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.
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.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
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
recognize
s
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.
C
ontract 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 adopte
d 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 classific
ations 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 twe
lve 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 Janu
ary 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 perfo
rmance 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. T
his 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)
:
|
December 31,
|
|
|
January 1,
|
|
|
2018
|
|
|
2018
|
|
Contract Assets
|
|
|
|
|
|
|
|
Trade Accounts Receivable, net
|
$
|
72,180
|
|
|
$
|
70,923
|
|
Unbilled Accounts Receivable
|
|
235
|
|
|
|
172
|
|
Costs to Fulfill
|
|
5,214
|
|
|
|
6,397
|
|
Total Contract Assets
|
$
|
77,629
|
|
|
$
|
77,492
|
|
Contract Liabilities
|
|
|
|
|
|
|
|
Accrued Contract Liabilities
|
$
|
535
|
|
|
$
|
583
|
|
Deferred Revenue
|
|
9,255
|
|
|
|
10,697
|
|
Total Contract Liabilities
|
$
|
9,790
|
|
|
$
|
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, exc
luding sales and usage-based taxes, disaggregated by revenue source (in thousands):
|
Year Ended December 31, 2018
|
|
|
PFS
Operations
|
|
|
LiveArea
Professional
Services
|
|
|
Total
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Service fee revenue
|
$
|
148,071
|
|
|
$
|
82,413
|
|
|
$
|
230,484
|
|
Product revenue, net
|
|
34,350
|
|
|
|
—
|
|
|
|
34,350
|
|
Pass-through revenue
|
|
59,315
|
|
|
|
2,011
|
|
|
|
61,326
|
|
Total revenues
|
$
|
241,736
|
|
|
$
|
84,424
|
|
|
$
|
326,160
|
|
The following table presents our revenues, excluding sales and usage-based taxes, disaggregated by timing of revenue recognition (in thousands):
|
Year Ended December 31, 2018
|
|
|
PFS
Operations
|
|
|
LiveArea
Professional
Services
|
|
|
Total
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Over time
|
$
|
207,385
|
|
|
$
|
84,274
|
|
|
$
|
291,659
|
|
Point-in-time
|
|
34,351
|
|
|
|
150
|
|
|
|
34,501
|
|
Total revenues
|
$
|
241,736
|
|
|
$
|
84,424
|
|
|
$
|
326,160
|
|
The following table presents our revenues, excluding sales and usage-based taxes, disaggregated by region (in thousands):
|
Year Ended December 31, 2018
|
|
|
PFS
Operations
|
|
|
LiveArea
Professional
Services
|
|
|
Total
|
|
Revenues by region:
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
$
|
194,496
|
|
|
$
|
73,653
|
|
|
$
|
268,149
|
|
Europe
|
|
47,240
|
|
|
|
10,771
|
|
|
|
58,011
|
|
Total revenues
|
$
|
241,736
|
|
|
$
|
84,424
|
|
|
$
|
326,160
|
|
5. Property and Equipment
The components of property and equipment as of December 31, 2018 and 2017 are as follows (in thousands):
|
December, 31
|
|
|
Depreciable
|
|
2018
|
|
|
2017
|
|
|
Life
|
Purchased and capitalized software costs
|
$
|
36,894
|
|
|
$
|
55,940
|
|
|
2-7 years
|
Furniture, fixtures and equipment
|
|
28,749
|
|
|
|
30,917
|
|
|
2-10 years
|
Computer equipment
|
|
15,265
|
|
|
|
16,657
|
|
|
2-6 years
|
Leasehold improvements
|
|
14,939
|
|
|
|
15,513
|
|
|
2-10 years
|
In-process assets
|
|
1,897
|
|
|
|
1,376
|
|
|
|
|
|
97,744
|
|
|
|
120,403
|
|
|
|
Less-accumulated depreciation and amortization
|
|
(76,248
|
)
|
|
|
(96,225
|
)
|
|
|
Property and equipment, net
|
$
|
21,496
|
|
|
$
|
24,178
|
|
|
|
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):
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
Estimated Useful Life
|
|
|
Value
|
|
|
