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 and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.

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 ☒

At November ~~5, 2016~~6, 2017 there were ~~18,706,633~~19,020,005 shares of registrant’s common stock outstanding.

	(Unaudited)						(Unaudited)
	September 30,			December 31,			September 30,			December 31,
	2016			2015			2017			2016
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	15,699		$	21,781		$	12,769		$	24,425
Restricted cash		219			275			215			215
Accounts receivable, net of allowance for doubtful accounts of $539 and $600 at September 30, 2016 and December 31, 2015, respectively		64,934			70,700
Inventories, net of reserves of $585 and $739 at September 30, 2016 and December 31, 2015, respectively		7,155			9,262
Accounts receivable, net of allowance for doubtful accounts of $642 and $494 at September 30, 2017 and December 31, 2016, respectively								56,541			80,223
Inventories, net of reserves of $421 and $568 at September 30, 2017 and December 31, 2016, respectively								5,183			6,632
Other receivables		4,821			8,704			5,272			6,750
Prepaid expenses and other current assets		5,017			5,662			4,930			7,299
Total current assets		97,845			116,384			84,910			125,544
PROPERTY AND EQUIPMENT, net		28,812			24,093			26,097			30,264
IDENTIFIABLE INTANGIBLES, net		8,125			8,810			4,410			6,864
GOODWILL		45,929			39,829			46,210			46,210
OTHER ASSETS		2,433			2,174			3,733			2,454
Total assets	$	183,144		$	191,290		$	165,360		$	211,336
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and capital lease obligations	$	5,672		$	3,153		$	6,648		$	7,300
Trade accounts payable		38,009			51,170			28,236			59,752
Deferred revenue		6,238			7,390			5,537			7,156
Performance-based contingent payments		—			11,679			3,934			2,405
Accrued expenses		25,109			30,563			26,427			30,360
Total current liabilities		75,028			103,955			70,782			106,973
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, less current portion		54,749			32,238			44,535			52,399
DEFERRED REVENUE		4,280			4,499
DEFERRED REVENUE, less current portion								4,555			4,127
DEFERRED RENT		4,849			4,362			5,654			4,810
PERFORMANCE-BASED CONTINGENT PAYMENTS		380			2,478
PERFORMANCE-BASED CONTINGENT PAYMENTS, less current portion								—			1,678
OTHER LIABILITIES								2,547			1,066
Total liabilities		139,286			147,532			128,073			171,053

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS’ EQUITY:
Preferred stock, $1.00 par value; 1,000,000 shares authorized; none issued or outstanding		—			—			—			—
Common stock, $0.001 par value; 35,000,000 shares authorized; 18,740,100 and 18,136,218 shares issued at September 30, 2016 and December 31, 2015, respectively; and 18,706,633 and 18,102,751 outstanding at September 30, 2016 and December 31, 2015, respectively		19			18
Common stock, $0.001 par value; 35,000,000 shares authorized; 19,053,472 and 18,768,567 shares issued at September 30, 2017 and December 31, 2016, respectively; and 19,020,005 and 18,735,100 outstanding at September 30, 2017 and December 31, 2016, respectively								19			19
Additional paid-in capital		145,045			141,948			149,805			146,286
Accumulated deficit		(101,760	)		(97,787	)		(112,867	)		(105,317	)
Accumulated other comprehensive income (loss)		679			(296	)		455			(580	)
Treasury stock at cost, 33,467 shares		(125	)		(125	)		(125	)		(125	)
Total shareholders’ equity		43,858			43,758			37,287			40,283
Total liabilities and shareholders’ equity	$	183,144		$	191,290		$	165,360		$	211,336

