 31, 2018 and 2017, respectively.
The underlying stock certificates for the Restricted Shares that vested December 31, 2018 are expected to be issued during the quarter ending March
31, 2019. The underlying stock certificates for the Restricted Shares that vested December 31, 2017 were issued during the quarter ended March 31, 2018.
Total stock-based compensation expense was $4.0 million and $3.3 million for the years ended December 31, 2018 and 2017, respectively, and was
included as a component of selling, general and administrative expenses in the consolidated statements of operations. As of December 31, 2018, there is $3.3
million of total unrecognized compensation costs related to non-vested share-based compensation arrangements granted under the Plan, which is expected to
be recognized over a remaining weighted average period of approximately 2.6 years. This expected cost does not include the impact of any future stock-based
compensation awards.
As of December 31, 2018, there were 1,076,003 shares available for future grants under the Plan. Each stock option or stock appreciation right award
granted 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 right
reduces the shares available for grant by 1.22 shares.
Stock Options
The rights to purchase shares under employee stock option agreements issued under the Plan typically vest over a three-year period, one-twelfth each
quarter. 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 the
market value of the Company’s common stock at the date of grant.
The following tables summarize stock option activity under the Plans:
Outstanding, December 31, 2017
Granted
Exercised
Canceled
Outstanding, December 31, 2018
Exercisable, December 31, 2018
Exercisable and expected to vest, December 31, 2018
Shares
1,035,842
375,000
(68,698)
(77,750)
1,264,394
Price Per Share
$1.46 - $15.36
$6.23 - $10.22
$3.11 - $8.90
$6.69 - $15.36
$1.46 - $14.66
861,856
$1.46 - $14.66
1,221,827
$1.46 - $14.66
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life (in
years)
Aggregate
Intrinsic
Value (in
millions)
$
$
$
$
$
$
$
7.87
6.79
5.09
12.61
7.41
7.59
7.42
4.5 $
6.0 $
0.4
0.4
The weighted average fair value per share of options granted during the years ended December 31, 2018 and 2017 was $2.96 and $3.58, respectively.
The total intrinsic value of options exercised under the Stock Option Plans was $0.3 million and $0.5 million during the years ended December 31, 2018 and
2017, respectively.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used
for grants of options under the Plans:
Expected dividend yield
Expected stock price volatility
Risk-free interest rate
Expected life of options (years)
Year Ended
December 31,
2018
—
40% - 45%
2.6% - 3.1%
6
2017
—
46% - 50%
2.0% - 2.2%
6
The Black-Scholes option valuation model requires the input of highly subjective assumptions, including the expected life of the stock-based award
and stock-price volatility. The assumptions listed above represent management’s best estimates, but these estimates involve inherent uncertainties and the
application of management judgment. As a result, if other assumptions had been used, the Company’s recorded and pro forma stock-based compensation
expense could have been different. In addition, the Company is required to estimate the expected forfeiture rate and only recognize expense for those shares
expected to vest. If the Company’s actual
52
forfeiture rate is materially different from its estimate, the share-based compensation expense could be materially different. The Company calculates the
expected stock price volatility using the Company’s historical stock price during the expected term immediately preceding a stock option grant date. The
Company has not paid dividends in the past and does not anticipate paying dividends in the future. The Company uses 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 options has been computed using the simplified
method, which the Company uses as it does not believe it has established a consistent exercise pattern to accurately estimate the expected term of stock
options.
Service-Based Restricted Stock and Unit Awards
The 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 of
grant 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 criteria
are 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, 2018:
Unvested restricted stock at December 31, 2017
Granted
Vested
Canceled
Unvested restricted stock at December 31, 2018
Performance-Based Restricted Stock and Unit Awards
Shares
112,569
158,292
(94,990)
(45,587)
130,284
$
$
$
$
$
Weighted
Average
Grant Date
Fair Value per Share
6.47
8.88
7.69
7.57
8.13
Pursuant to the Employee Plan, the Company grants restricted stock and unit awards that vest upon reaching certain performance targets, and
individual performance goals, which historically have been based on the Company’s financial performance, Company operating income and other financial
metrics for the current and/or future years. Such awards generally are subject to annual vesting from three to four years based upon continued employment
and 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 any
compensation expense previously recognized will be reversed. The actual number of shares that will ultimately vest is dependent upon achieving the
performance condition or other conditions set forth in the award agreement. The Company recognizes stock-based compensation expense related to
performance awards based upon our determination of the likelihood of achieving the performance target or targets at each reporting date, net of estimated
forfeitures.