Amortization
|
|
|
Value
|
|
|
Value
|
|
|
Amortization
|
|
|
Value
|
|
|
from Acquisition
|
Trade names
|
|
$
|
1,250
|
|
|
$
|
(1,250
|
)
|
|
$
|
—
|
|
|
$
|
1,250
|
|
|
$
|
(1,250
|
)
|
|
$
|
—
|
|
|
2.25 - 2.5 years
|
Non-compete
agreements
|
|
|
569
|
|
|
|
(569
|
)
|
|
|
—
|
|
|
|
571
|
|
|
|
(499
|
)
|
|
|
72
|
|
|
1- 3.5 years
|
Leasehold
|
|
|
45
|
|
|
|
(45
|
)
|
|
|
—
|
|
|
|
45
|
|
|
|
(45
|
)
|
|
|
—
|
|
|
2.5 years
|
Customer relationships
|
|
|
10,071
|
|
|
|
(8,278
|
)
|
|
|
1,793
|
|
|
|
10,154
|
|
|
|
(7,177
|
)
|
|
|
2,977
|
|
|
1.6 - 9 years
|
Developed technology
|
|
|
1,487
|
|
|
|
(1,487
|
)
|
|
|
—
|
|
|
|
1,525
|
|
|
|
(1,219
|
)
|
|
|
306
|
|
|
2.5-3 years
|
Other intangibles
|
|
|
493
|
|
|
|
(483
|
)
|
|
|
10
|
|
|
|
493
|
|
|
|
(477
|
)
|
|
|
16
|
|
|
9 years
|
Total definite-lived
identifiable
intangible assets
|
|
$
|
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
|
$
|
668
|
|
2020
|
|
470
|
|
2021
|
|
282
|
|
2022
|
|
197
|
|
2023
|
|
138
|
|
2024
|
|
48
|
|
7. Inventory Financing
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 financi
al covenants. Supplies Distributors has received lender approval to pay approximately $
2.8
million of dividends in 2019. Supplies Distributo
rs 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):
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
U.S. Credit Agreement:
|
|
|
|
|
|
|
|
|
Revolving loan
|
|
$
|
35,500
|
|
|
$
|
13,234
|
|
Term loan
|
|
|
—
|
|
|
|
27,000
|
|
Equipment loan
|
|
|
3,263
|
|
|
|
4,205
|
|
Debt issuance costs
|
|
|
(382
|
)
|
|
|
(376
|
)
|
Master lease agreements:
|
|
|
|
|
|
|
|
|
Capital leases
|
|
|
3,495
|
|
|
|
2,903
|
|
Other financing
|
|
|
82
|
|
|
|
232
|
|
Other
|
|
|
—
|
|
|
|
128
|
|
Total
|
|
|
41,958
|
|
|
|
47,326
|
|
Less current portion of long-term debt
|
|
|
2,610
|
|
|
|
9,460
|
|
Long-term debt, less current portion
|
|
$
|
39,348
|
|
|
$
|
37,866
|
|
U.S. Credit Agreement
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
|
$
|
959
|
|
2020
|
|
992
|
|
2021
|
|
960
|
|
2022
|
|
118
|
|
2023
|
|
35,434
|
|
Total
|
$
|
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
|
$
|
1,811
|
|
2020
|
|
1,169
|
|
2021
|
|
725
|
|
2022
|
|
55
|
|
2023
|
|
—
|
|
Total minimum lease payments
|
$
|
3,760
|
|
Less amount representing interest at rates ranging from 0% to 7.47%
|
$
|
(265
|
)
|
Present value of net minimum lease payments
|
|
3,495
|
|
Less: Current portion
|
|
(1,651
|
)
|
Long-term capital lease obligations
|
$
|
1,844
|
|
9. Stock and Stock Options
Preferred Stock Purchase Rights
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 o
f 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 o
f Restricted Shares vested under the Employee Plans was $
2.0
million and
$0.5
million
during th
e 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:
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
Life (in
|
|
|
Value (in
|
|
|
Shares
|
|
|
Price Per Share
|
|
Price
|
|
|
years)
|
|
|
millions)
|
|
Outstanding, December 31, 2017
|
|
1,035,842
|
|
|
$1.46 - $15.36
|
|
$
|
7.87
|
|
|
|
|
|
|
|
|
|
Granted
|
|
375,000
|
|
|
$6.23 - $10.22
|
|
$
|
6.79
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
(68,698
|
)
|
|
$3.11 - $8.90
|
|
$
|
5.09
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
(77,750
|
)
|
|
$6.69 - $15.36
|
|
$
|
12.61
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2018
|
|
1,264,394
|
|
|
$1.46 - $14.66
|
|
$
|
7.41
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2018
|
|
861,856
|
|
|
$1.46 - $14.66
|
|
$
|
7.59
|
|
|
|
4.5
|
|
|
$
|
0.4
|
|
Exercisable and expected to vest, December 31, 2018
|
|
1,221,827
