ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our results of operations and financial condition should be read in conjunction with the unaudited interim condensed consolidated financial statements and related notes appearing elsewhere in this Form 10-Q.
Forward-Looking Information
We have made forward-looking statements in this Report on Form 10-Q. 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 and estimate or similar expressions, we are making forward-looking statements. You should understand that the following important factors, in addition to those set forth above or elsewhere in this Report on Form 10-Q and our Form 10-K for the year ended December 31, 2012, could cause our results to differ materially from those expressed in our forward-looking statements. These factors include:
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our ability to retain and expand relationships with existing clients and attract and implement new clients;
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our reliance on the fees generated by the transaction volume or product sales of our clients;
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our reliance on our clients
projections or transaction volume or product sales;
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our dependence upon our agreements with International Business Machines Corporation (
IBM) and Ricoh Company Limited and Ricoh Production Print Solutions, a strategic business unit within the Ricoh Family Group of Companies, (collectively hereafter referred to as Ricoh);
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our dependence upon our agreements with our major clients;
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our client mix, their business volumes and the seasonality of their business;
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our ability to finalize pending contracts;
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the impact of strategic alliances and acquisitions;
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trends in e-
commerce, outsourcing, government regulation, both foreign and domestic, and the market for our services;
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whether we can continue and manage growth;
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our ability to generate more revenue and achieve sustainable profitability;
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effects of changes in profit margins;
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the customer and supplier concentration of our business;
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the reliance on third-party subcontracted services;
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the unknown effects of possible system failures and rapid changes in technology;
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foreign currency risks and other risks of operating in foreign countries;
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our dependency upon key personnel;
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the impact of new accounting standards, and changes in existing accounting rules or the interpretations of those rules;
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our ability to raise additional capital or obtain additional financing;
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our ability, and the ability of our subsidiaries, to borrow under current financing arrangements and maintain compliance with debt covenants;
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relationship with, and our guarantees of, certain of the liabilities and indebtedness of our subsidiaries; and
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taxation on the sale of our products.
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We have based these statements on our current expectations about future events. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee these expectations actually will 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.
13
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.
Overview
We are an international business process outsourcing provider of end-to-end eCommerce solutions. We provide these solutions to major brand name companies seeking to optimize their supply chain and to enhance their traditional and online business channels and initiatives. We derive our revenues from providing a broad range of services as we process individual business transactions on our clients behalf using three different seller services financial models: 1) the Enablement model, 2) the Agent (or Flash) model and 3) the Retail model.
We refer to the standard PFSweb seller services financial model as the Enablement model. In this model, our clients own the inventory and are the merchants of record and engage us to provide various business outsourcing services in support of their business operations. We derive our service fee revenues from a broad range of service offerings that include digital marketing, eCommerce technologies, order management, customer care, logistics and fulfillment, financial management and professional consulting. We offer our services as an integrated solution, which enables our clients to outsource their complete infrastructure needs to a single source and to focus on their core competencies. Our distribution services are conducted at warehouses we lease or manage. We currently provide infrastructure and distribution solutions to clients that operate in a range of vertical markets, including technology manufacturing, computer products, cosmetics, fragile goods, contemporary home furnishings, apparel, aviation, telecommunications, consumer electronics and consumer packaged goods, among others.
In this model, we typically charge for our services on a cost-plus basis, a percent of shipped revenue basis 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.
As an additional service, we offer our second model, the Agent, or Flash, financial model, in which our clients maintain ownership of the product inventory stored at our locations as in the Enablement 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.
Finally, our Retail model allows us to purchase inventory from the client just as any other client reseller partner. In this model, we place the initial and replenishment purchase orders with the client and take ownership of the product upon delivery to our facility. Consequently, in this model, we generate product revenue, as we 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. In this model we recognize product revenue for customer sales. 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 client or under senior credit facilities.
