pfsw-20200930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________________________________________

FORM 10-Q

__________________________________________


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2020


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from to

Commission File Number 000-28275

___________________________________________

PFSweb, Inc.

(Exact name of registrant as specified in its charter)

___________________________________________

Delaware

75-2837058

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification Number)

505 Millennium Drive,

Allen,

Texas

75013

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (972) 881-2900

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

__________________________________________

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.001 par value	PFSW	NASDAQ	Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by checkmark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☒

Non-accelerated filer

☐

Smaller Reporting Company

☒

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

As of November 4, 2020, there were 20,248,171 shares of registrant’s common stock outstanding.

PFSWEB, INC. AND SUBSIDIARIES

Form 10-Q

INDEX


PART I. FINANCIAL INFORMATION		Page Number

Item 1.	Financial Statements:

	Condensed Consolidated Balance Sheets as of September 30, 2020 (Unaudited) and December 31, 2019	4

	Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2020 and 2019	5

	Unaudited Condensed Consolidated Statements of Shareholders' Equity for the Three and Nine Months Ended September 30, 2020 and 2019	6

	Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019	8

	Notes to Unaudited Condensed Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16

Item 3.	Quantitative and Qualitative Disclosure about Market Risk	24

Item 4.	Controls and Procedures	24

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	25

Item 1A.	Risk Factors	25

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25

Item 3.	Defaults Upon Senior Securities	25

Item 4.	Mine Safety Disclosure	25

Item 5.	Other Information	25

Item 6.	Exhibits	26

SIGNATURES		27

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

PFSWEB, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Data)


	(Unaudited) September 30, 2020		December 31, 2019
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	10,397	$	12,434
Restricted cash	214		214
Accounts receivable, net of allowance for doubtful accounts of $1,437 and $1,071 at September 30, 2020 and December 31, 2019, respectively	56,156		72,262
Inventories, net of reserves of $128 and $291 at September 30, 2020 and December 31, 2019, respectively	5,086		3,281
Other receivables	3,199		3,324
Prepaid expenses and other current assets	7,213		6,954
Total current assets	82,265		98,469
PROPERTY AND EQUIPMENT:
Cost	104,836		99,750
Less: accumulated depreciation	(85,290)		(81,314)
	19,546		18,436
OPERATING LEASE RIGHT-OF-USE ASSETS	36,529		36,403
IDENTIFIABLE INTANGIBLES, net	772		1,135
GOODWILL	45,192		45,393
OTHER ASSETS	3,919		3,772
Total assets	$	188,223	$	203,608
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Trade accounts payable	$	22,907	$	44,640
Accrued expenses	23,431		21,625
Current portion of operating lease liabilities	9,491		8,904
Current portion of long-term debt and finance lease obligations	3,155		2,971
Deferred revenues	3,031		6,058
Total current liabilities	62,015		84,198
LONG-TERM DEBT AND FINANCE LEASE OBLIGATIONS, less current portion	36,334		34,829
DEFERRED REVENUES, less current portion	1,528		1,398
OPERATING LEASE LIABILITIES	31,777		33,295
OTHER LIABILITIES	5,828		3,046
Total liabilities	137,482		156,766

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS’ EQUITY:
Preferred stock, $1.00 par value; 1,000,000 shares authorized; none issued or outstanding	—		—
Common stock, $0.001 par value; 35,000,000 shares authorized; 20,281,638 and 19,465,877 issued at September 30, 2020 and December 31, 2019, respectively; and 20,248,171 and 19,432,410 outstanding at September 30, 2020 and December 31, 2019, respectively	20		19
Additional paid-in capital	166,204		158,192
Accumulated deficit	(113,980)		(109,943)
Accumulated other comprehensive loss	(1,378)		(1,301)
Treasury stock at cost, 33,467 shares	(125)		(125)
Total shareholders’ equity	50,741		46,842
Total liabilities and shareholders’ equity	$	188,223	$	203,608

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

PFSWEB, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE LOSS

(In Thousands, Except Per Share Data)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
REVENUES:
Service fee revenue	$	60,194	$	49,602	$	176,488	$	151,371
Product revenue, net	4,229		6,579		17,677		20,216
Pass-through revenue	12,661		11,810		42,053		37,063
Total revenues	77,084		67,991		236,218		208,650
COSTS OF REVENUES:
Cost of service fee revenue	40,877		32,296		116,358		99,062
Cost of product revenue	4,019		6,250		16,732		19,117
Cost of pass-through revenue	12,661		11,810		42,053		37,063
Total costs of revenues	57,557		50,356		175,143		155,242
Gross profit	19,527		17,635		61,075		53,408
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES	21,389		18,886		62,301		55,329
Loss from operations	(1,862)		(1,251)		(1,226)		(1,921)
INTEREST EXPENSE, net	365		458		1,154		1,418
Loss before income taxes	(2,227)		(1,709)		(2,380)		(3,339)
INCOME TAX EXPENSE (BENEFIT), net	592		(71)		1,657		438
NET LOSS	$	(2,819)	$	(1,638)	$	(4,037)	$	(3,777)

NET LOSS PER SHARE:
Basic	$	(0.14)	$	(0.08)	$	(0.20)	$	(0.19)
Diluted	$	(0.14)	$	(0.08)	$	(0.20)	$	(0.19)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic	20,211		19,432		19,899		19,454
Diluted	20,211		19,432		19,899		19,454
COMPREHENSIVE LOSS:
Net loss	$	(2,819)	$	(1,638)	$	(4,037)	$	(3,777)
Foreign currency translation adjustment	944		(458)		(77)		(332)
TOTAL COMPREHENSIVE LOSS	$	(1,875)	$	(2,096)	$	(4,114)	$	(4,109)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

PFSWEB, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(In Thousands, Except Share Data)

Three Months Ended September 30, 2020


								Accumulated
				Additional				Other					Total
	Common Stock			Paid-In		Accumulated		Comprehensive		Treasury Stock			Shareholders'
	Shares	Amount		Capital		Deficit		Income (Loss)		Shares	Amount		Equity
Balance, June 30, 2020	19,976,731	$	19	$	163,139	$	(111,161)	$	(2,322)	33,467	$	(125)	$	49,550
Net loss	—	—		—		(2,819)		—		—	—		(2,819)
Stock-based compensation	—	—		3,235		—		—		—	—		3,235
Exercise of stock options	41,583	—		226		—		—		—	—		226
Issuance of shares under stock-based compensation awards	263,324	1		—		—		—		—	—		1
Tax withholding on shares under stock-based compensation awards	—	—		(396)		—		—		—	—		(396)
Foreign currency translation	—	—		—		—		944		—	—		944
Balance, September 30, 2020	20,281,638	$	20	$	166,204	$	(113,980)	$	(1,378)	33,467	$	(125)	$	50,741

Nine Months Ended September 30, 2020


								Accumulated
				Additional				Other					Total
	Common Stock			Paid-In		Accumulated		Comprehensive		Treasury Stock			Shareholders'
	Shares	Amount		Capital		Deficit		Income (Loss)		Shares	Amount		Equity
Balance, December 31, 2019	19,465,877	$	19	$	158,192	$	(109,943)	$	(1,301)	33,467	$	(125)	$	46,842
Net loss	—	—		—		(4,037)		—		—	—		(4,037)
Stock-based compensation	—	—		8,934		—		—		—	—		8,934
Exercise of stock options	76,083	—		352		—		—		—	—		352
Issuance of shares under stock-based compensation awards	739,678	1		—		—		—		—	—		1
Tax withholding on shares under stock-based compensation awards	—	—		(1,274)		—		—		—	—		(1,274)
Foreign currency translation	—	—		—		—		(77)		—	—		(77)
Balance, September 30, 2020	20,281,638	$	20	$	166,204	$	(113,980)	$	(1,378)	33,467	$	(125)	$	50,741

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

PFSWEB, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (cont.)