The following table summarizes the performance-based restricted stock and unit award activity for the year ended December 31, 2018:
Unvested restricted stock at December 31, 2017
Granted
Vested
Canceled
Unvested restricted stock at December 31, 2018
Market-Based Restricted Stock and Unit Awards
Shares
65,254
348,803
(138,372)
(221,850)
53,835
$
$
$
$
$
Weighted
Average
Grant Date
Fair Value per Share
8.30
8.88
9.14
8.68
8.28
Pursuant to the Employee Plan, the Company grants restricted stock and unit awards that vest upon the achievement of certain defined total
stockholder return targets using the companies in the Russell Micro Cap Index as a comparative group for current and/or future years. Such awards generally
are subject to annual vesting from three to four years based upon continued employment and the achievement of the defined performance criteria. The actual
number 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 Company reverses
previously recognized compensation cost for market-based restricted stock unit awards only if the requisite service is not rendered.
53
The following table summarized the market-based restricted stock and unit award activity for the year ended December 31, 2018:
Unvested restricted stock at December 31, 2017
Granted
Vested
Canceled
Unvested restricted stock at December 31, 2018
Shares
259,938
191,852
—
(179,582)
272,208
$
$
$
$
$
Weighted
Average
Grant Date
Fair Value per Share
6.22
6.59
—
6.70
6.16
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 the
following assumptions used for grants under the Plans:
Expected dividend yield
Expected stock price volatility
Risk-free interest rate
Expected term (years)
Weighted average grant date fair value
Stock Units
2018
—
41.6%
2.4%
3
8.85
$
Year Ended
December 31,
$
2017
—
40.9%
1.4%
3
6.40
Each non-employee Director of the Company’s Board of Directors (the “Board”) receives a quarterly retainer (the “Retainer”), payable on or 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 Stock Unit (a
“DSU”). During 2018, the Retainer was $25,000 for the first quarterly payment and $30,000 for each subsequent quarterly payment. The number of DSUs is
determined by dividing the Retainer by the immediately preceding closing price of the Common Stock on the grant date. Each DSU represents 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, 2018:
Unvested deferred stock at December 31, 2017
Granted
Vested
Unvested deferred stock at December 31, 2018
54
Shares
182,306
69,690
—
251,996
$
$
$
$
Weighted
Average
Grant Date
Fair Value per Share
9.74
8.25
—
9.33
10. Income Taxes
The consolidated income (loss) from operations before income taxes, by domestic and foreign entities, is as follows (in thousands):
Domestic
Foreign
Total
Year Ended
December 31,
2018
2017
$
$
(459) $
4,457
3,998
$
(2,981)
841
(2,140)
A reconciliation of the difference between the expected income tax expense (benefit) from operations at the U.S. federal statutory corporate tax rate of
21% and the Company’s effective tax rate is as follows (in thousands):
Income tax benefit computed at statutory rate
Foreign dividends received
Items not deductible for tax purposes
Change in valuation allowance
Impact of Tax Reform Act
State taxes
Foreign exchange rate difference
Net operating loss adjustments
Prior year return-to-provision true-up
Other
Provision for income taxes
Year Ended
December 31,
2018
2017
840 $
—
437
(79)
170
576
(80)
421
426
59
2,770
$
(728)
591
663
(10,503)
12,112
558
(102)
—
(932)
165
1,824
$
$
On December 22, 2017, the United States government enacted the Tax Cuts and Jobs Act, commonly referred to as the Tax Reform Act. The Tax
Reform 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 provisions
related 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
time U.S. tax liability on those earnings which have not previously been repatriated to the U.S. (the “Transition Tax”). The provisional impacts of this
legislation are 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 rate
change on its deferred tax assets and liabilities in the period enacted. 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%. The amount related to the remeasurement of our deferred tax
balance was $12.1 million that was mostly offset by a change in the valuation allowance, except for a $0.6 million benefit that was recorded to
our statement of operations related to tax amortization 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 the
Company’s analysis of the transition tax, there were no provisional amounts recorded for the year ended December 31, 2017. The Company
concluded the Transition tax analysis in the fourth quarter of 2018 and concluded no measurement period adjustments were required.