In general, we provide the Enablement and Agent (or Flash) models through our PFS and Supplies Distributors subsidiaries and the Retail model through our Supplies Distributors and PFSweb Retail Connect subsidiaries.
Growth is a key element to achieving our future goals, including achieving and maintaining sustainable profitability. Growth in our Enablement and Agent models is driven by two main elements: new client relationships and organic growth from existing clients. We focus our sales efforts on larger contracts with brand-name companies within two primary target markets, online brands and retailers and technology manufacturers, which, by nature, require a longer duration to close but also have the potential to be higher-quality and longer duration engagements.
Currently, any growth within our Retail model would be primarily driven by our ability to attract new distributor arrangements with Ricoh or other manufacturers and the sales and marketing efforts of the manufacturers and third party sales partners. As a result of certain operational restructuring of its business, Ricoh has implemented, and will continue to implement, certain changes in the sale
14
and distribution of Ricoh products. The changes have resulted, and are expected to continue to result, in reduced revenues and profitability under our Retail model in 2013 and beyond.
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.
Our expenses comprise primarily four categories: 1) cost of product revenue, 2) cost of service fee revenue, 3) cost of pass-through revenue and 4) selling, general and administrative 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 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 consulting 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 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 Supplies Distributors business 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.
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. To improve our cash and liquidity position, in May 2013, we sold an aggregate of 3.2 million shares of our Common Stock at $4.57 per share, resulting in net proceeds of $14.1 million.
15
Results of Operations For the Interim Periods Ended June 30, 2013 and 2012
The following table discloses certain financial information for the periods presented, expressed in terms of dollars, dollar change, percentage change and as a percentage of total revenue (in millions):
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Three Months Ended June 30,
|
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Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
% of Net Revenues
|
|
|
|
|
|
|
|
% of Net Revenues
|
|
|
2013
|
|
2012
|
|
Change
|
|
2013
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|
2012
|
|
2013
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|
2012
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Change
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2013
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|
2012
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Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Product revenue, net
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$
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23.0
|
|
|
$
|
29.4
|
|
|
$
|
(6.4
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)
|
|
39.5
|
%
|
|
43.9
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%
|
|
$
|
48.4
|
|
|
$
|
64.0
|
|
|
$
|
(15.6
|
)
|
|
9
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%
|
|
45.7
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%
|
|
Service fee revenue
|
|
26.5
|
|
|
|
28.3
|
|
|
|
(1.8
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)
|
|
45.5
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%
|
|
42.3
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%
|
|
|
54.5
|
|
|
|
56.8
|
|
|
|
(2.3
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)
|
|
44.9