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

	Three Months Ended						Nine Months Ended						Three Months Ended						Nine Months Ended
	September 30,						September 30,						September 30,						September 30,
	2016			2015			2016			2015			2017			2016			2017			2016
REVENUES:
Service fee revenue	$	53,788		$	45,528		$	154,271		$	121,311		$	54,490		$	53,788		$	166,455		$	154,271
Product revenue, net		11,671			14,419			36,658			44,731			9,616			11,671			30,881			36,658
Pass-through revenue		14,451			11,236			41,259			32,163			13,212			14,451			36,816			41,259
Total revenues		79,910			71,183			232,188			198,205			77,318			79,910			234,152			232,188
COSTS OF REVENUES:
Cost of service fee revenue		36,903			30,193			103,547			81,993			35,719			36,903			111,280			103,547
Cost of product revenue		10,994			13,702			34,649			42,321			8,991			10,994			29,221			34,649
Cost of pass-through revenue		14,451			11,236			41,259			32,163			13,212			14,451			36,816			41,259
Total costs of revenues		62,348			55,131			179,455			156,477			57,922			62,348			177,317			179,455
Gross profit		17,562			16,052			52,733			41,728			19,396			17,562			56,835			52,733
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES, including stock based compensation of $347 and $1,492 for the three months ended September 30, 2016 and 2015, respectively, and $1,743 and $3,446 for the nine months ended September 30, 2016 and 2015, respectively		17,568			18,778			53,926			47,068
Loss from operations		(6	)		(2,726	)		(1,193	)		(5,340	)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES, including stock based compensation of $783 and $347 for the three months ended September 30, 2017 and 2016, respectively and $2,544 and $1,743 for the nine months ended September 30, 2017 and 2016, respectively														18,229			17,568			60,682			53,926
Income (loss) from operations														1,167			(6	)		(3,847	)		(1,193	)
INTEREST EXPENSE, net		714			706			1,807			1,247			778			714			2,125			1,807
Loss from operations before income taxes		(720	)		(3,432	)		(3,000	)		(6,587	)
Income (loss) from operations before income taxes														389			(720	)		(5,972	)		(3,000	)
INCOME TAX EXPENSE, net		319			238			973			676			487			319			1,578			973
NET LOSS	$	(1,039	)	$	(3,670	)	$	(3,973	)	$	(7,263	)	$	(98	)	$	(1,039	)	$	(7,550	)	$	(3,973	)

NET LOSS PER SHARE:
Basic	$	(0.06	)	$	(0.21	)	$	(0.21	)	$	(0.42	)	$	(0.01	)	$	(0.06	)	$	(0.40	)	$	(0.21	)
Diluted	$	(0.06	)	$	(0.21	)	$	(0.21	)	$	(0.42	)	$	(0.01	)	$	(0.06	)	$	(0.40	)	$	(0.21	)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic		18,699			17,829			18,552			17,449			18,995			18,699			18,868			18,552
Diluted		18,699			17,829			18,552			17,449			18,995			18,699			18,868			18,552
COMPREHENSIVE LOSS:
COMPREHENSIVE INCOME (LOSS):
Net loss	$	(1,039	)	$	(3,670	)	$	(3,973	)	$	(7,263	)	$	(98	)	$	(1,039	)	$	(7,550	)	$	(3,973	)
Foreign currency translation adjustment		680			(89	)		976			(757	)		228			680			1,035			976
TOTAL COMPREHENSIVE LOSS	$	(359	)	$	(3,759	)	$	(2,997	)	$	(8,020	)
TOTAL COMPREHENSIVE INCOME (LOSS)													$	130		$	(359	)	$	(6,515	)	$	(2,997	)

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

	Nine Months Ended						Nine Months Ended
	September 30,						September 30,
	2016			2015			2017			2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(3,973	)	$	(7,263	)	$	(7,550	)	$	(3,973	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		11,206			10,645			11,096			11,206
Amortization of debt issuance costs		109			—			112			109
Provision for doubtful accounts		16			53			160			16
Provision for excess and obsolete inventory		21			75			—			21
Deferred income taxes		57			125			409			57
Stock-based compensation expense		1,743			3,446			2,544			1,743
Non-cash compensation expense		—			131
Change in performance-based contingent payments		(2,638	)		403			2,209			(2,638	)
Changes in operating assets and liabilities:
Restricted cash		—			34
Accounts receivable		7,651			13,077			25,220			7,651
Inventories		2,106			1,690			1,463			2,106
Prepaid expenses, other receivables and other assets		4,843			4,583			3,752			4,843
Deferred rent		906			(421	)		187			906
Accounts payable, deferred revenue, accrued expenses and other liabilities		(24,412	)		(18,289	)		(38,106	)		(24,412	)
Net cash (used in) provided by operating activities		(2,365	)		8,289
Net cash provided by (used in) operating activities								1,496			(2,365	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(7,532	)		(3,468	)		(3,965	)		(7,532	)
Acquisitions, net of cash acquired		(8,320	)		(31,619	)		—			(8,320	)
Net cash used in investing activities		(15,852	)		(35,087	)		(3,965	)		(15,852	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock		1,073			1,328			877			1,073
Taxes paid on behalf of employees for withheld shares								(256	)		(1,307	)
Decrease in restricted cash		56			434			—			56
Payments on performance-based contingent payments		(9,454	)		(2,043	)		(2,004	)		(9,454	)
Payments on capital lease obligations		(2,210	)		(1,687	)		(2,425	)		(2,210	)
Taxes paid on-behalf of employees for withheld shares		(1,307	)		(588	)
Payments on debt, net		(384	)		(6,306	)		(324	)		(384	)
Borrowings on term loan		20,000			10,000
Borrowings (payments) on term loan								(1,688	)		20,000
Borrowings on revolver		61,906			30,000			62,849			61,906
Payments on revolver		(58,188	)		(7,800	)		(68,173	)		(58,188	)
Debt issuance costs		—			(634	)
Net cash provided by financing activities		11,492			22,704
Net cash provided by (used in) financing activities								(11,144	)		11,492

EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS		643			(1,034	)		1,957			643

NET DECREASE IN CASH AND CASH EQUIVALENTS		(6,082	)		(5,128	)		(11,656	)		(6,082	)

CASH AND CASH EQUIVALENTS, beginning of period		21,781			18,128			24,425			21,781

CASH AND CASH EQUIVALENTS, end of period	$	15,699		$	13,000		$	12,769		$	15,699

SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash investing and financing activities:
Property and equipment acquired under long-term debt and capital leases	$	3,890		$	3,703		$	270		$	3,890
Performance-based contingent payments through stock issuance							$	354		$	2,238

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

PFSweb, Inc. and its ~~direct and indirect~~ subsidiaries are collectively referred to as the “Company”; “Supplies Distributors” collectively refers to Supplies Distributors, Inc. and its subsidiaries; “Retail Connect” refers to PFSweb Retail Connect, Inc.; “REV” collectively refers to REV Solutions, Inc. and REVTECH Solutions India Private Limited; “LAL” refers to LiveAreaLabs, Inc.; “Moda” refers to Moda Superbe Limited; “CrossView” refers to CrossView, Inc.; “Conexus” refers to Conexus ~~Limited~~Limited; and “PFSweb” refers to PFSweb, Inc. and its subsidiaries, excluding Supplies Distributors and Retail Connect.

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. The majority of Supplies Distributors’ revenue is generated by its sale of product purchased from Ricoh.

Supplies Distributors has obtained financing (see Note 7) to fund certain working capital requirements for the sale of primarily Ricoh products. Pursuant to the transaction management services agreements between PFSweb and Supplies Distributors, PFSweb provides to Supplies Distributors transaction management and fulfillment services, such as managed web hosting and maintenance, procurement support, web-enabled customer contact center services, customer relationship management, financial services including billing and collection services, information management, and international distribution services. Supplies Distributors does not have its own sales force and relies upon Ricoh’s sales force and product demand generation activities for its sale of Ricoh products. Supplies Distributors sells its products in the United States, Canada and Europe.

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 ~~clients’~~ customer, and records product revenue net of cost of product revenue as a component of service fee revenue. ~~PFSweb also provides various transaction management services~~Pursuant to ~~Supplies Distributors under these arrangements.~~

~~All of the~~ agreements between PFSweb and Supplies Distributors, ~~were made in the context of an affiliate relationship~~PFSweb provides transaction management and ~~were negotiated in the overall context of PFSweb’s and~~fulfillment services to Supplies Distributors’ arrangement with the client or vendor. Although management believes the terms of these agreements are generally consistent with fair market values, there can be no assurance that the prices charged to or by each company under these arrangements are not higher or lower than the prices that may be charged by, or to, unaffiliated third parties for similar services. All of these transactions are eliminated upon consolidation.Distributors.

The interim condensed consolidated financial statements as of September 30, ~~2016,~~2017, and for the three and nine months ended September 30, ~~2016~~2017 and ~~2015,~~2016, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and are unaudited. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to the rules and regulations promulgated by the SEC. In the opinion of management and subject to the foregoing, the unaudited interim condensed consolidated financial statements of the Company include all adjustments necessary for a fair presentation of the Company’s financial position as of September 30, ~~2016,~~2017, its results of operations for the three and nine months ended September 30, ~~2016~~2017 and ~~2015~~2016 and its cash flows for the nine months ended September 30, ~~2016~~2017 and ~~2015. Certain prior-year amounts have been reclassified to conform to the current year's presentation.~~2016. Results of the Company’s operations for interim periods may not be indicative of results for the full fiscal year.