|
|
|
$1.46 - $14.66
|
|
$
|
7.42
|
|
|
|
6.0
|
|
|
$
|
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:
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Expected dividend yield
|
|
|
—
|
|
|
|
—
|
|
Expected stock price volatility
|
|
40% - 45%
|
|
|
46% - 50%
|
|
Risk-free interest rate
|
|
2.6% - 3.1%
|
|
|
2.0% - 2.2%
|
|
Expected life of options (years)
|
|
6
|
|
|
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 diff
erent. 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 pa
ying 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:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value per Share
|
|
Unvested restricted stock at December 31, 2017
|
|
|
112,569
|
|
|
$
|
6.47
|
|
Granted
|
|
|
158,292
|
|
|
$
|
8.88
|
|
Vested
|
|
|
(94,990
|
)
|
|
$
|
7.69
|
|
Canceled
|
|
|
(45,587
|
)
|
|
$
|
7.57
|
|
Unvested restricted stock at December 31, 2018
|
|
|
130,284
|
|
|
$
|
8.13
|
|
Performance-Based Restricted Stock and Unit Awards
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:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value per Share
|
|
Unvested restricted stock at December 31, 2017
|
|
|
65,254
|
|
|
$
|
8.30
|
|
Granted
|
|
|
348,803
|
|
|
$
|
8.88
|
|
Vested
|
|
|
(138,372
|
)
|
|
$
|
9.14
|
|
Canceled
|
|
|
(221,850
|
)
|
|
$
|
8.68
|
|
Unvested restricted stock at December 31, 2018
|
|
|
53,835
|
|
|
$
|
8.28
|
|
Market-Based Restricted Stock and Unit Awards
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 restric
ted stock and unit award activity for the year ended December 31, 2018:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value per Share
|
|
Unvested restricted stock at December 31, 2017
|
|
|
259,938
|
|
|
$
|
6.22
|
|
Granted
|
|
|
191,852
|
|
|
$
|
6.59
|
|
Vested
|
|
|
—
|
|
|
$
|
—
|
|
Canceled
|
|
|
(179,582
|
)
|
|
$
|
6.70
|
|
Unvested restricted stock at December 31, 2018
|
|
|
272,208
|
|
|
$
|
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:
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Expected dividend yield
|
|
|
—
|
|
|
|
—
|
|
Expected stock price volatility
|
|
41.6%
|
|
|
40.9%
|
|
Risk-free interest rate
|
|
2.4%
|
|
|
1.4%
|
|
Expected term (years)
|
|
3
|
|
|
3
|
|
Weighted average grant date fair value
|
|
$
|
8.85
|
|
|
$
|
6.40
|
|
Stock Units
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:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value per Share
|
|
Unvested deferred stock at December 31, 2017
|
|
|
182,306
|
|
|
$
|
9.74
|
|
Granted
|
|
|
69,690
|
|
|
$
|
8.25
|
|
Vested
|
|
|
—
|
|
|
$
|
—
|
|
Unvested deferred stock at December 31, 2018
|
|
|
251,996
|
|
|
$
|
9.33
|
|
54
10
. Income
Taxes
The consolidated income (loss) from operations before income taxes, by domestic and foreign entities, is as follows (in thousands):
|
Year Ended
|
|
|
December 31,
|
|
|
2018
|
|
|
2017
|
|
Domestic
|
$
|
(459
|
)
|
|
$
|
(2,981
|
)
|
Foreign
|
|
4,457
|
|
|
|
841
|
|
Total
|
$
|
3,998
|
|
|
$
|
(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):
|
Year Ended
|
|
|
December 31,
|
|
|
2018
|
|
|
2017
|
|
Income tax benefit computed at statutory rate
|
$
|
840
|
|
|
$
|
(728
|
)
|
Foreign dividends received
|
|
—
|
|
|
|
591
|
|
Items not deductible for tax purposes
|
|
437
|
|
|
|
663
|
|
Change in valuation allowance
|
|
(79
|
)
|
|
|
(10,503
|
)
|
Impact of Tax Reform Act
|
|
170
|
|
|
|
12,112
|
|
State taxes
|
|
576
|
|
|
|
558
|
|
Foreign exchange rate difference
|
|
(80
|
)
|
|
|
(102
|
)
|
Net operating loss adjustments
|
|
421
|
|
|
|
—
|
|
Prior year return-to-provision true-up
|
|
426
|
|
|
|
(932
|
)
|
Other
|
|
59
|
|
|
|
165
|
|