(In Thousands, Except Share Data)

Three Months Ended September 30, 2019


								Accumulated
				Additional				Other					Total
	Common Stock			Paid-In		Accumulated		Comprehensive		Treasury Stock			Shareholders'
	Shares	Amount		Capital		Deficit		Income (Loss)		Shares	Amount		Equity
Balance, June 30, 2019	19,465,877	$	19	$	156,494	$	(109,912)	$	(867)	33,467	$	(125)	$	45,609
Net loss	—	—		—		(1,638)		—		—	—		(1,638)
Stock-based compensation	—	—		852		—		—		—	—		852
Foreign currency translation adjustment, net of taxes	—	—		—		—		(458)		—	—		(458)
Balance, September 30, 2019	19,465,877	$	19	$	157,346	$	(111,550)	$	(1,325)	33,467	$	(125)	$	44,365

Nine Months Ended September 30, 2019


								Accumulated
				Additional				Other					Total
	Common Stock			Paid-In		Accumulated		Comprehensive		Treasury Stock			Shareholders'
	Shares	Amount		Capital		Deficit		Income (Loss)		Shares	Amount		Equity
Balance, December 31, 2018	19,294,296	$	19	$	155,455	$	(107,773)	$	(993)	33,467	$	(125)	$	46,583
Net loss	—	—		—		(3,777)		—		—	—		(3,777)
Stock-based compensation	—	—		2,181		—		—		—	—		2,181
Exercise of stock options	9,500	—		14		—		—		—	—		14
Issuance of shares under stock-based compensation awards	162,081	—		—		—		—		—	—		—
Tax withholding on shares under stock-based compensation awards	—	—		(304)		—		—		—	—		(304)
Foreign currency translation adjustment, net of taxes	—	—		—		—		(332)		—	—		(332)
Balance, September 30, 2019	19,465,877	$	19	$	157,346	$	(111,550)	$	(1,325)	33,467	$	(125)	$	44,365

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

PFSWEB, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)


	Nine Months Ended September 30,
	2020		2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(4,037)	$	(3,777)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	6,278		7,942
Deferred income taxes	527		258
Stock-based compensation expense	8,934		2,181
Other	494		1,200
Changes in operating assets and liabilities:
Accounts receivable	15,901		20,194
Inventories	(1,790)		2,030
Prepaid expenses, other receivables and other assets	(194)		2,463
Operating leases	(1,033)		53
Trade accounts payable, deferred revenues, accrued expenses and other liabilities	(23,577)		(20,502)
Net cash provided by operating activities	1,503		12,042

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment	(2,755)		(3,164)
Proceeds from sale of property and equipment	145		—
Net cash used in investing activities	(2,610)		(3,164)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock	352		14
Taxes paid on behalf of employees for withheld shares	(1,274)		(304)
Payments on finance lease obligations	(968)		(1,330)
Payments on revolving loan	(88,407)		(107,703)
Borrowings on revolving loan	90,407		101,294
Payments on other debt	(1,414)		(3,522)
Borrowings on other debt	148		1,105
Net cash used in financing activities	(1,156)		(10,446)

EFFECT OF EXCHANGE RATES ON CASH, CASH EQUIVALENTS AND RESTRICTED CASH	226		(340)
NET DECREASE IN CASH AND CASH EQUIVALENTS	(2,037)		(1,908)

Cash and cash equivalents, beginning of period	12,434		15,419
Restricted cash, beginning of period	214		207
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period	12,648		15,626

Cash and cash equivalents, end of period	10,397		13,511
Restricted cash, end of period	214		207
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period	$	10,611	$	13,718

SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes	$	1,079	$	726
Cash paid for interest	$	1,078	$	1,451
Non-cash investing and financing activities:
Property and equipment acquired under long-term debt and finance leases	$	4,454	$	2,357

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

PFSWEB, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of PFSweb, Inc. and its subsidiaries have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and include all normal and recurring adjustments necessary to present fairly the unaudited condensed consolidated balance sheets, statements of operations and comprehensive loss, statements of shareholders' equity, and statements of cash flows for the periods indicated. Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted pursuant to the rules and regulations of the SEC. This report should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2019. We refer to PFSweb, Inc. and its subsidiaries collectively as “PFSweb,” the “Company,” “us,” “we” and “our” in these unaudited condensed consolidated financial statements.

Results of our operations for interim periods may not be indicative of results for the full fiscal year. We reclassify certain prior year amounts, as applicable, to conform to the current year presentation.

Recent Developments

We continue to monitor the impact of the 2019 novel coronavirus, or COVID-19, on all aspects of our business. COVID-19 was declared a global pandemic by the World Health Organization on March 11, 2020 and the President of the United States declared the COVID-19 outbreak a national emergency. While the COVID-19 pandemic has not had a material adverse impact on our results of operations to date, the future impacts of the pandemic and any resulting economic impact are largely unknown and rapidly evolving. Beginning in late March 2020 and continuing through the third quarter of 2020, we experienced an increase in demand from certain clients for our services in our PFS Operations segment, as more consumers around the world practiced social distancing, complied with stay-at-home restrictions and many retail stores were closed toward the end of the March 2020 quarter and into the June 2020 quarter. This generated increased volume of online ordering. This trend has continued into the third quarter of 2020 but at a reduced rate from the March through June 2020 period. However, going forward there could be significant volatility in customer demand and buying habits as the pandemic continues and the resulting adverse economic impacts continue or deepen. We have begun experiencing labor rate increases in certain of our markets for fulfillment activities. We believe this will continue and that this could impact our overall fulfillment related costs and staffing.

We have taken a number of precautionary measures designed to help minimize the risk of the spread of the virus to our employees and adjusted our operations wherever necessary to help ensure a safe environment for our staff across business functions. Beginning in April 2020, we began to receive requests from a limited number of our clients to assist them with extended payment terms and/or pricing adjustments for a short time period. We have also experienced delays in certain limited projects and requests from certain clients to reduce current staffing on some of our projects. Prolonged delays or cancellations could have a material adverse impact to our overall business and financial results. As a result of the impact of COVID-19, many businesses have or will be experiencing short-term or long-term liquidity issues. It is possible that the COVID-19 pandemic, the restrictive measures taken by national and local governments to contain the virus and the resulting economic impact may cause disruptions and impact our business as we continue to move through the fiscal year which may materially and adversely affect the Company’s results of operations, cash flows and financial position as well as that of our customers.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was enacted. The CARES Act is an emergency economic stimulus package that includes spending and tax breaks to strengthen the United States’ economy and fund a nationwide effort to curtail the effect of COVID-19. The Company has made use of the allowance granted under section 2302 of the CARES Act, which permits employers to forgo timely payment of the employer portions of Social Security and RRTA taxes that would otherwise be due from March 27 through December 31, 2020, without penalty or interest charges. Similarly, the UK and Belgium governments have granted businesses the option to defer the payment of certain value-added tax ("VAT") amounts. The Company has elected this option and we continue to examine the impact that the CARES Act and similar international statutes may have on our business.