All intercompany balances and transactions have been eliminated in consolidation.

The preparation of condensed consolidated financial statements and related disclosures in conformity with U.S. 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 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 on 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 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. These uncertainties are discussed in this report and in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2015~~2016 in the section entitled “Risk Factors.” 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 condensed consolidated financial statements are fairly stated in accordance with U.S. GAAP, and provide a fair presentation of the Company’s financial position and results of operations.

The Company derives revenue primarily from services provided under contractual arrangements with its clients or from the sale of products under its distributor agreements. The following revenue recognition policies define the manner in which the Company accounts for sales transactions.

The Company recognizes revenue when persuasive evidence that a sales arrangement exists, product shipment or delivery has occurred or services are rendered, the sales price or fee is fixed or determinable, and collectability is reasonably assured.

In instances where revenue is derived from sales of third-party vendor products or services, the Company records revenue on a gross basis when the Company is a principal to the transaction and net of costs when the Company is acting as an agent between the customer or client and the vendor. The Company considers several factors to determine whether it is a principal or an agent, most notably whether the Company is the primary obligor to the vendor or customer, has established its own pricing and has inventory and credit risks, if applicable.

The Company’s service fee revenue primarily relates to its distribution services, order management/customer care services, professional digital agency and technology services. The Company typically charges its service fee revenue on either a cost-plus basis, a percent of shipped revenue basis, on a time and materials, project or retainer basis for professional services, or a per transaction basis, such as a per item basis for fulfillment services or a per labor hour basis for web-enabled customer contact center services. Additional fees are billed for other services.

The Company evaluates its contractual arrangements to determine whether or not they include multiple service elements. Revenue recognition is determined for the separate service elements of the contract in accordance with the requirements of Accounting Standards Codification (“ASC”) 605, “Revenue Recognition.” A deliverable constitutes a separate unit of accounting when it has standalone value and there are no return rights or other contingencies present for the delivered elements. The Company allocates revenue to each element based on estimated selling price. Each of the Company’s client contracts, and the related services, is unique, with individual needs and criteria customized for each client. Each client engagement is scoped and priced separately and as such the Company is not able to establish vendor specific objective evidence of fair value for its services, nor is third-party evidence available to establish stand-alone selling prices. Accordingly the Company uses management’s best estimate of selling price for the

deliverables. The Company establishes its estimates considering internal factors such as margin objectives, pricing practices and controls as well as market conditions such as competitor pricing strategies.

Distribution services relate primarily to inventory management, product receiving, warehousing and fulfillment (i.e., picking, packing and shipping) and facilities and operations management. Service fee revenue for these activities is recognized as earned, which is either (i) on a per transaction basis or (ii) at the time of product fulfillment, which occurs at the completion of the distribution services.

Order management/customer care services relate primarily to taking customer orders for the Company’s clients’ products. These services also ~~entail~~include addressing customer questions related to orders, as well as cross-selling/up-selling activities. Service fee revenue for this activity is recognized as the services are rendered. Fees charged to the client are on a per transaction basis based on either (i) a pre-determined fee per order or fee per telephone minutes incurred, (ii) a per dedicated agent fee, or (iii) are included in the product fulfillment service fees that are recognized on product shipment.

Professional consulting and technology service revenues primarily relate to design, implementation, service and support of eCommerce platforms, website design and solutions and quality control for the Company’s clients. Additionally, the Company provides digital agency services that enable client marketing programs to attract new customers, convert buyers and increase website value. These fees are typically charged on either a per labor hour basis, or transaction basis, a dedicated resource model, a fixed price arrangement, or a percent of merchandise shipped basis. Service fee revenue for this activity is generally recognized as the services are rendered.