The Tax Reform Act creates a new requirement that GILTI income earned by foreign subsidiaries must be included currently in the gross
income of the U.S. shareholder. Due to the complexity of the new GILTI tax rules, the Company is continuing to evaluate this provision of the
Tax Reform Act. Under U.S. GAAP, the Company is permitted to make an accounting policy election to either treat taxes due on future
inclusions in U.S. taxable income related to GILTI as a current period expense when incurred or to factor such amounts into the Company's
measurement of its deferred taxes. The Company has not yet completed its analysis of the GILTI tax rules and is not yet able to reasonably
estimate the effect of this provision of the Tax Reform Act or make an accounting policy election for the accounting treatment whether
55
to record deferred taxes attributable to the GILTI tax. The Company has GILTI inclusion in taxable income of $0.6 million which has been
considered in the tax provision for the period ended December 31, 2018.
Current and deferred income tax expense (benefit) is summarized as follows (in thousands):
Current
Domestic
State
Foreign
Total Current
Deferred
Domestic
State
Foreign
Total Deferred
Provision for income taxes
The components of the deferred tax asset (liability) are as follows (in thousands):
Deferred tax assets:
Allowance for doubtful accounts
Inventory reserve
Property and equipment
Accrued expenses
Net operating loss carryforwards
Other
Less - Valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Other
Total deferred tax liabilities
Deferred tax liabilities, net
December 31,
2018
2017
93
577
1,856
2,526
352
21
(129)
244
2,770
$
$
3
558
1,537
2,098
127
12
(413)
(274)
1,824
Year Ended
December 31,
2018
2017
$
105
67
1,078
1,276
14,114
6,359
22,999
22,143
856
(1,434)
(1,434)
(578)
$
77
100
708
1,353
14,608
5,994
22,840
22,222
618
(951)
(951)
(333)
$
$
$
$
We believe that we have not established a sufficient history of earnings, on a stand-alone basis, to support the more likely than not realization of
certain deferred tax assets in excess of existing taxable temporary differences. A valuation allowance has been provided for the majority of these net deferred
income tax assets as of December 31, 2018 and 2017. The remaining net deferred tax assets at both December 31, 2018 and 2017 primarily relate to the
Company’s European operations and certain state tax benefits and are included in other non-current assets on the consolidated balance sheets. At December
31, 2018, net operating loss (“NOL”) carryforwards relate to taxable losses of our Canadian subsidiary totaling approximately $1.7 million, our European
subsidiaries totaling approximately $5.2 million, and our U.S. subsidiaries totaling approximately $60.5 million that expire at various dates from 2020
through 2036. The U.S. NOL also includes approximately $2.3 million of NOL created before February 2006 subject to annual limits of $1.4 million, and
$0.2 million acquired September 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 record
unrecognized tax benefits in the next twelve months.
For federal income tax purposes, tax years that remain subject to examination include years 2015 through 2018. However, the utilization of net
operating loss carryforwards that arose prior to 2014 remains subject to examination through the years such carryforwards are utilized. For Europe, tax years
that remain subject to examination include years 2015 to 2018. For Canada, tax years that remain subject to examination include years 2011 to 2018,
depending on the subsidiary. For state income tax purposes, the tax years that remain subject to examination include years 2014 to 2018, depending upon the
jurisdiction in which the Company files tax returns. The Company and its subsidiaries have various income tax returns in the process of examination. The
Company does not expect these examinations will result in unrecognized tax benefits.
56
11. Earnings Per Share
Basic and diluted earnings per share are computed by dividing net loss by the weighted-average number of common shares outstanding for the
reporting period. Diluted earnings per share is computed by giving effect to all potential weighted average dilutive common stock, including options,
restricted stock units and other equity based awards. A reconciliation of the denominator used in the calculation of basic and diluted earnings per share is as
follows (in thousands):
Numerator:
Net income (loss)
Denominator:
Weighted-average shares outstanding for basic earnings (loss) per share
Effect of dilutive securities:
Options to purchase common stock
Other dilutive securities
Adjusted weighted-average shares outstanding for diluted earnings (loss) per share
Year Ended December 31,
2018
2017
$
1,228
$
(3,964)
19,203
211
412
19,826
18,933
—
—
18,933
In periods when we recognize a net loss, we exclude the impact of outstanding common stock equivalents from the diluted loss per share calculation as
their inclusion would have an antidilutive effect. As of December 31, 2018 and 2017, we had outstanding common stock equivalents of approximately 0.8
million and 1.6 million, respectively, that have been excluded from the calculations of diluted earnings per share attributable to common stockholders because
their effect would have been antidilutive.