2. Significant Accounting Policies

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 unaudited condensed 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 unaudited condensed 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 unaudited condensed 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.

Furthermore, we considered the impact of the COVID-19 pandemic on the use of estimates and assumptions used for financial reporting and determined that there was no adverse material impact to our results of operations for the three and nine months ended September 30, 2020; however, the extent and duration of future impacts of the COVID-19 pandemic and any resulting economic impact are largely unknown and difficult to predict due to these unknown factors which may have a material impact on our financial position and results of operations in the future.

For a complete set of our significant accounting policies, refer to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019. During the three and nine-month periods ended September 30, 2020, there were no significant changes to our significant accounting policies.

Impact of Recently Issued Accounting Standards

Pronouncements Recently Adopted

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, 2022, with early adoption permitted. The Company elected to adopt this new guidance early, beginning on January 1, 2020. The adoption of ASU 2017-04 did not have a material impact on our condensed consolidated financial statements.

In August 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 Subtopic 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 have adopted ASU 2018-15 on January 1, 2020 on a prospective basis. The adoption of ASU 2018-15 did not have a material impact on our condensed consolidated financial statements.

Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," ("ASU 2016-13") which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. ASU 2016-13 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2019 for all public entities, excluding smaller reporting companies, and after December 15, 2022 for smaller reporting companies. It requires a cumulative effect adjustment to the balance sheet as of the beginning of the first reporting period in which the guidance is effective. We will adopt ASU 2016-13 on January 1, 2023. We are currently in the early phase of evaluating the impact of the adoption of ASU 2016-13 on our condensed consolidated financial statements.

3. Revenue from Contracts with Clients and Customers

The following table presents our revenues, excluding sales and usage-based taxes, disaggregated by revenue source (in thousands):


	Three Months Ended September 30, 2020						Nine Months Ended September 30, 2020
	PFS Operations		LiveArea Professional Services		Total		PFS Operations		LiveArea Professional Services		Total
Revenues:
Service fee revenue	$	39,339	$	20,855	$	60,194	$	114,184	$	62,304	$	176,488
Product revenue, net	4,229		—		4,229		17,677		—		17,677
Pass-through revenue	11,836		825		12,661		39,708		2,345		42,053
Total revenues	$	55,404	$	21,680	$	77,084	$	171,569	$	64,649	$	236,218


	Three Months Ended September 30, 2019						Nine Months Ended September 30, 2019
	PFS Operations		LiveArea Professional Services		Total		PFS Operations		LiveArea Professional Services		Total
Revenues:
Service fee revenue	$	31,176	$	18,426	$	49,602	$	95,930	$	55,441	$	151,371
Product revenue, net	6,579		—		6,579		20,216		—		20,216
Pass-through revenue	10,760		1,050		11,810		35,049		2,014		37,063
Total revenues	$	48,515	$	19,476	$	67,991	$	151,195	$	57,455	$	208,650

The following table presents our revenues, excluding sales and usage-based taxes, disaggregated by timing of revenue recognition (in thousands):


	Three Months Ended September 30, 2020						Nine Months Ended September 30, 2020
	PFS Operations		LiveArea Professional Services		Total		PFS Operations		LiveArea Professional Services		Total
Revenues:
Over time	$	51,175	$	21,680	$	72,855	$	153,892	$	64,649	$	218,541
Point-in-time	4,229		—		4,229		17,677		—		17,677
Total revenues	$	55,404	$	21,680	$	77,084	$	171,569	$	64,649	$	236,218


	Three Months Ended September 30, 2019						Nine Months Ended September 30, 2019
	PFS Operations		LiveArea Professional Services		Total		PFS Operations		LiveArea Professional Services		Total
Revenues:
Over time	$	41,936	$	19,476	$	61,412	$	130,979	$	56,477	$	187,456
Point-in-time	6,579		—		6,579		20,216		978		21,194
Total revenues	$	48,515	$	19,476	$	67,991	$	151,195	$	57,455	$	208,650

The following table presents our revenues, excluding sales and usage-based taxes, disaggregated by region (in thousands):


	Three Months Ended September 30, 2020						Nine Months Ended September 30, 2020
	PFS Operations		LiveArea Professional Services		Total		PFS Operations		LiveArea Professional Services		Total
Revenues by region:
North America	$	43,440	$	18,557	$	61,997	$	135,552	$	56,286	$	191,838
Europe	11,964		3,123		15,087		36,017		8,363		44,380
Total revenues	$	55,404	$	21,680	$	77,084	$	171,569	$	64,649	$	236,218


	Three Months Ended September 30, 2019						Nine Months Ended September 30, 2019
	PFS Operations		LiveArea Professional Services		Total		PFS Operations		LiveArea Professional Services		Total
Revenues by region:
North America	$	41,052	$	17,260	$	58,312	$	125,950	$	50,803	$	176,753
Europe	7,463		2,216		9,679		25,245		6,652		31,897
Total revenues	$	48,515	$	19,476	$	67,991	$	151,195	$	57,455	$	208,650

Contract Assets and Contract Liabilities

Changes in costs to fulfill contract assets during the period decreased $1.7 million from December 31, 2019 to September 30, 2020, primarily due to a decrease of approximately $3.6 million for amortization and recognition of costs, offset by approximately $1.9 million from new projects in the nine months ended September 30, 2020. Costs to fulfill contract assets relate to deferred costs, which are included within other current assets and/or other assets, and software development costs, which are included within property and equipment, in our condensed consolidated balance sheets.

Changes in contract liabilities during the period decreased $3.8 million from December 31, 2019 to September 30, 2020, primarily due to a decrease of approximately $10.8 million for amortization and recognition of revenue, offset by approximately $7.0 million from new projects in the nine months ended September 30, 2020. Contract losses recognized for the nine months ended September 30, 2020 were not material. Accrued contract liabilities below are included within accrued expenses in our condensed consolidated balance sheets.

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 condensed consolidated balance sheets. Changes in the contract asset and liability balances during the nine months ended September 30, 2020 were not materially impacted by any other factors.

Contract balances consist of the following (in thousands):


	September 30, 2020		December 31, 2019
Contract Assets
Trade accounts receivable, net	$	55,815	$	71,183
Unbilled accounts receivable	341		1,079
Costs to fulfill	3,159		4,875
Total contract assets	$	59,315	$	77,137
Contract Liabilities
Accrued contract liabilities	$	934	$	1,806
Deferred revenue	4,559		7,456
Total contract liabilities	$	5,493	$	9,262

Remaining performance obligations represent the transaction price of firm orders for which work has not yet been performed. This amount does not include 1) contracts that are less than one year in duration, 2) contracts for which we recognize revenue based on the right to invoice for services performed, or 3) variable consideration allocated entirely to a wholly unsatisfied performance obligation. Much of our revenue qualifies for one of these exemptions. As of September 30, 2020, 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 $9.5 million. We expect to recognize revenue on approximately 60% of the remaining performance obligations in 2020, 33% in 2021, and the remaining recognized thereafter.

4. Inventory Financing

Supplies Distributors, a wholly-owned subsidiary, has a short-term credit facility with IBM Credit LLC and its assignees (“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 $7.5 million, as per an 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 $3.1 million and $3.0 million as of September 30, 2020 and December 31, 2019, respectively, as trade accounts payable in the condensed consolidated balance sheets. As of September 30, 2020, Supplies Distributors had $2.1 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 an 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 3.75% and 5.25% as of September 30, 2020 and December 31, 2019, respectively. As of September 30, 2020, the Company was in compliance with all financial covenants.