The Company performs front-end set-up and integration services to support client eCommerce platforms and websites. When the Company determines these front-end set-up and integration services do not meet the criteria for recognition as a separate unit of accounting, the Company defers the start-up fees received and the related costs, and recognizes them over the expected performance period. When the Company determines these front-end set-up and integration services do meet the criteria for recognition as a separate unit of accounting, for time and material arrangements, the Company recognizes revenue as services are rendered and costs as they are incurred. For fixed-price arrangements, the Company uses the completed contract method to recognize revenues and costs if reasonable and reliable cost estimates for a project cannot be made. If reasonable and reliable costs estimates for a project can be made, the Company recognizes revenue over the expected performance period on a proportional performance basis, as determined by the relationship of actual costs incurred compared to the estimated total contract costs. ~~At the time a loss in a contract is expected, the entire amount of the estimated loss is accrued.~~

The Company’s billings for reimbursement of out-of-pocket expenses, including travel and certain third-party vendor expenses such as shipping and handling costs and telecommunication charges, are included in pass-through revenue. The related reimbursable costs are reflected as cost of pass-through revenue.

The Company’s cost of service fee revenue, representing the cost to provide the services described above, is recognized as incurred. Cost of service fee revenue also includes certain costs associated with technology collaboration and ongoing technology support that include maintenance, web hosting and other ongoing programming activities. These activities are primarily performed to support the distribution and order management/customer care services and are recognized as incurred.

Depending on the terms of the customer arrangement, Supplies Distributors recognizes product revenue and product cost either upon the shipment of product to customers or when the customer receives the product. Supplies Distributors permits its customers to return product for credit against other purchases, which include returns for defective products (that Supplies Distributors then returns to the manufacturer) and incorrect shipments. Supplies Distributors provides a reserve for estimated returns and allowances and offers terms to its customers that it believes are standard for its industry.

Freight costs billed to customers are reflected as components of product revenue. Freight costs incurred are recorded as a component of cost of product revenue.

Under its distributor agreements, Supplies Distributors bills Ricoh for reimbursements of certain expenses, including: pass-through customer marketing programs, including rebates and co-op funds; 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 certain other expenses as defined. Supplies Distributors

records these reimbursable amounts as they are incurred as other receivables in the condensed consolidated balance sheet with a corresponding reduction in either inventory or cost of product revenue. Supplies Distributors also records pass-through customer marketing programs as a reduction of both product revenue and cost of product revenue.

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.

The Company primarily performs its distribution services and order management customer care services under multiple-year contracts, certain of which include early termination provisions, and clients are obligated to pay for services performed. In conjunction with these long-term contracts, the Company sometimes receives start-up fees to cover its implementation costs, including certain technology infrastructure and development costs. When the Company determines that these start-up and integration activities do not meet the criteria for recognition as a separate unit of accounting, the Company defers the start-up fees received, and the related costs, and recognizes them over the expected performance period. The amortization of deferred revenue is included as a component of service fee revenue. The amortization of deferred implementation costs is included as a cost of service fee revenue. To the extent implementation costs for non-technology infrastructure and development exceed the corresponding fees received, the excess costs are expensed as incurred.

Priority Fulfillment Services, Inc. (“PFS”) a wholly-owned subsidiary of PFSweb, Inc. has made advances to Supplies Distributors that are evidenced by a Subordinated Demand Note (the “Subordinated Note”). Under the terms of certain of Supplies Distributors’ debt facilities, the outstanding balance of the Subordinated Note cannot be decreased to less than $2.5 million without prior approval of certain of Supplies Distributors’ lenders. As of September 30, 2016 and December 31, 2015, the outstanding balance of the Subordinated Note was $2.5 million. The Subordinated Note is eliminated in the Company’s condensed consolidated financial statements.

~~One~~No product customer nor service fee client relationship represented ~~approximately~~more than 10% ~~and 13%~~ of the Company’s consolidated total revenues during the nine months ended September 30, ~~2016 and 2015, respectively. No customer or~~2017. One service fee ~~clients~~client relationship represented 10% of the Company’s consolidated total revenues during the nine months ended September 30, 2016. No client exceeded 10% of consolidated accounts receivable as of September 30, ~~2016 or 2015.~~2017. Amounts due from one client exceeded 10% of consolidated accounts receivable as of December 31, 2016.

A summary of the nonaffiliated customer and client revenue concentrations as a percentage of product revenue and service fee revenue, respectively, is as follows:

	Nine Months Ended						Nine Months Ended
	September 30,						September 30,
	2016			2015			2017			2016
Service Fee Revenue (as a percentage of total Service Fee Revenue):
Client 1		10	%		13	%		9	%		10	%
Product Revenue (as a percentage of total Product Revenue):
Customer 1		13	%		15	%		6	%		13	%
Customer 2		15	%		14	%		13	%		16	%
Customer 3								12	%		5	%

The Company currently anticipates that its product revenue, including the revenue from certain of the customers identified above, will decline during the next twelve months.