12. Commitments and Contingencies
The Company leases facilities, warehouse and office space and transportation and other equipment under operating leases expiring in various years
through 2026. In most cases, management expects that, in the normal course of business, leases will be renewed or replaced by other similar leases. The
Company’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 (in
thousands):
Year ended December 31,
2019
2020
2021
2022
2023
Thereafter
Total
Operating
Lease
Payments
9,659
10,028
9,222
8,407
6,828
12,840
56,984
$
$
Total rental expense under operating leases approximated $11.1 million and $11.3 million for the years ended December 31, 2018 and 2017,
respectively.
The Company received municipal tax abatements in certain locations. In prior years, the Company received notice from a municipality that it did not
satisfy certain criteria necessary to maintain the abatements and that the municipal authority planned to make an adjustment to the Company’s tax abatement.
The Company disputed the adjustment and such dispute has been settled with the municipality. However, the amount of additional property taxes to be
assessed against the Company and the timing of the related payments has not been finalized. As of December 31, 2018, the Company believes it has
adequately accrued for the expected assessment.
The Company is subject to claims in the ordinary course of business, including claims of alleged infringement by the Company or its subsidiaries of
the patents, trademarks and other intellectual property rights of third parties. The Company is generally required to indemnify its service fee clients against
any third party claims asserted against such clients alleging infringement by PFS of the patents, trademarks and other intellectual property rights of third
parties. In the opinion of management, any liabilities resulting from these claims, would not have a material adverse effect on the Company’s financial
position or results of operations.
57
13. Segment and Geographic Information
Prior to January 1, 2018, the Company’s operations were organized into two reportable segments: PFSweb and Business and Retail Connect. In
accordance with ASC 280, Segment Reporting (“ASC 280”), an operating segment is defined as a component of an enterprise for which discrete financial
information is available and is reviewed regularly by the Chief Operating Decision Maker (“CODM”), or decision-making group, to evaluate performance
and make operating decisions.
Effective January 1, 2018, we changed our organizational structure in an effort to create more effective and efficient operations and to improve client
and service focus. In that regard, we revised the information that our chief executive officer and chief financial officer, who are also our Chief Operating
Decision Makers, regularly review for purposes of allocating resources and assessing performance. As a result, beginning January 1, 2018, we now report our
financial performance based on our new reportable segments. These segments are comprised of strategic businesses that are defined by the service offerings
they provide and consist of PFS Operations (which provides client services in relation to the customer physical experience, such as order management
(OMS), order fulfillment, customer care and financial services) and LiveArea Professional Services (which provides client services in relation to the digital
shopping experience of shopping online, such as strategic commerce consulting, strategy, design and digital marketing services and technology services).
Each segment is led by a separate Business Unit Executive who reports directly to the Company’s Chief Executive Officer.
The CODM evaluates segment performance using business unit direct contribution, which is defined as business unit revenues less costs of revenue
and direct selling, general and administrative expenses, including depreciation and amortization. Direct contribution does not include any allocated corporate
expenses nor does it include stock-based compensation. The CODM does not routinely review assets by segment. The balance sheet by segment is not
prepared and, therefore, we do not present segment assets below.
Corporate operations is a non-operating segment that develops and implements strategic initiatives and supports the Company’s operations by
centralizing certain administrative functions such as finance, treasury, information technology and human resources.
All prior period segment information has been restated to conform to the 2018 presentation. The changes in the reportable segments have no effect on
the consolidated balance sheets, statements of operations or cash flows for the periods presented.
Subsequent to change in the Company’s operating segments, the Company’s reporting units changed. We now have two reporting units: PFS
Operations and LiveArea Professional Services. We allocated goodwill to our new reporting units using a relative fair value approach. In addition, we
completed an assessment of any potential goodwill impairment for all reporting units immediately prior to and after the reallocation and determined that no
impairment existed.