5. Debt and Finance Lease Obligations

Outstanding debt and finance lease obligations consist of the following (in thousands):


	September 30, 2020		December 31, 2019
U.S. Credit Agreement
Revolver	$	32,200	$	30,200
Equipment loan	6,066		5,426
Debt issuance costs	(244)		(303)
Finance Leases	1,305		2,177
Other	162		300
Total	39,489		37,800
Less current portion of long-term debt	3,155		2,971
Long-term debt, less current portion	$	36,334	$	34,829

U.S. Credit Agreement

On November 1, 2018, we entered into Amendment No. 1 to our Credit Agreement with Regions Bank (the “Amended Facility”). The Amended Facility provided 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 a total of $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 extended the maturity date to November 1, 2023 and provided for, subject to approval, up to an additional $10.0 million in equipment financing.

As of September 30, 2020, we had $26.3 million of available credit under the revolving loan facility. As of September 30, 2020 and December 31, 2019, the weighted average interest rate on the revolving loan facility was 2.46% and 3.96%, respectively.

As of September 30, 2020, we had approval for $6.0 million of available credit in equipment financing.

As of September 30, 2020, we were in compliance with all debt covenants.

6. Earnings (Loss) Per Share

Basic net loss per common share was computed by dividing net loss by the weighted-average number of common shares outstanding for the reporting period. In periods when we recognize a net loss, we exclude the impact of outstanding common stock equivalents from the diluted loss per share calculation as their inclusion would have an antidilutive effect. As of September 30, 2020 and September 30, 2019, we had outstanding common stock equivalents of approximately 3.7 million and 2.5 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.

7. Segment Information

Our 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 experience of shopping online, such as strategic commerce consulting, strategy, design and digital marketing services and technology services). Each segment is led by a separate Business Unit Executive who reports directly to our Chief Operating Decision Maker.

The following table presents information concerning operations by segment (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Revenues:
PFS Operations	$	55,404	$	48,515	$	171,569	$	151,195
LiveArea Professional Services	21,680		19,476		64,649		57,455
Total revenues	$	77,084	$	67,991	$	236,218	$	208,650
Business unit direct contribution:
PFS Operations	$	2,538	$	1,702	$	10,030	$	6,357
LiveArea Professional Services	2,541		2,594		6,172		6,768
Total business unit direct contribution	5,079		4,296		16,202		13,125
Unallocated corporate expenses	(6,941)		(5,547)		(17,428)		(15,046)
Loss from operations	$	(1,862)	$	(1,251)	$	(1,226)	$	(1,921)
Depreciation and amortization:
PFS Operations	$	1,616	$	2,120	$	4,811	$	6,153
LiveArea Professional Services	204		276		633		891
Unallocated corporate expenses	209		278		834		898
Total depreciation and amortization	$	2,029	$	2,674	$	6,278	$	7,942

8. Commitments and Contingencies

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 the Company 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.

9. Related Party Transaction

In June 2020 the Company entered into an agreement with Hardinge, Inc. ("Hardinge") in which our LiveArea segment is to provide various services related to eCommerce. Benjamin Rosenzweig ("Mr. Rosenzweig"), a member of our Board of Directors, is a partner at Privet Fund Management LLC ("Privet"). Privet is the general partner and investment manager of funds that own Hardinge and Mr. Rosenzweig also serves on the Board of Directors of Hardinge.

We recognized $0.3 million in revenue in the three and nine months ended September 30, 2020. As of September 30, 2020, there was an accounts receivable balance of $0.2 million from Hardinge.

ITEM 2. Management’s 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 condensed consolidated financial statements and related notes appearing elsewhere in this Form 10-Q.

Forward-Looking Information

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements that involve expectations, plans or intentions (such as those relating to future business, future results of operations or financial condition, new or planned features or services, or management strategies). You can identify these forward-looking statements by words such as “may,” “will,” “would,” “should,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “intend,” “plan,” “potential,” “project,” “predict,” “future,” “target,” “seek,” “continue” and other similar expressions. These forward-looking statements involve risks and uncertainties, and may include assumptions as to how we may perform in the future, including the impact of the COVID-19 pandemic on our business, results of operations and global economic conditions. Although we believe the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee these expectations will actually be achieved. In addition, some forward-looking statements are based upon assumptions about future events that may not prove to be accurate. Therefore, our actual results may differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include, among others, those discussed in “Part I, Item 1A: Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 as supplemented by our Form 10-K/A filed on April 29, 2020 (the “Annual Report”), as well as in our consolidated financial statements, related notes, and the other information appearing elsewhere in the Annual Report and our other filings with the Securities and Exchange Commission, or the SEC, including any quarterly reports on Form 10-Q. We do not intend, and undertake no obligation, to update any of our forward-looking statements after the date of this report to reflect actual results or future events or circumstances. There may be additional risks we do not currently view as material or that are not presently known or that are beyond our ability to control or predict. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

Key Events and Trends

COVID-19 Pandemic

We continue to closely monitor the impact of the 2019 novel coronavirus, or COVID-19, pandemic on all aspects of our business. Our focus has been, and continues to be, on protecting our employees, while continuing to serve our clients. While the COVID-19 pandemic has not had a material adverse impact on our results of operations to date, the future impacts of the pandemic and any resulting economic impact are largely unknown and rapidly evolving.

Beginning in late March 2020 and continuing through the third quarter of 2020, we experienced an increase in demand from certain clients for our services in our PFS Operations segment, as more consumers around the world practiced social distancing, complied with stay-at-home restrictions and many retail stores were closed during the March 2020 to June 2020 period. This generated increased volume of online ordering. This trend has continued into the third quarter of 2020 but at a reduced rate from the March 2020 through June 2020 period. However, going forward there could be significant volatility in customer demand and buying habits as the pandemic continues and the resulting adverse economic impacts continue or deepen. We have begun experiencing labor rate increases in certain of our markets for fulfillment activities. We believe this will continue and that this could impact our overall fulfillment related costs and staffing.

Both our LiveArea and PFS Operations business segments are engaged in the support of our clients’ direct to consumer online business activity. Due to restrictions on traditional brick and mortar activities introduced by government mandates in 2020, many businesses, including many of our clients, have migrated an incremental amount of their investments and business volumes to their online channel, including both website development and marketing activity as well as the physical movement of product. This is a trend which has continued through the third quarter of 2020. We believe this has resulted in, and is currently expected to continue to provide us with strong demand for our service offerings. As the restrictions on brick and mortar activities are lessened, this may lead to reduced demand for the services of LiveArea and PFS Operations as customers return to stores. Despite the unpredictability of volumes brought on by the COVID-19 pandemic, the contracts that had been secured during the pandemic with new clients and amended contracts with existing clients were entered into with the intention to support volumes post-COVID-19 that are the same or higher than those pre-COVID-19. As a result of the increased volumes that are currently occurring and those potentially expected, we have secured additional warehouse space and headcount to meet the current and expected future volumes for the PFS Operations business.