The Company has provided certain collateralized guarantees of its subsidiaries’ financings and credit arrangements. These subsidiaries’ ability to obtain financing on similar terms would be significantly impacted without these guarantees.

The Company has multiple arrangements with International Business Machines Corporation (“IBM”) and Ricoh. These arrangements include Supplies Distributors’ distributor agreements and certain of Supplies Distributors’ working capital financing agreements. The majority of Supplies Distributors’ revenue is generated by its sale of product purchased from Ricoh. Supplies Distributors also relies upon Ricoh’s sales force and product demand generation activities and the discontinuance of such services would have a material impact upon Supplies Distributors’ business. In addition, Supplies Distributors has product sales to IBM and Ricoh business affiliates.

As a result of certain operational restructuring of its business, Ricoh has implemented, and will continue to implement, certain changes in the sale and distribution of Ricoh products. The changes have resulted, and are expected to continue to result, in reduced revenues and profitability for Supplies Distributors.

~~Inventories (all of which are finished goods) are stated at the lower of weighted average cost or market. The Company establishes inventory reserves based upon estimates of declines in values due~~9

Notes to ~~inventories that are slow moving or obsolete, excess levels of inventory or values assessed at lower than cost.~~Unaudited Condensed Financial Statements

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 PFS, 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.

The Company leases certain real estate for its warehouse, call center, sales, professional services and corporate ~~operations,~~offices, as well as certain equipment, under non-cancelable operating leases that expire at various dates through 2026. Management expects that, in the normal course of business, leases that expire will be renewed or replaced by other similar leases. The Company recognizes escalating lease payments on a straight-line basis over the term of each respective lease, and classifies with the difference between cash payments and rent expense recognized ~~being recorded~~ as deferred rent in the accompanying condensed consolidated balance sheets.

The Company’s property and equipment held under capital leases totaled approximately ~~$5.4~~$3.3 million and ~~$5.5~~$5.4 million, net of accumulated amortization of approximately ~~$5.2~~$7.3 million and ~~$4.6~~$5.1 million, at September 30, ~~2016~~2017 and December 31, ~~2015,~~2016, respectively. Depreciation and amortization expense related to capital leases during ~~three months ended September 30, 2016 and 2015 was $.08 million and $.07 million, respectively. Depreciation and amortization expense related to capital leases during~~the nine months ended September 30, 2017 and 2016 was $2.3 million and ~~2015 was~~ $2.1 million, ~~and $1.7 million,~~ respectively.

The Company records a tax provision primarily associated with state income taxes and the majority of its ~~foreign~~international operations. The Company has recorded a valuation allowance for the majority of its domestic net deferred tax assets, which are primarily related to ~~its~~ net operating loss carryforwards and ~~for~~ certain foreign deferred tax assets.

The Company made payments for interest of approximately ~~$0.5~~$1.9 million and ~~$0.4~~$1.1 million in the ~~three~~nine months ended September 30, ~~2016~~2017 and ~~2015, respectively, and $1.1 million and $0.6 million in the nine month periods ended September 30,~~ 2016, ~~and 2015,~~ respectively. Income taxes of approximately ~~$0.1~~$1.0 million and $0.7 million were paid by the Company in ~~both~~ the ~~three~~nine months ended September 30, 2017 and 2016, ~~and 2015, and $0.7 million was paid by the Company during both the nine month periods ended September 30, 2016 and 2015.~~

In March 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” The amendment in this ASU affects all organizations that issue share-based payment awards to employees and is intended to simplify several aspects of the accounting for these awards, including income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows, and allowing an accounting policy election to account for forfeitures as they occur. As permitted by ASU 2016-09, the Company elected to early adopt ASU 2016-09 in the quarter ended June 30, 2016 with an effective date of January 1, 2016. As a result of the adoption, the Company recognized previously unrecognized excess tax benefits of $1.9 million, which was offset by a valuation allowance in the same amount as the Company does not believe, on a more-likely-than-not basis, the net operating losses will be realized. The adoption of ASU 2016-09 resulted in a cumulative adjustment to equity, subject to a full valuation allowance, as of January 1, 2016. Additionally, as a result of the adoption, the Company reclassified previous years taxes paid on behalf of employees for withheld shares in the condensed consolidated cash flow statements.