The following table discloses segment information for the periods presented (in thousands):
Revenues:
PFS Operations
LiveArea Professional Services
Total revenues
Business unit direct contribution:
PFS Operations
LiveArea Professional Services
Total business unit direct contribution
Unallocated corporate expenses
Income (loss) from operations
Year ended December 31,
2018
2017
$
$
$
$
$
241,736 $
84,424
326,160 $
27,578 $
13,343
40,921 $
(34,424)
6,497 $
236,808
90,017
326,825
25,171
11,758
36,929
(36,331)
598
58
Geographic areas in which the Company operates include the United States, Europe (primarily Belgium and U.K.), Canada and India. Substantially all
of the services performed in India support client arrangements in the United States, where the resulting revenue is reported. The following is geographic
information by area. Revenues are attributed based on the Company’s domicile.
Revenues (in thousands):
United States
Europe
Canada
India
Inter-segment Eliminations
Long-lived assets (in thousands):
United States
Europe
Canada
India
14. Employee Savings Plan
Year Ended
December 31,
2018
2017
263,506
58,027
4,642
8,900
(8,915)
326,160
$
$
December 31,
2018
2017
59,530 $
8,695
139
3,621
71,985 $
265,144
55,943
5,847
8,747
(8,856)
326,825
62,257
10,425
170
4,256
77,108
$
$
$
$
The Company has a defined contribution employee savings plan under Section 401(k) of the Internal Revenue Code. Substantially all full-time and
part-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 make
an additional matching contribution in the form of profit sharing in recognition of the Company’s performance. Our employees in Europe and Canada also
have defined contribution plans. The Company contributed approximately $0.5 million in each of the years ended December 31, 2018 and 2017, respectively,
to match an approved percentage of employee contributions.
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Controls And Procedures
Evaluation of Disclosure Controls and Procedures
We maintain a comprehensive set of disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934 (the “Exchange Act”). As of December 31, 2018, an evaluation of the effectiveness of our disclosure controls and procedures was carried out
under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, these disclosure controls
and procedures were effective.
Changes in Internal Control Over Financial Reporting
During the quarter ended on December 31, 2018, there was no change in internal control over financial reporting (as defined in Rule 13a-15(f) or Rule
15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
59
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) under
the 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 and
the 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 reasonable
detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with
authorizations of our management and Board of Directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, 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, 2018. This evaluation was based
on 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 can
provide only reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with GAAP. Also, projections of any evaluation of the effectiveness of internal control over financial reporting to future periods are subject to the
risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Based on our evaluation under the framework in Internal Control—Integrated Framework, our Chief Executive Officer and Chief Financial Officer
concluded that internal control over financial reporting was effective as of December 31, 2018. BDO USA, LLP, an independent registered public accounting
firm, has audited the effectiveness of our internal control over financial reporting as of December 31, 2018, as stated in their report, which is included herein.
60
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
PFSweb, Inc.
505 Millennium Dr.
Allen, TX 75013
Opinion on Internal Control over Financial Reporting
We have audited PFSweb, Inc. (the “Company’s”) internal control over financial reporting as of December 31, 2018, based on criteria established in
Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”).
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the
COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the
consolidated balance sheets of the Company and subsidiaries as of December 31, 2018 and 2017, the related consolidated statements of operations and
comprehensive income (loss), shareholders’ equity, and cash flows for the years then ended, and the related notes, and our report dated March 18, 2019
expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management’s Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public
accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws
and 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 we
plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other
procedures 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 Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal
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 as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ BDO USA, LLP
Dallas, Texas
March 18, 2019
61
Item 9B.
Other Information
None.
PART III
Item 10.
Directors and Executive Officers and Corporate Governance
Information required by Part III, Item 10, is incorporated herein by reference to the Company’s Proxy Statement for its 2018 Annual Meeting of
Shareholders (the “Proxy Statement”).
Item 11.
Executive Compensation
Information 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 Matters
Information 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 authorized
for issuance as of December 31, 2018:
Plan category (1)
Equity compensation plans approved by
shareholders
Equity compensation plans not approved by
shareholders
(a)
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
(b)
Weighted-
average
exercise price
of outstanding
options,
warrants and
rights (2)
(c)
Number of
securities
remaining available
for future issuance
under equity compensation
plans (excluding securities
reflected in column (a)
2,200,379
$
7.41
—
1,076,003
—
(1)
(2)
See Note 9 to the Consolidated Financial Statements for more detailed information regarding the Company’s equity compensation plans.
Excludes 219,574 service-based restricted stock units, 464,415 performance-based and market-based restricted stock units, and 251,996 deferred stock
units.