We are incurring additional costs related to the enhanced cleaning regimen implemented in our facilities and purchasing personal protective equipment ("PPE") which we are providing to our employees. As of September 30, 2020, we have incurred approximately $1.1 million in costs related to the COVID-19 pandemic, excluding hourly wage rate related labor cost increases

and performance based incentives. Included in this $1.1 million, are capital expenditures related to COVID-19 which amounted to approximately $0.5 million. Beginning in April 2020, we began to receive requests from a limited number of our clients to assist them with extended payment terms and/or pricing adjustments for a short time period. For the nine months ended September 30, 2020, this has not resulted in a material impact to cash flows. We have also begun to see delays in certain limited projects and requests from certain clients to reduce current staffing on our time and materials projects. While we believe this will have a short-term impact on cash flow and revenues, we do not currently anticipate these identified modifications to date will have a material impact to our overall business and financial results. We will continue to monitor these for potential impacts to future cash flow.

Overall, while there is an increased level of uncertainty in our financial forecasts for the remainder of 2020 due to the macro-economic uncertainty related to the COVID-19 pandemic, we currently continue to target growth in service fee revenues for both of our business segments for the remainder of the year as compared to 2019. For our LiveArea business, we expect some short-term impact on revenue and profitability continuing into the fourth quarter of 2020, as a result of the client requested project deferrals and adjustments, but we expect to have continuing success in winning new or expanded client relationships that are expected to offset this impact. For our PFS business segment, we are expecting an overall stronger level of service fees from existing clients who have migrated more of their business to the online channel that we support. However, we expect some shortfalls versus our original projections in winning new client opportunities due to the COVID-19 pandemic related restrictions on our prospects’ abilities to adjust their business operations in the near term and implement such business within 2020.

As a result of the impact of the COVID-19 pandemic, many businesses have or will be experiencing short-term or long-term liquidity issues. Based on our current expectations, we believe we have the appropriate financial structure in place to support our own business operations. However, we do expect increased potential risk from the viability of clients and their ability to make payments on time. We have and will continue to closely monitor our clients’ financial results, payment patterns and business updates in an effort to minimize the potential impact of our credit risk.

While the COVID-19 pandemic has not yet had a material adverse impact on our operations to date, the extent and duration of future impacts of the pandemic and any resulting economic impact on our business are largely unknown and difficult to predict. We recommend that you review Item 1A. “Risk Factors” in the Annual Report on Form 10-K for fiscal year ended December 31, 2019, as supplemented by our Form 10-K/A filed on April 29, 2020 for a description of the risks related to the COVID-19 pandemic.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was enacted and signed into law. The Company has made use of the allowance granted under section 2302 of the CARES Act, which permits employers to forgo timely payment of the employer portions of Social Security and RRTA taxes that would otherwise be due from March 27 through December 31, 2020, without penalty or interest charges. We have elected this option and it has resulted in deferred payments through September 30, 2020 totaling $2.5 million, due in equal payments on December 31, 2021 and December 31, 2022. We expect to defer between $3.5 million and $4.0 million through December 31, 2020. Similarly, the UK and Belgium governments have granted businesses the option to defer the payment of certain value-added tax ("VAT") amounts. We have elected to take advantage of the options available to us but the effects have been immaterial. We continue to examine the impact that the CARES Act and similar international statutes may have on our business.

In March 2020, we established a COVID-19 task force, comprised of leaders from a cross function of each of our operational sites and business units. The objectives of the task force are to:

•Gather daily key information from each site regarding risks, opportunities and developments related to the pandemic's impact and Company's response to ensure unfiltered access to information for the Company’s leadership.

•Identify and accumulate data required for decision making at the leadership level, including providing recommended courses of action.

•Coordinate communication plans for all of our geographic locations.

•Access, establish, monitor and adjust our business operations continuity plans for each geographic location.

•Ensure formal tracking of any known or suspected employee cases of COVID-19.

We have taken a number of precautionary measures designed to help minimize the risk of the spread of the virus to our employees, including suspending all non-essential travel worldwide for our employees, and adjusting our operations wherever necessary to help ensure a safe environment for our staff across business functions.

We have transitioned our professional staff and contact center agents to a work-from-home solution, with only a few exceptions. While all of our distribution facilities are considered essential businesses in the jurisdictions in which they are located and have continued to operate, we have established procedures to ensure the safety of our distribution facility staff, including:

•Employees are not required to come to work if they are not comfortable doing so.

•Employees that are experiencing or have been exposed to anyone exhibiting symptoms of COVID-19 have been told not to come to work and to seek medical attention and/or testing and stay home until they receive a negative test result, have self-quarantined for 14 days and/or receive clearance from a medical professional.

•Performing temperature checks at entry doors. Employees exhibiting any symptoms of COVID-19 or who have an elevated temperature are not allowed in the facility.

•Provide PPE for employees including gloves, face masks and in certain facilities, face shields. We have provided training for proper use of the equipment.

•Require distancing among employees inside of the working areas of the distribution facilities and require that all employees use the greatest social distancing available inside of the facilities with constant enforcement being maintained.

•Provide mobile cleaning stations for employee use at any time and access to hand sanitizer stations.

•Increased and enhanced cleaning regimen in all facilities. Facilities are cleaned on a daily basis, as well as a nightly cleaning that includes disinfectant fogging at some facilities.

•Facilitating virtual focus groups with employees to seek out ways to provide suggestions to the task force.

Overview

We are a global commerce services company. We manage the entire commerce customer experience for major branded manufacturers and retailers through two business segments, LiveArea Professional Services ("LiveArea") and PFS Operations. LiveArea provides a comprehensive set of services to support and improve B2B, B2C and B2B2C digital and physical shopping experiences or eCommerce. Service areas include eCommerce strategy and consulting, omni-channel experience design, digital marketing, data strategy and technology services including development and system integration. PFS Operations provides services to support and improve the physical experience, such as order management, order fulfillment, customer care and payment services. We offer our services on an a la carte basis or as a complete end-to-end solution.

Operating Results

The following table discloses certain financial information for the periods presented, expressed in terms of dollars, dollar change, percentage change and as a percentage of total revenues (in thousands, except percentages):


	Three Months Ended September 30,						% of Total Revenues					Nine Months Ended September 30,						% of Total Revenues
	2020		2019		Change		2020			2019		2020		2019		Change		2020			2019
Revenues
Service fee revenue	$	60,194	$	49,602	$	10,592	78.1	%		73.0	%	$	176,488	$	151,371	$	25,117	74.7	%		72.5	%
Product revenue, net	4,229		6,579		(2,350)		5.5	%		9.7	%	17,677		20,216		(2,539)		7.5	%		9.7	%
Pass-through revenue	12,661		11,810		851		16.4	%		17.4	%	42,053		37,063		4,990		17.8	%		17.8	%
Total revenues	77,084		67,991		9,093		100.0	%		100.0	%	236,218		208,650		27,568		100.0	%		100.0	%
Costs of Revenues
Cost of service fee revenue	40,877		32,296		8,581		67.9	%	(1)	65.1	%	116,358		99,062		17,296		65.9	%	(1)	65.4	%
Cost of product revenue	4,019		6,250		(2,231)		95.0	%	(2)	95.0	%	16,732		19,117		(2,385)		94.7	%	(2)	94.6	%
Cost of pass-through revenue	12,661		11,810		851		100.0	%	(3)	100.0	%	42,053		37,063		4,990		100.0	%	(3)	100.0	%
Total costs of revenues	57,557		50,356		7,201		74.7	%		74.1	%	175,143		155,242		19,901		74.1	%		74.4	%
Service fee gross profit	19,317		17,306		2,011		32.1	%	(1)	34.9	%	60,130		52,309		7,821		34.1	%	(1)	34.6	%
Product revenue gross profit	210		329		(119)		5.0	%	(2)	5.0	%	945		1,099		(154)		5.3	%	(2)	5.4	%
Total gross profit	19,527		17,635		1,892		25.3	%		25.9	%	61,075		53,408		7,667		25.9	%		25.6	%
Selling, General and Administrative expenses	21,389		18,886		2,503		27.7	%		27.8	%	62,301		55,329		6,972		26.4	%		26.5	%
Loss from operations	(1,862)		(1,251)		(611)		(2.4)	%		(1.8)	%	(1,226)		(1,921)		695		(0.5)	%		(0.9)	%
Interest expense, net	365		458		(93)		0.5	%		0.7	%	1,154		1,418		(264)		0.5	%		0.7	%
Loss before income taxes	(2,227)		(1,709)		(518)		(2.9)	%		(2.5)	%	(2,380)		(3,339)		959		(1.0)	%		(1.6)	%
Income tax expense (benefit), net	592		(71)		663		0.8	%		(0.1)	%	1,657		438		1,219		0.7	%		0.2	%
Net loss	$	(2,819)	$	(1,638)	$	(1,181)	(3.7)	%		(2.4)	%	$	(4,037)	$	(3,777)	$	(260)	(1.7)	%		(1.8)	%