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%
|
|
40.6
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%
|
|
Pass-through revenue
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|
8.7
|
|
|
|
9.3
|
|
|
|
(0.6
|
)
|
|
15.0
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%
|
|
13.8
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%
|
|
|
18.4
|
|
|
|
19.1
|
|
|
|
(0.7
|
)
|
|
15.2
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%
|
|
13.7
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%
|
|
Total net revenues
|
|
58.2
|
|
|
|
67.0
|
|
|
|
(8.8
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)
|
|
100.0
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%
|
|
100.0
|
%
|
|
|
121.3
|
|
|
|
139.9
|
|
|
|
(18.6
|
)
|
|
100.0
|
%
|
|
100.0
|
%
|
|
Cost of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue (1)
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|
21.5
|
|
|
|
27.2
|
|
|
|
(5.7
|
)
|
|
93.4
|
%
|
|
92.7
|
%
|
|
|
44.9
|
|
|
|
59.0
|
|
|
|
(14.1
|
)
|
|
92.8
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%
|
|
92.1
|
%
|
|
Cost of service fee revenue (2)
|
|
17.8
|
|
|
|
20.7
|
|
|
|
(2.9
|
)
|
|
67.2
|
%
|
|
72.9
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%
|
|
|
37.1
|
|
|
|
42.4
|
|
|
|
(5.3
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)
|
|
68.0
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%
|
|
74.6
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%
|
|
Pass-through cost of revenue (3)
|
|
8.7
|
|
|
|
9.3
|
|
|
|
(0.6
|
)
|
|
100.0
|
%
|
|
100.0
|
%
|
|
|
18.4
|
|
|
|
19.1
|
|
|
|
(0.7
|
)
|
|
100.0
|
%
|
|
100.0
|
%
|
|
Total cost of revenues
|
|
48.0
|
|
|
|
57.2
|
|
|
|
(9.2
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)
|
|
82.5
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%
|
|
85.3
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%
|
|
|
100.4
|
|
|
|
120.5
|
|
|
|
(20.1
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)
|
|
82.8
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%
|
|
86.1
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%
|
|
Product revenue gross profit
|
|
1.5
|
|
|
|
2.2
|
|
|
|
(0.7
|
)
|
|
6.6
|
%
|
|
7.3
|
%
|
|
|
3.5
|
|
|
|
5.0
|
|
|
|
(1.5
|
)
|
|
7.2
|
%
|
|
7.9
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%
|
|
Service fee gross profit
|
|
8.7
|
|
|
|
7.6
|
|
|
|
1.1
|
|
|
32.8
|
%
|
|
27.1
|
%
|
|
|
17.4
|
|
|
|
14.4
|
|
|
|
3.0
|
|
|
32.0
|
%
|
|
25.4
|
%
|
|
Pass-through gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
%
|
|
Total gross profit
|
|
10.2
|
|
|
|
9.8
|
|
|
|
0.4
|
|
|
17.5
|
%
|
|
14.7
|
%
|
|
|
20.9
|
|
|
|
19.4
|
|
|
|
1.5
|
|
|
17.2
|
%
|
|
13.9
|
%
|
|
Selling General and Administrative expense
|
|
10.9
|
|
|
|
9.9
|
|
|
|
1.0
|
|
|
18.8
|
%
|
|
14.8
|
%
|
|
|
23.7
|
|
|
|
20.4
|
|
|
|
3.3
|
|
|
19.6
|
%
|
|
14.6
|
%
|
|
Loss from operations
|
|
(0.7
|
)
|
|
|
(0.1
|
)
|
|
|
(0.6
|
)
|
|
(1.3
|
)%
|
|
(0.1
|
)%
|
|
|
(2.8
|
)
|
|
|
(1.0
|
)
|
|
|
(1.8
|
)
|
|
(2.4
|
)%
|
|
(0.7
|
)%
|
|
Interest expense, net
|
|
0.2
|
|
|
|
0.2
|
|
|
|
|
|
|
0.3
|
%
|
|
0.4
|
%
|
|
|
0.4
|
|
|
|
0.5
|
|
|
|
(0.1
|
)
|
|
0.3
|
%
|
|
0.4
|
%
|
|
Loss before income taxes
|
|
(0.9
|
)
|
|
|
(0.3
|
)
|
|
|
(0.6
|
)
|
|
(1.6
|
)%
|
|
(0.5
|
)%
|
|
|
(3.2
|
)
|
|
|
(1.5
|
)
|
|
|
(1.7
|
)
|
|
(2.7
|
)%
|
|
(1.1
|
)%
|
|
Income tax expense, net
|
|
|
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
%
|
|
0.3
|
%
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
|
|
|
0.2
|
%
|
|
0.2
|
%
|
|
Net loss
|
$
|
(0.9
|
)
|
|
$
|
(0.5
|
)
|
|
$
|
0.4
|
|
|
(1.6
|
)%
|
|
(0.8
|
)%
|
|
$
|
(3.5
|
)
|
|
$
|
(1.8
|
)
|
|
$
|
(1.7
|
)
|
|
(2.9
|
)%
|
|
(1.3
|
)%
|
|
(1)
|
% of net revenues represents the percent of Product revenue, net.
|
(2)
|
% of net revenues represents the percent of Service fee revenue.
|
(3)
|
% of net revenues represents the percent of Pass-through revenue.
|
16
Product Revenue, net.