Item 13.
Certain Relationships and Related Transactions and Director Independence
Information regarding certain of our relationships and related transactions will be included in our Proxy Statement and is incorporated herein by
reference.
Item 14.
Principal Accounting Fees and Services
Information required by Part III, Item 14, set forth in our Proxy Statement, is incorporated herein by reference.
62
PART IV
Item 15.
Exhibits, Financial Statement Schedules
(a)
1.
The following documents are filed as part of this report:
Financial Statements
PFSweb, Inc. and Subsidiaries
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Loss
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2.
Exhibits
Exhibit
Number
3.1 (1)
3.1.1 (12)
3.1.2 (20)
3.1.3 (23)
3.1.4 (32)
3.1.5 (15)
3.1.6 (26)
3.2 (1)
Description of Exhibits
Amended and Restated Certificate of Incorporation of PFSweb, Inc.
Certificate of Amendment to Amended and Restated Certificate of Incorporation of PFSweb, Inc.
Certificate of Amendment to Certificate of Incorporation of PFSweb, Inc.
Certificate of Amendment to Amended and Restated Certificate of Incorporation of PFSweb, Inc.
Certificate of Amendment to Amended and Restated Certificate of Incorporation of PFSweb, Inc.
Amendment to the Amended and Restated By-Laws of PFSweb, Inc.
Amendment to the Amended and Restated By-Laws of PFSweb, Inc.
Amended and Restated Bylaws. (P)
3.2.3 (32)
Amendment to the Amended and Restated By-Laws of PFSweb, Inc.
4.1 (18)
4.1.1 (19)
4.1.2 (25)
4.1.3 (26)
4.1.4 (29)
4.1.5 (37)
4.1.6 (38)
4.1.7(39)
Rights Agreement, dated as of June 8, 2000, between the Company and ChaseMellon Shareholder Services, LLC.
Amendment No. 1 to Rights Agreement, dated as of May 30, 2008 between the Company and Mellon Investor Services LLC, as
successor to ChaseMellon Shareholder Services, L.L.C., as rights agent.
Amendment No. 2 to Rights Agreement, dated as of May 24, 2010 between the Company and Mellon Investor Services LLC, as
successor to ChaseMellon Shareholder Services, L.L.C., as rights agent.
Amendment No. 3 to Rights Agreement, dated as of July 2, 2010 between the Company and Mellon Investor Services LLC, as successor
to ChaseMellon Shareholder Services, L.L.C., as rights agent.
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.
Amendment No. 5 to Rights Agreement, dated as of June 18, 2015 between the Company and Computershare, Inc., successor to
Computershare Shareowner Services LLC (formerly known as Mellon Investor Services LLC,) as successor to ChaseMellon Shareholder
Services, L.L.C., as rights agent.
Amendment No. 6 to Rights Agreement, dated as of July 30, 2015 between the Company and Computershare, Inc., Successor to
Computershare Shareowner Services LLC (formerly known as Mellon Investor Services LLC,) as successor to ChaseMellon Shareholder
Services, L.L.C., as rights agent.
Amendment No. 7 to Rights Agreement, dated as of June 27, 2018 between the Company and Computershare, Inc., as successor to
Computershare Shareowner Services LLC (formerly known as Mellon Investor Services LLC) as successor to ChaseMellon Shareholder
Services L.L.C., as rights agent.
63
Exhibit
Number
10.1 (11)
10.2 (10)
10.3 (10)
10.4 (10)
10.5 (1)
10.6 (1)
10.7 (2)
10.8 (3)
10.9 (3)
10.10 (3)
10.11 (3)
10.12 (4)
Description of Exhibits
Amendment 6 to Agreement for Inventory Financing.
Amendment 5 to Amended and Restated Platinum Plan Agreement.
Agreement for IBM Global Financing Platinum Plan Invoice Discounting Schedule.
Amendment No. 5 to Agreement for Inventory Financing.
Industrial Lease Agreement between Shelby Drive Corporation and Priority Fulfillment Services, Inc. (P)
Lease Contract between Transports Weerts and Priority Fulfillment Services Europe B.V. (P)
Form of Change of Control Agreement between the Company and certain of its executive officers.
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.
Amended and Restated Collateralized Guaranty by and between Priority Fulfillment Services, Inc. and IBM Credit Corporation.