(1) Represents the percent of Service fee revenue.

(2) Represents the percent of Product revenue, net.

(3) Represents the percent of Pass-through revenue.

Segment Operating Data

PFS Operations (in thousands, except percentages)


	Three Months Ended September 30,								Nine Months Ended September 30,
	2020		2019		Change		Change %		2020		2019		Change		Change %
Revenues
Service fee revenue	$	39,339	$	31,176	$	8,163	26.2	%	$	114,184	$	95,930	$	18,254	19.0	%
Product revenue, net	4,229		6,579		(2,350)		(35.7)	%	17,677		20,216		(2,539)		(12.6)	%
Pass-through revenue	11,836		10,760		1,076		10.0	%	39,708		35,049		4,659		13.3	%
Total revenues	55,404		48,515		6,889		14.2	%	171,569		151,195		20,374		13.5	%
Costs of Revenues
Cost of service fee revenue	29,658		22,349		7,309		32.7	%	82,397		69,023		13,374		19.4	%
Cost of product revenue	4,019		6,250		(2,231)		(35.7)	%	16,732		19,117		(2,385)		(12.5)	%
Cost of pass-through revenue	11,836		10,760		1,076		10.0	%	39,708		35,049		4,659		13.3	%
Total costs of revenues	45,513		39,359		6,154		15.6	%	138,837		123,189		15,648		12.7	%
Gross Profit	9,891		9,156		735		8.0	%	32,732		28,006		4,726		16.9	%
Direct operating expenses	7,353		7,454		(101)		(1.4)	%	22,702		21,649		1,053		4.9	%
Direct contribution	$	2,538	$	1,702	$	836	49.1	%	$	10,030	$	6,357	$	3,673	57.8	%

PFS Operations total revenues for the three and nine months ended September 30, 2020 increased by $6.9 million and $20.4 million, respectively, compared with the corresponding periods in 2019. Service fee revenue for the three and nine months ended September 30, 2020 increased $8.2 million and $18.3 million, respectively, compared to the prior year. The service fee revenue increase was primarily due to growth from new and existing clients, driven primarily from increased fulfillment activity related to increased on-line spending as a result of COVID-19, offset by client terminations and bankruptcies. For the three and nine months ended September 30, 2019, we had service fee revenues totaling approximately $0.4 million and $3.1 million, respectively, related to two clients that filed bankruptcy and subsequently liquidated their operations in 2019. Excluding the decrease from these clients, service fee revenues would have increased by $8.6 million and $21.4 million for the three and nine months ended September 30, 2020, respectively.

Product revenue, net, for the three and nine months ended September 30, 2020, decreased by $2.4 million and $2.5 million, respectively, compared with the corresponding periods in 2019. Product revenue declined as it is primarily dependent on one client, which restructured its operations and discontinued certain product lines. We expect to see continued reduced product revenue as the year continues, as a result of the restructuring of our client.

Pass-through revenue, primarily related to freight activity, increased by $1.1 million and $4.7 million for the three and nine months ended September 30, 2020 compared to the corresponding periods in 2019 primarily due to incremental activity with both new and existing clients partially offset by the impact of a client's transition of their freight management activities.

PFS Operations gross margin decreased by 1.0% to 17.9% for the three months ended September 30, 2020 as compared to 18.9% in the same period of the prior year. The decreased margin is due to a decrease of our service fee margin of 3.7% to 24.6% for the three months ended September 30, 2020 as compared to 28.3% in the same period of the prior year, primarily as a result of increased fulfillment labor costs. This was somewhat offset by the impact of revenue mix, as the service fee business activity, which generates a higher gross margin than the product revenue and pass-through revenue activity, represents a larger proportion of total revenues for the three months ended September 30, 2020 as compared to the prior year. PFS Operations gross margin increased by 0.6% to 19.1% for the nine months ended September 30, 2020 as compared to 18.5% in the same period of the prior year. The service fee margin decreased by 0.2% to 27.8% for the nine months ended September 30, 2020 as compared to 28.0% for the same period of the prior year, primarily as a result of increased labor costs in the third quarter of 2020, reduced by operating cost efficiencies gained in the first half of 2020. The decrease in the service fee margin is offset by the service fee business representing a larger proportion of total revenues for the nine months ended September 30, 2020, compared to the lower margin product revenue and pass-through revenue.

Direct operating expenses for the three months ended September 30, 2020 decreased by $0.1 million compared to the corresponding period in 2019. For the nine months ended September 30, 2020, direct operating expenses increased by $1.1 million compared to the corresponding period in 2019. The movements for the three months ended September 30, 2020 were impacted by personnel costs arising from stock-based compensation expense which increased by $0.7 million and $1.4 million for the three and nine months ended September 30, 2020 as compared to the prior year. The increased stock compensation expense for the three and nine months ended September 30, 2020 arose from the issuance of incremental awards after the approval of a new Stock and Incentive Plan by shareholders on June 30, 2020. Excluding the impact of stock-based compensation, direct operating expenses decreased by $0.8 million and $0.3 million for the three and nine months ended September 30, 2020, respectively. The decrease for the three and nine months ended September 30, 2020 was primarily due to reduced severance related costs and by the prior year amount including a higher provision for doubtful accounts due to a 2019 client bankruptcy. These were partially offset by increased personnel related costs (including variable compensation expense), facility costs, and sales and marketing related spend.