Product revenue was $23.0 million for the three months ended June 30, 2013, which represents a decrease of $6.4 million or 21.9% as compared to the same quarter of the prior year. In the six months ended June 30, 2013, product revenue was $48.4 million, which represented a decrease of $15.6 million or 24.2% compared to the same period of the prior year. This reduction in revenue is primarily due to the operational restructuring by Ricoh of its business, which has resulted, and will continue to result, in changes in the sale and distribution of Ricoh products and lower product revenue. We currently expect product revenue to be approximately $90 million to $100 million in 2013.
Service Fee Revenue
. The decrease in service fee revenue for the three and six months ended June 30, 2013 as compared to the same period of the prior year was primarily due to decreased service fees from both existing and terminated client relationships, partially offset by the impact of new client relationships that began in 2012 and early 2013.
The change in service fee revenue, excluding pass-through revenue, is shown below ($ millions):
|
Three
Months
|
|
|
Six
Months
|
|
Period ended June 30, 2012
|
$
|
28.3
|
|
|
$
|
56.8
|
|
New service contract relationships
|
|
3.4
|
|
|
|
5.8
|
|
Change in existing client service fees
|
|
(2.0
|
)
|
|
|
(7.8
|
)
|
Terminated clients not included in 2013 revenue
|
|
(3.2
|
)
|
|
|
(0.3
|
)
|
Period ended June 30, 2013
|
$
|
26.5
|
|
|
$
|
54.5
|
|
Our service fee revenue has been negatively impacted, and will continue to be negatively impacted, in 2013 by the conclusion or anticipated reduction of operations of certain client programs. Based on current client projections for fiscal year 2013, we currently expect the reduction in revenue derived from these client programs to be offset in part, but not in whole, by new or expanded client opportunities.
Cost of Product Revenue.
The cost of product revenue decreased by $5.7 million, or 21.2%, to $21.5 million in the three months ended June 30, 2013. The resulting gross profit margin was $1.5 million, or 6.6% of product revenue, for the three months ended June 30, 2013 and $2.2 million, or 7.3% of product revenue, for the comparable 2012 period. The cost of product revenue decreased by $14.1 million, or 23.7%, to $44.9 million in the six months ended June 30, 2013. The resulting gross profit margin was $3.5 million, or 7.2% of product revenue, for the six months ended June 30, 2013 and $5.0 million, or 7.9% of product revenue, for the comparable 2012 period. The gross profit was negatively impacted by reduced product revenue primarily attributable to the Ricoh restructuring activities, which we expect to continue in 2013. The gross profit margin for 2013 and 2012 includes the impact of incremental gross margin earned on product sales resulting from certain product price increases and the impact of certain incremental inventory cost reductions.
Cost of Service Fee Revenue
. Gross profit as a percentage of service fees was 32.8% in three month period ended June 30, 2013 and 27.1% in the same period of 2012. In the six month period ended June 30, 2013, gross profit, as a percentage of service fees was 32.0% as compared to 25.4% in the comparable 2012 period. The gross profit percentage increase resulted from a change in the client mix, improved operating efficiencies and an increased level of higher margin client project activity. Additionally, the three and six months ended June 30, 2013 included an incremental benefit of $0.4 million and $1.0 million, respectively, applicable to certain client transition related agreements, which we expect to continue into the quarter ended September 30, 2013 although at a lower amount.
We target to earn an overall average gross profit of 25-30% on existing and new service fee contracts, but we have accepted, and may continue to accept, lower gross margin percentages on certain contracts depending on contract scope and other factors including projected volumes.