Provision for income taxes
|
$
|
2,770
|
|
|
$
|
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):
|
December 31,
|
|
|
2018
|
|
|
2017
|
|
Current
|
|
|
|
|
|
|
|
Domestic
|
$
|
93
|
|
|
$
|
3
|
|
State
|
|
577
|
|
|
|
558
|
|
Foreign
|
|
1,856
|
|
|
|
1,537
|
|
Total Current
|
|
2,526
|
|
|
|
2,098
|
|
Deferred
|
|
|
|
|
|
|
|
Domestic
|
|
352
|
|
|
|
127
|
|
State
|
|
21
|
|
|
|
12
|
|
Foreign
|
|
(129
|
)
|
|
|
(413
|
)
|
Total Deferred
|
|
244
|
|
|
|
(274
|
)
|
Provision for income taxes
|
$
|
2,770
|
|
|
$
|
1,824
|
|
The components of the deferred tax asset (liability) are as follows (in thousands):
|
Year Ended
|
|
|
December 31,
|
|
|
2018
|
|
|
2017
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
$
|
105
|
|
|
$
|
77
|
|
Inventory reserve
|
|
67
|
|
|
|
100
|
|
Property and equipment
|
|
1,078
|
|
|
|
708
|
|
Accrued expenses
|
|
1,276
|
|
|
|
1,353
|
|
Net operating loss carryforwards
|
|
14,114
|
|
|
|
14,608
|
|
Other
|
|
6,359
|
|
|
|
5,994
|
|
|
|
22,999
|
|
|
|
22,840
|
|
Less - Valuation allowance
|
|
22,143
|
|
|
|
22,222
|
|
Total deferred tax assets
|
|
856
|
|
|
|
618
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
Other
|
|
(1,434
|
)
|
|
|
(951
|
)
|
Total deferred tax liabilities
|
|
(1,434
|
)
|
|
|
(951
|
)
|
Deferred tax liabilities, net
|
$
|
(578
|
)
|
|
$
|
(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):
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,228
|
|
|
$
|
(3,964
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding for basic earnings (loss) per share
|
|
|
19,203
|
|
|
|
18,933
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Options to purchase common stock
|
|
|
211
|
|
|
|
—
|
|
Other dilutive securities
|
|
|
412
|
|
|
|
—
|
|
Adjusted weighted-average shares outstanding for diluted earnings (loss) per share
|
|
|
19,826
|
|
|
|
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):
|
Operating
|
|
|
Lease
|
|
|
Payments
|
|
Year ended December 31,
|
|
|
|
2019
|
$
|
9,659
|
|
2020
|
|
10,028
|
|
2021
|
|
9,222
|
|
2022
|
|
8,407
|
|
2023
|
|
6,828
|
|
Thereafter
|
|
12,840
|
|
Total
|
$
|
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):
|
Year ended December 31,
|
|
|
2018
|
|
|
2017
|
|
Revenues:
|
|
|
|
|
|
|
|
PFS Operations
|
$
|
241,736
|
|
|
$
|
236,808
|
|
LiveArea Professional Services
|
|
84,424
|
|
|
|
90,017
|
|
Total revenues
|
$
|
326,160
|
|
|
$
|
326,825
|
|
Business unit direct contribution:
|
|
|
|
|
|
|
|
PFS Operations
|
$
|
27,578
|
|
|
$
|
25,171
|
|
LiveArea Professional Services
|
|
13,343
|
|
|
|
11,758
|
|
Total business unit direct contribution
|
$
|
40,921
|
|
|
$
|
36,929
|
|
Unallocated corporate expenses
|
|
(34,424
|
)
|
|
|
(36,331
|
)
|
Income (loss) from operations
|
$
|
6,497
|
|
|
$
|
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 reve
nue is reported. The following is geographic information by area. Revenues are attributed based on the Company’s domicile.
|
Year Ended
|
|
|
December 31,
|
|
|
2018
|
|
|
2017
|
|
Revenues (in thousands):
|
|
|
|
|
|
|
|
United States
|
$
|
263,506
|
|
|
$
|
265,144
|
|
Europe
|
|
58,027
|
|
|
|
55,943
|
|
Canada
|
|
4,642
|
|
|
|
5,847
|
|
India
|
|
8,900
|
|
|
|
8,747
|
|
Inter-segment Eliminations
|
|
(8,915
|
)
|
|
|
(8,856
|
)
|
|
$
|
326,160
|
|
|
$
|
326,825
|
|
|
December 31,
|
|
|
2018
|
|
|
2017
|
|
Long-lived assets (in thousands):
|
|
|
|
|
|
|
|
United States
|
$
|
59,530
|
|
|
$
|
62,257
|
|
Europe
|
|
8,695
|
|
|
|
10,425
|
|
Canada
|
|
139
|
|
|
|
170
|
|
India
|
|
3,621
|
|
|
|
4,256
|
|
|
$
|
71,985
|
|
|
$
|
77,108
|
|
14. Employee Savings Plan
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.