LiveArea Professional Services (in thousands, except percentages)


	Three Months Ended September 30,								Nine Months Ended September 30,
	2020		2019		Change		Change %		2020		2019		Change		Change %
Revenues
Service fee revenue	$	20,855	$	18,426	$	2,429	13.2	%	$	62,304	$	55,441	$	6,863	12.4	%
Pass-through revenue	825		1,050		(225)		(21.4)	%	2,345		2,014		331		16.4	%
Total revenues	21,680		19,476		2,204		11.3	%	64,649		57,455		7,194		12.5	%
Costs of revenues
Cost of service fee revenue	11,219		9,947		1,272		12.8	%	33,961		30,039		3,922		13.1	%
Cost of pass-through revenue	825		1,050		(225)		(21.4)	%	2,345		2,014		331		16.4	%
Total costs of revenues	12,044		10,997		1,047		9.5	%	36,306		32,053		4,253		13.3	%
Gross profit	9,636		8,479		1,157		13.6	%	28,343		25,402		2,941		11.6	%
Direct operating expenses	7,095		5,885		1,210		20.6	%	22,171		18,634		3,537		19.0	%
Direct contribution	$	2,541	$	2,594	$	(53)	(2.0)	%	$	6,172	$	6,768	$	(596)	(8.8)	%

LiveArea Professional Services revenues for the three and nine months ended September 30, 2020 increased by $2.2 million and $7.2 million, respectively, compared to the corresponding periods in 2019. The increase in revenues are primarily due to the higher level of new and existing client activity, as a result of increased success in booking new projects and engagements during late 2019 and continuing into 2020.

LiveArea Professional Services gross margin increased by 0.9% to 44.4% for the three months ended September 30, 2020 as compared to 43.5% in the same period of the prior year, and remained essentially flat in the nine months ended September 30, 2020 at 43.8% against 44.2% in the same period of the prior year. The increase in gross margin for the three months ended September 30, 2019 is primarily attributable to higher than expected costs incurred on certain client projects.

Direct operating expenses increased by $1.2 million and $3.5 million for the three and nine months ended September 30, 2020, respectively, compared to the corresponding periods in 2019. The increase was primarily attributable to increases in stock-based compensation of $0.6 million and $2.7 million for the three and nine months ended September 30, 2020, respectively. Excluding this expense, direct operating expenses increased by $0.6 million and $0.8 million for the three and nine months ended September 30, 2020, respectively. The increase arose primarily as a result of incremental sales and marketing personnel costs and increased variable compensation expense, partially offset by reduced travel related spend.

Corporate (in thousands, except percentages)


	Three Months Ended September 30,								Nine Months Ended September 30,
	2020		2019		Change		Change %		2020		2019		Change		Change %
Unallocated corporate expenses	$	6,941	$	5,547	$	1,394	25.1	%	$	17,428	$	15,046	$	2,382	15.8	%

Unallocated corporate expenses increased by $1.4 million and $2.4 million for the three and nine months ended September 30, 2020, respectively, compared to the corresponding periods in 2019. The increases were in part attributable to increases in stock-based compensation of $1.1 million and $2.7 million, offset by a $0.5 million and $1.6 million reduction to vacation expense for the three and nine months ended September 30, respectively. The decrease to vacation expense was primarily related to a change in policy to allow for the introduction of a flexible vacation policy that is not restricted to time earned by the Company for our US full-time exempt employees in the second quarter of 2020. Excluding the impacts of these factors, unallocated corporate expenses increased by $0.8 million and $1.3 million for the three and nine months ended September 30, 2020, respectively, primarily as a result of increased personnel related costs.

Income Taxes

During the three months ended September 30, 2020, we recorded a tax expense of $0.6 million comprised primarily of $0.4 million related to the majority of our international operations, $0.1 million related to state income taxes, and $0.1 million associated with the tax amortization of goodwill in relation to our 2015 acquisition. A valuation allowance has been provided for the majority of our domestic net deferred tax assets, which are primarily related to our net operating loss carryforwards, and for certain foreign deferred tax assets.

During the nine months ended September 30, 2020, we recorded a tax expense of $1.7 million comprised primarily of $0.8 million related to the majority of our international operations, $0.5 million related to state income taxes, and $0.4 million associated with the tax amortization of goodwill in relation to our 2015 acquisition. A valuation allowance has been provided for the majority of our domestic net deferred tax assets, which are primarily related to our net operating loss carryforwards, and for certain foreign deferred tax assets.

For the three and nine months ended September 30, 2020 and 2019, we have utilized the discrete effective tax rate method, as allowed by Accounting Standards Codification (“ASC”) 740-270-30-18, “Income Taxes—Interim Reporting,” to calculate the interim income tax provision. The discrete method is applied when the application of the estimated annual effective tax rate is impractical because it is not possible to reliably estimate the annual effective tax rate. The discrete method treats the year to date period as if it was the annual period and determines the income tax expense or benefit on that basis. We believe that, at this time, the use of this discrete method is more appropriate than the annual effective tax rate method as (i) the estimated annual effective tax rate method is not reliable due to the high degree of uncertainty in estimating annual pretax earnings by jurisdiction and (ii) our ongoing assessment that the recoverability of our deferred tax assets is not likely in several jurisdictions.

The CARES Act, among other things, permits net operating loss ("NOL") carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years. Due to the company’s historical NOLs, the NOL carryback provision of the CARES Act would not result in a benefit.

Liquidity and Capital Resources

We currently believe our cash position, financing available under our credit facilities and funds generated from operations will satisfy our known operating cash needs, our working capital and capital expenditure requirements, our current debt and lease obligations, and additional loans to our subsidiaries, if necessary, for at least the next twelve months. However, our assumptions and expectations may be impacted by the uncertain duration and extent of the adverse economic conditions caused by the COVID-19 pandemic.

Our cash position decreased in the nine months ended September 30, 2020 primarily from purchases of property and equipment and cash used in financing activities partially offset cash provided by operating activities.

Cash Flows from Operating Activities

During the nine months ended September 30, 2020, net cash provided by operations was $1.5 million, compared to net cash provided by operations of $12.0 million in the same period of the prior year. Both periods included benefits from cash income generated from operations before changes in operating assets and liabilities. Such benefits were then either increased or decreased, depending on period, by the net impact of changes in assets and liabilities, primarily related to the amount and timing of client revenue billings and collections as well as vendor purchasing and payment activity. In the nine months ended September 30, 2020, there was a reduced cash flow benefit from a seasonality driven reduction in accounts receivable. In addition, one of our clients transitioned away from our service offering of credit card collections from this client’s customers which further increased our net cash used in operations. We expect the impact from the change in this client’s service offering to have a reduced impact on cash flows from operating activities for the remainder of 2020.

We have deferred payment of the employer portions of Social Security and RRTA taxes that would otherwise be due from March 27 through December 31, 2020, by election of the option provided by the CARES Act. This has resulted in deferred payments through September 30, 2020 totaling $2.5 million, due in equal payments on December 31, 2021 and December 31, 2022 and we expect to defer between $3.5 million and $4.0 million through December 31, 2020.

Cash Flows from Investing Activities

Cash used in investing activities included capital expenditures of $2.8 million and $3.2 million during the nine months ended September 30, 2020 and 2019, respectively, exclusive of property and equipment acquired under debt and finance lease financing, which consisted primarily of capitalized software costs and equipment purchases. Capital expenditures have historically consisted of additions to upgrade our management information systems, development of customized technology solutions to support and integrate with our service fee clients and general expansion and upgrades to our facilities, both domestic and foreign. We expect to incur capital expenditures to support new facilities, contracts and anticipated future growth opportunities. Based on our current client business activity and our targeted growth plans, we anticipate our total investment in upgrades and additions to facilities and information technology solutions and services for the upcoming twelve months, including costs to implement new clients, will be approximately $8.0 million to $10.0 million, although additional capital expenditures may be necessary to support the infrastructure requirements of new clients. To maintain our current operating cash position, a portion of these expenditures may be financed through client reimbursements, debt, operating or finance leases or additional equity. We may elect to modify or defer a portion of such anticipated investments in the event that we do not obtain the financing results necessary to support such investments.