Selling, General and Administrative Expenses
. Selling, General and Administrative expenses for the three months ended June 30, 2013 and 2012 were $10.9 million and $9.9 million, respectively. As a percentage of total net revenue, selling, general and administrative expenses were 18.8% in the three months ended June 30, 2013 and 14.8% in the prior year period. In the six months ended June 30, 2013, selling, general and administrative expenses were $23.7 million, or 19.6% of total net revenue, as compared to $20.4 million, or 14.6% of total net revenue in the comparable period of 2012. The increase in costs in the three and six months ended June 30, 2013 is primarily related to certain restructuring related charges of approximately $0.3 million and $2.5 million, respectively and an increase in personnel related costs and depreciation and amortization expense in the three and six months ended June 30, 2013. The prior year three month period ended June 30, 2012 included approximately $0.3 million of relocation costs relating to our facility relocations and expansions in 2012. The six month period ended June 30, 2012 included $0.5 million of lease termination costs and $0.9 million of relocation related costs relating to our facility relocations and expansions in 2012. Excluding the restructuring related charges, lease termination costs and relocation related costs in both 2013 and 2012, as a percent of total net revenue, selling, general and administrative expenses were 18.3% and 17.5% in the three and six months ended June 30, 2013, respectively, and 14.3% and
17
13.7% in the comparable three and six months of the prior year period, respectively. As a result of our restructuring efforts and our ongoing focus on cost controls, we currently expect reductions in selling, general and administrative costs during the remainder of calendar year 2013 as compared to the June 30, 2013 quarter.
Income Taxes.
We recorded a tax provision associated primarily with state income taxes, our subsidiary Supplies Distributors Canadian and European operations and our Philippines operations. A valuation allowance has been provided for the majority of our net deferred tax assets, which are primarily related to our net operating loss carryforwards and certain foreign deferred tax assets. We expect we will continue to record an income tax provision associated with state income taxes, Supplies Distributors Canadian and European results of operations and our Philippines operations.
Liquidity and Capital Resources
During the six months ended June 30, 2013, we generated $0.8 million of cash from operating activities primarily due to a $7.7 million decrease in accounts receivable mostly applicable to our services business following the holiday seasonal peak period, a $6.7 million reduction in inventories related to reduced product revenue and a $0.9 decrease in prepaid expenses, other receivable and other assets primarily related to timing of receipts. Included in our cash flows from operating activities is also $2.2 million of cash income from operations before working capital changes. The increase in cash was partially offset by a $16.5 million decrease in accounts payable, deferred revenue, accrued expenses and other liabilities related to reduced inventory purchases as a result of a reduction in product revenue, reduced service fee business payables and accrual levels and a reduction related to timing of various vendor and client reimbursable payments.
During the six months ended June 30, 2012, we generated $16.1 million of cash from operating activities primarily due to a $13.3 million decrease in accounts receivable mostly applicable to our services business following the holiday seasonal peak period, a $5.3 million increase in deferred rent related to tenant allowance improvements at certain new facilities, a $4.2 million decrease in prepaid expenses, other receivables and other assets primarily related to a timing of receipts and a reduction of value-added tax receivable at our European subsidiary and a $3.0 million reduction in inventories related to reduced product revenue. Included in our cash flows from operating activities is also $3.4 million of cash income from operations before working capital changes. These inflows were partially offset by a $12.9 million decrease in accounts payable, deferred revenue, accrued expenses and other liabilities following the timing of payments we make for products and services, payment processing and related transactions costs.
In the six months ended June 30, 2013, we incurred capital expenditures of $3.2 million, net of $1.1 million of property and equipment acquired under debt and capital lease financing, which consisted primarily of payments for internally developed software and capital leases on equipment. Net proceeds of $14.3 million from the issuance of common stock, including an equity offering in May, were partially offset by payments on debt and capital leases, net of any proceeds from debt and an increase in restricted cash of $9.7 million in the six months ended June 30, 2013.
In the six months ended June 30, 2012, we incurred capital expenditures of $9.4 million, exclusive of $5.6 million of property and equipment acquired under debt and capital lease financing. This included capital expenditures related to our new corporate headquarters and call center facility, which were financed by the landlords through tenant allowances. Cash used for payments on debt and capital leases, net of any proceeds from debt and a decrease in restricted cash, was $7.2 million in the six months ended June 30, 2012.