Amended and Restated Guaranty to IBM Credit Corporation by PFSweb, Inc.
Subordinated Demand Note by and between Supplies Distributors, Inc. and Priority Fulfillment Services, Inc.
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)
10.14 (6)
10.15 (7)
10.16 (7)
10.17 (8)
10.18 (8)
10.19 (9)
10.20 (9)
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.
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.
Second Amendment to Industrial Lease Agreement between ProLogis North Carolina Limited Partnership and Priority Fulfillment
Services, Inc.
Modification, Ratification and Extension of Lease between Shelby Drive Corporation and Priority Fulfillment Services, Inc.
Amendment 4 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.
Form of Modification to Executive Severance Agreement.
Industrial Lease Agreement by and between Industrial Developments International, Inc. and Priority Fulfillment Services, Inc.
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.
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.
64
Exhibit
Number
10.27 (16)
Description of Exhibits
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., Supplies
Distributors, 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)
10.48 (31)
10.49 (32)
10.50 (34)
10.51 (35)
First Amendment to Industrial Lease Agreement dated May 7, 2013 by and between US Industrial REIT II and Priority Fulfillment
Services, Inc.
Agreement, dated as of May 15, 2013, by and among PFSweb, Inc. and Privet Fund LP, Privet Fund Management LLC, Ryan Levenson
and Benjamin Rosenzweig.
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.
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.
Ninth Amended and Restated Notes Payable Subordination Agreement by and between Priority Fulfillment Services, Inc., Supplies
Distributors, 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.
65
Exhibit
Number
10.55 (37)
Description of Exhibits
Form of 2018 LTI TSR Executive Performance Share Award.
10.56 (37)
Form of 2018 LTI Time Based Restricted Stock Unit Award.
10.57 (37)
Form of 2018 STI Company Performance Based Share Award.
10.58 (38)
Form of 2018 STI Company Performance Based Cash Award.
10.59 (37)
Form of 2018 LTI Non-Executive Time and Performance-Based Restricted Stock Unit Award.
10.60 (37)
Form of Deferred Stock Unit.
10.61 (39)
10.62 (39)
Guaranty dated March 21, 2016 by PFSweb, Inc., in favor of Stateline J, LLC.
Deed of Sub-Lease dated December 31, 2015 by and between Milestone Buildcon Private Limited and PFSweb Global Services Private
Limited.
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 Priority
Fulfillment 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)
10.68 (42)
Second Amendment to Lease agreement dated September 16, 2016 by and between Binyan Realty, LP and Priority Fulfillment Services,
Inc.
Expansion Agreement and Amendment to Lease agreement dated June 20, 2016 by and between 2145312 Ontario, Inc. and Priority
Fulfillment Services, Inc.
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 (47)
Sixth Amendment to Lease Agreement by and between Western B. South MS, LLC and Priority Fulfillment Services, Inc. dated August
14, 2017.
10.76 (47)
Amendment to Lease by and between GPT Stateline Road Owner LLC and Priority Fulfillment Services, Inc. dated September 12, 2017.
10.78(48)
Amendment No. 1 dated as of November 1, 2018 by and among Priority Fulfillment Services, Inc., a Delaware corporation, as Borrower,
PFSweb, Inc., a Delaware corporation, and certain Subsidiaries and Affiliates, as Guarantors, and Regions Bank, as Administrative
Agent, for itself and the other Lenders identified therein.
21 (49)
Subsidiary Listing.
23.1 (49)
Consent of BDO USA, LLP, Independent Registered Public Accounting Firm.
31.1 (49)
Certifications of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350.
31.2 (49)
Certifications of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350.
66
Exhibit
Number
Description of Exhibits
32.1 (49)
Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS (49)
XBRL Instance Document.
101.SCH (49)
XBRL Taxonomy Extension Schema.
101.CAL (49)
XBRL Taxonomy Extension Calculation Linkbase.
101.DEF (49)
XBRL Taxonomy Extension Definition Linkbase.
101.LAB (49)
XBRL Taxonomy Extension Label Linkbase.
101.PRE (49)
XBRL Taxonomy Extension Presentation Linkbase.
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Incorporated by reference from PFSweb, Inc. Registration Statement on Form S-1 (Commission File No. 333-87657).
Incorporated by reference from PFSweb, Inc. Form 10-K for the fiscal year ended March 31, 2001.
Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended March 31, 2002.
Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended June 30, 2002.
Incorporated by reference from PFSweb, Inc. Form 10-K for the year ended December 31, 2002.
Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended March 31, 2003.
Incorporated by reference from PFSweb, Inc. Form 10-K for the year ended December 31, 2003.
Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended March 31, 2004.
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.
67
(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. Report on Form 8-K filed on June 28, 2018.
(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.
(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 June 30, 2018.
(47)
Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended September 30, 2017.
(48)
Incorporated by reference from PFSweb, Inc. Form 10-Q for the quarterly period ended September 30, 2018.
(49)
Filed herewith.
(P)
Indicates Paper Filing
Item 16.
Form 10-K Summary
None.
68
SIGNATURES
Pursuant 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 on
its behalf by the undersigned, thereunto duly authorized.
Dated March 18, 2019
/s/Thomas J. Madden
By:
Thomas J. Madden,
Executive Vice President and Chief Financial and Accounting
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Michael Willoughby 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 connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority 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 and purposes 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 their substitute 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 the
Registrant and in the capacities and on the dates indicated.
Signature
/s/Michael Willoughby
Michael Willoughby
/s/Thomas J. Madden
Thomas J. Madden
/s/James F. Reilly
James F. Reilly
/s/Monica Luechtefeld
Monica Luechtefeld
/s/David I. Beatson
David I. Beatson
/s/Benjamin Rosenzweig
Benjamin Rosenzweig
/s/Shinichi Nagakura
Shinichi Nagakura
/s/Peter J. Stein
Peter J. Stein
Title
Chief Executive Officer (Principal Executive Officer)
Date
March 18, 2019
Executive Vice President and Chief Financial and Accounting Officer
(Principal Financial and Accounting Officer)
March 18, 2019
Chairman of the Board
Director
Director
Director
Director
Director
69
March 18, 2019
March 18, 2019
March 18, 2019
March 18, 2019
March 18, 2019
March 18, 2019
Name
Priority Fulfillment Services, Inc.
Priority Fulfillment Services of Canada, Inc.
PFSweb BV SPRL
PFSweb Bulgaria EOOD
PFSweb GmbH
PFSweb Global Services Private Limited
Business Supplies Distributors Holdings, LLC
Supplies Distributors, Inc.
Supplies Distributors of Canada, Inc.
Supplies Distributors S.A.
PFSweb Retail Connect, Inc.,
LiveAreaLabs, Inc.
REV Solutions Inc.
REVTECH Solutions India Private Limited
CrossView, LLC
Conexus, Limited
Moda Superbe Limited
PFSweb Philippines Services LLC
Exhibit 21
Jurisdiction
Delaware
Ontario
Belgium
Bulgaria
Germany
India
Delaware
Delaware
Ontario
Belgium
Delaware
Washington
Delaware
India
Delaware
England
England
Philippines
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
PFSweb, Inc.
Allen, TX
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-223737) of PFSweb, Inc. and Subsidiaries of our
reports dated March 18, 2019, relating to the consolidated financial statements, 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, 2018.
/s/ BDO USA, LLP
Dallas, TX
March 18, 2019
CERTIFICATIONS OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
Exhibit 31.1
I, 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 the
statements 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 financial
condition, 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 Exchange
Act 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 registrant
and have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that 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;
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 in
accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over
financial reporting.
Date: March 18, 2019
By:
/s/ MICHAEL WILLOUGHBY
Chief Executive Officer
CERTIFICATIONS OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
Exhibit 31.2
I, 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 the
statements 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 financial
condition, 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 Exchange
Act 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 registrant
and have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that 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;
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 in
accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over
financial reporting.
Date: March 18, 2019
By:
/s/ THOMAS J. MADDEN
Chief Financial Officer
CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY
ACT OF 2002
Pursuant 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), each
of 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, 2018 (the “Form 10-K”) of the Company fully complies with the requirements of
Section 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 material
respects, the financial condition and results of operations of the Company as of, and for, the periods presented in the Form 10-K.
Exhibit 32.1
March 18, 2019
March 18, 2019
/s/ Michael Willoughby
Michael Willoughby
Chief Executive Officer
/s/ Thomas J. Madden
Thomas J. Madden
Chief Financial Officer
The 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 the
Form 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 general
incorporation 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 to
the Securities and Exchange Commission or its staff upon request.