Cash Flows from Financing Activities

During the nine months ended September 30, 2020, cash used in financing activities was $1.2 million and during the nine months ended September 30, 2019, cash used in financing activities was $10.4 million. The balances in both periods were primarily due to net borrowing and payment activity on our revolving loan and other debt.

Working Capital

During the nine months ended September 30, 2020, our working capital increased to $20.3 million compared to $14.3 million at December 31, 2019. This increase was primarily related to income generated from operations before working capital changes, plus net borrowings on our revolving debt facility, partially offset by capital expenditures.

To obtain any necessary additional financing in the future, in addition to our current cash position, we continue to evaluate our needs in light of various financing alternatives potentially available 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 our subsidiaries, if necessary, for at least the next twelve months.

Our term and revolving loan facilities described below contain both financial and non-financial covenants. To the extent we fail to comply with our debt covenants, including the financial covenant requirements, and we are not able to obtain a waiver, the lenders would be entitled to accelerate the repayment of any outstanding credit facility obligations, and exercise all other rights and remedies, including sale of collateral. An acceleration of the repayment of our credit facility obligations may have a material adverse impact on our financial condition and results of operations. We can provide no assurance we will have the financial ability to repay all such obligations. As of September 30, 2020, 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.

Inventory Financing

To finance its distribution of Ricoh products in the U.S., Supplies Distributors has a short-term credit facility with IBM Credit LLC and its assignees (“IBM Credit”) that provides financing for eligible inventory and certain receivables for up to $7.5 million. We have provided a collateralized guarantee to secure the repayment of this credit facility. The IBM Credit facility does not have a stated maturity and both parties have the ability to exit the facility following a 90-day notice.

This credit facility contains various restrictions upon the ability of Supplies Distributors and its subsidiaries to, among other things, merge, consolidate, sell assets, incur indebtedness, make loans, investments and payments to related parties (including entities directly or indirectly owned by PFSweb, Inc.), provide guarantees, make investments and loans, pledge assets, make changes to capital stock ownership structure and pay dividends, as well as financial covenants, such as annualized revenue to working capital, net profit after tax to revenue and total liabilities to tangible net worth, as defined, and are secured by all of the assets of Supplies Distributors, as well as a collateralized guaranty of PFSweb. Additionally, we are required to maintain a subordinated loan to Supplies Distributors of no less than $1.0 million, not maintain restricted cash of more than $5.0 million, are restricted with regard to transactions with related parties, indebtedness and changes to capital stock ownership. Furthermore, we are obligated to repay any over-advance made to Supplies Distributors or its subsidiaries under these facilities if they are unable to do so. We have also provided a guarantee of substantially all of the obligations of Supplies Distributors and its subsidiaries to IBM and Ricoh.

Debt and Finance Lease Obligations

U.S. Credit Agreement. In August 2015, we entered into a credit agreement (“Credit Agreement”) with Regions Bank, as agent for itself and one or more future lenders (the “Lenders”). Under the Credit Agreement, and subject to the terms set forth therein, the Lenders provided us with a revolving loan facility for up to $32.5 million and a term loan facility for up to $30 million. Borrowings under the Credit Agreement accrued interest at a variable rate based on prime rate or Libor, plus an applicable margin.

On November 1, 2018, we entered into Amendment No. 1 to our credit agreement with Regions Bank (the “Amended Facility”). The Amended Facility provided 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 a total of $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 extended the maturity date to November 1, 2023.

As of September 30, 2020 and December 31, 2019, the weighted average interest rate on the revolving loan facility was 2.46% and 3.96%, respectively. The Amended Facility is secured by a lien on substantially all of the operating assets of the US entities and a pledge of 65% of the shares of certain of our foreign subsidiaries. The Amended Facility contains cross default provisions, various restrictions upon the Company’s ability to, among other things, merge, consolidate, sell assets, incur indebtedness, make loans and payments to subsidiaries, affiliates and related parties, make capital expenditures, make investments and loans, pledge assets, make changes to capital stock ownership structure, as well as financial covenants, as defined, of a minimum consolidated fixed charge ratio and a maximum consolidated leverage ratio.

Master Lease Agreements. We have various agreements that provide for leasing or financing transactions of equipment and other assets and will continue to enter into such arrangements as needed to finance the purchasing or leasing of certain equipment or other assets. Borrowings under these agreements, which generally have terms of three to five years, are generally secured by the related equipment, and in certain cases, by a Company parent guarantee.

Other than our finance and operating lease commitments, we do not have any other material financial commitments, although future client contracts may require capital expenditures and lease commitments to support the services provided to such clients.

ITEM 3. Quantitative and Qualitative Disclosure about Market Risk

Not applicable.

ITEM 4. Controls and Procedures

Disclosure Controls and Procedures

We maintain a comprehensive set of disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”). As of September 30, 2020, an evaluation of the effectiveness of our disclosure controls and procedures was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, these disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

During the quarter ended September 30, 2020, there was no change in internal control over financial reporting (as defined in Rule 13a-15(f) or Rule 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Most of our employees, excluding our warehouse workers, are working remotely due to the COVID-19 pandemic. We have not experienced any material adverse impact to our internal controls over financial reporting due to our change in operations. We are continually monitoring and assessing whether these changes in operations as a response to the COVID-19 pandemic will have any impact on the design and operating effectiveness of our internal controls.

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

None.

ITEM 1A. Risk Factors

There have been no material changes from the risk factors disclosed in Part I, Item 1A. of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, as supplemented by our Form 10-K/A filed with the Securities and Exchange Commission on April 29, 2020.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

ITEM 3. Defaults Upon Senior Securities

None.

ITEM 4. Mine Safety Disclosures

Not applicable.

ITEM 5. Other Information

None.

ITEM 6. Exhibits

a) Exhibits:


Exhibit No.						Description of Exhibits
3.1						Amended and Restated Certificate of Incorporation of PFSweb, Inc.
3.1.1						Certificate of Amendment of Certificate of Incorporation of PFSweb, Inc.
3.1.2						Certificate of Amendment to Certificate of Incorporation of PFSweb, Inc.
3.1.3						Certificate of Amendment to Certificate of Incorporation of PFSweb, Inc.
3.1.4						Certificate of Amendment to Amended and Restated Certificate of Incorporation of PFSweb, Inc.
3.2						Amended and Restated By-Laws.
4.1						Amendment No. 7 to Rights Agreement, dated as of June 27, 2018 between the Company and Computershare Inc., successor in interest to Computershare Shareowner Services LLC (formerly known as Mellon Investor Services LLC,) as successor to ChaseMellon Shareholder Services, LLC., as rights agent.
10.2**						Logistics Warehouse Lease Agreement between Weerts Logistic Park III NV and Supplies Distributors SA
10.3**						Warehouse Lease Agreement between ProLogis Texas II (2) LLC and Priority Fulfillment Services, Inc.
31.1**						Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2**						Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**						Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101**						The following unaudited financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations and Comprehensive Income, (iii) Condensed Consolidated Statements of Shareholders' Equity, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements.
104**						Cover Page Interactive Data file, formatted in Inline XBRL (included as Exhibit 101).

* Denotes management or compensatory agreements

** Filed herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: November 6, 2020


			PFSweb, Inc.

			By:			/s/ Thomas J. Madden
						Thomas J. Madden
						Chief Financial Officer
						Executive Vice President