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 services for the upcoming twelve months, including costs to implement new clients, will be approximately $9 million to $11 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 modify or defer a portion of such anticipated investments in the event we do not obtain the financing or achieve the financial results necessary to support such investments.
During the six months ended June 30, 2013, our working capital increased to $26.5 million from $15.4 million at December 31, 2012 primarily due to net proceeds of $14.1 million from an equity offering in May 2013 partially offset by the paydown of debt facilities, capital expenditures and the impact of certain restructuring related accruals. 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. 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
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our subsidiaries, if necessary, for at least the next twelve months.
In support of certain debt instruments and leases, as of June 30, 2013, we had $0.5 million of cash restricted for repayment to lenders. In addition, as described above, we have provided collateralized guarantees to secure the repayment of certain of our subsidiaries credit facilities. Many of these facilities include both financial and non-financial covenants, and also include cross default provisions applicable to other credit facilities and agreements. These covenants include, among others, minimum levels of net worth, profitability and cash flow (as defined) and restrictions on the ability of the borrower subsidiaries to advance funds to other borrower subsidiaries. As a result, it is possible for one or more of these borrower subsidiaries to fail to meet their respective covenants even if another borrower subsidiary otherwise has available excess funds, which, if not restricted, could be used to cure the default. To the extent we fail to comply with our debt covenants, including the monthly financial covenant requirements and our required level of shareholders equity, 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 and enforcement of payment under our parent guarantee. A requirement to accelerate the repayment of the 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 June 30, 2013, 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. 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.
In the future, we may attempt to acquire other businesses or seek an equity or strategic partner to generate capital or expand our services or capabilities in connection with our efforts to grow our business. Acquisitions involve certain risks and uncertainties and may require additional financing. Therefore, we can give no assurance with respect to whether we will be successful in identifying businesses to acquire or an equity or strategic partner, whether we or they will be able to obtain financing to complete a transaction, or whether we or they will be successful in operating the acquired business.
We receive municipal tax abatements in certain locations. In prior years, we received notice from a municipality that we did not satisfy certain criteria necessary to maintain the abatements and that the municipal authority planned to make an adjustment to our tax abatement. We disputed the adjustment and such dispute has been settled with the municipality. However, the amount of additional property taxes to be assessed against us and the timing of the related payments has not been finalized. As of June 30, 2013, we believe we have adequately accrued for the expected assessment.
In April 2010, a sales employee of eCOST (the former name of Retail Connect) was charged with violating various federal criminal statutes in connection with the sales of eCOST products to certain customers, and approximately $620,000 held in an eCOST deposit account was seized and turned over to the Office of the U.S. Attorney in connection with such activity. We received subpoenas from the Office of the U.S. Attorney requesting information regarding the employee and other matters, and have responded to such subpoenas and are fully cooperating with the Office of the U.S. Attorney. In August 2012, the employee pleaded guilty to a misdemeanor. Neither the Company nor eCOST have been charged with any criminal activity, and we intend to seek the recovery or reimbursement of such funds, that are currently classified as other receivables in the June 30, 2013 financial statements. Based on the information available to date, we are unable to determine the amount of the loss, if any, relating to the seizure of such funds. No assurance can be given, however, that the seizure of such funds, or our inability to recover such funds or any significant portion thereof, or any costs and expenses we may incur in connection with such matter will not have a material adverse effect upon our financial condition or results of operations.
Supplies Distributors 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 up to $20.0 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. The Company has direct vendor credit terms with Ricoh to finance Supplies Distributors European subsidiarys inventory purchases.
Supplies Distributors also has a loan and security agreement with Wells Fargo Bank, National Association (Wells Fargo) to provide financing for up to $25.0 million of eligible accounts receivables in the United States and Canada. The Wells Fargo facility expires on the earlier of March 2014 or the date on which the parties to the Ricoh distributor agreement no longer operate under the terms of such agreement and/or Ricoh no longer supplies products pursuant to such agreement.
Supplies Distributors European subsidiary has a factoring agreement with BNP Paribas Fortis Factor (BNP Paribas) to provide factoring for up to 7.5 million Euros (approximately $9.8 million at June 30, 2013) of eligible accounts receivables through March 2014.
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These credit facilities contain cross default provisions, 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), 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 cash flow from operations, annualized revenue to working capital, net profit after tax to revenue, minimum net worth 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 $3.5 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 structure and a minimum shareholders equity of at least $18.0 million. 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.
PFS Financing
Our PFS subsidiary has a Loan and Security Agreement (Comerica Agreement) with Comerica Bank, which provides for up to $12.5 million ($10.0 million during certain non-seasonal peak-months) of eligible accounts receivable financing through March 2014. The Comerica Agreement also provided for up to $3.0 million of eligible equipment financing (Equipment Advances). Outstanding Equipment Advances have a final maturity date of April 15, 2015. We entered into this Comerica Agreement to supplement our existing cash position and provide funding for our current and future operations, including our targeted growth. The Comerica Agreement contains cross default provisions, various restrictions upon our ability to, among other things, merge, consolidate, sell assets, incur indebtedness, make loans and payments to subsidiaries, affiliates and related parties (including entities directly or indirectly owned by PFSweb), make capital expenditures, make investments and loans, pledge assets, make changes to capital stock ownership structure, as well as financial covenants of a minimum tangible net worth of $20.0 million, as defined, a minimum earnings before interest and taxes, plus depreciation, amortization and non-cash compensation accruals, if any, as defined, and a minimum liquidity ratio, as defined. The Comerica Agreement also limits PFS ability to increase the subordinated loan to Supplies Distributors to more than $5.0 million and permits PFS to advance incremental amounts to certain of its subsidiaries and/or affiliates subject to certain financial covenants, as defined. The Comerica Agreement is secured by all of the assets of PFS, as well as a guarantee of PFSweb.
Retail Connect Financing
Retail Connect has an asset-based line of credit facility for up to $2.0 million of eligible financing with Wells Fargo, which is collateralized by substantially all of Retail Connects assets and expires in May 2014. Borrowings under the facility and letter of credit availability are limited to a percentage of accounts receivable and inventory, up to specified amounts. As of June 30, 2013, Retail Connect had $0.1 million of available credit under this facility. The credit facility restricts Retail Connects ability to, among other things, merge, consolidate, sell assets, incur indebtedness, make loans, investments and payments to subsidiaries, affiliates and related parties, make investments and loans, pledge assets, make changes to capital stock ownership structure, as well as a minimum tangible net worth for Retail Connect of $0 million, as defined. PFSweb has guaranteed all current and future obligations of Retail Connect under this line of credit.
Equity Offering
In May 2013, we sold 3.2 million shares of our common stock in a private transaction at $4.57 per share, resulting in net proceeds of approximately $14.1 million after deducting expenses.
Seasonality
The seasonality of our service fee business is dependent upon the seasonality of our clients business and sales of their products. Accordingly, we must rely upon the projections of our clients in assessing quarterly variability. We believe that with our current client mix and their current business volumes, our run rate service fee business activity, which is dependent upon the business volume of our clients, will generally be lower in the first three quarters of the calendar year, and highest in the quarter ended December 31. We anticipate our product revenue will be generally highest during the quarter ended December 31. We believe our historical revenue pattern makes it difficult to predict the effect of seasonality on our future revenues and results of operations.
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.
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Inflation
Management believes that inflation has not had a material effect on our operations.
Critical Accounting Policies
A description of our critical accounting policies is included in Note 2 of the consolidated financial statements in our December 31, 2012 Annual Report on Form 10-K.