In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory,” which modifies existing requirements regarding measuring inventory at the lower of cost or market. Under existing standards, the market amount requires consideration of replacement cost, net realizable value (NRV), and NRV less an approximately normal profit margin. The new ASU replaces market with NRV, defined as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This eliminates the need to determine and consider replacement cost or NRV less an approximately normal profit margin when measuring inventory. The Company ~~has~~adopted this standard prospectively effective January 1, 2017, which did not ~~yet adopted and is currently assessing~~have a material impact on the ~~potential effect of the following pronouncements on its~~Company’s unaudited condensed consolidated financial ~~statements~~statements.

In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes,” which simplifies the presentation of deferred income taxes by requiring deferred tax assets and ~~related disclosures:~~liabilities be classified as noncurrent on the balance sheet. The Company adopted this standard effective January 1, 2017, which did not have a material impact on the unaudited condensed consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with ~~Customers (Topic 606)~~Customers.” ~~(“ASU 2014-09”), which~~The new guidance outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with ~~customers.~~customers and supersedes most current revenue recognition guidance, including industry specific guidance. The core principle ofbehind ASU No. 2014-09 is that an entity should recognize revenue to ~~recognize revenues when~~depict the transfer of promised goods orand services ~~are transferred~~ to customers in an amount that reflects the consideration ~~that is expected~~to which the entity expects to be ~~received~~entitled in exchange for delivering those goods and services. The standard creates a model that requires companies to exercise judgment when considering the terms of a contract and all relevant facts and circumstances. The new standard requires significantly expanded disclosures about revenue contract assets and liabilities and includes new accounting principles related to the deferral and amortization of contract acquisition and fulfillment costs. The ASU allows two methods of adoption: (a) a full retrospective approach in which the standard is applied to all periods presented, or ~~services. ASU 2014-09 defines~~(b) a ~~five step process~~modified retrospective approach in which the standard is applied only to ~~achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within~~ the ~~revenue recognition process than required under existing U.S. GAAP, including identifying performance obligations~~most current period presented in the ~~contract, estimating~~financial statements. In August 2015, the ~~amount~~FASB deferred the effective date of ~~variable consideration~~this standards update to ~~include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is effective for the~~ fiscal ~~year~~years beginning ~~January 1, 2018,~~after December 15, 2017, with early adoption permitted ~~for~~on the original effective date of fiscal years beginning after December 15, 2016. The Company currently anticipates adopting the standard on January 1, ~~2017.~~2018 using the modified retrospective method. The ~~FASB~~Company is assessing the new standard and analyzing the standard’s impact on the Company’s internal controls, accounting policies and financial statements and disclosures. As the Company is in the process of evaluating the impact of the standard, it has ~~also issued~~not yet quantified the ~~following standards~~impact of the adoption. However, based on the initial phase of its evaluation process, the Company has identified certain potential areas of impact. Application of the new standard requires that incremental costs of obtaining a contract (including sales commissions plus any associated fringe benefits) be recognized as an asset and expensed over the expected life of the arrangement, unless that life is less than one year. Currently the Company expenses certain of these contract acquisition costs as incurred. Additionally, the Company is assessing the expanded disclosure requirements of the new standard and whether the principal versus agent considerations would change how it presents certain revenues, primarily pass-through revenues. We are in the process of implementing related changes to our financial reporting processes and related internal controls over financial reporting. We do not expect these changes to result in a material impact to those reporting processes or internal controls. The Company expects to continue its evaluation and implementation processes, which ~~clarify ASU 2014-09~~will include the quantification of impact and ~~have~~development of policies, to facilitate adoption during the ~~same effective date as the original standard:~~quarter ended March 31, 2018.

In February 2016, the FASB issued ASU 2016-02, ~~“Leases”. The new standard establishes~~"Leases (Topic 842)," which modifies the accounting for leases, intending to increase transparency and comparability of organizations by requiring balance sheet presentation of leased assets and increased financial statement disclosure of leasing arrangements. ASU 2016-02 will require entities to recognize a ~~right-of-use (“ROU”) model that requires a lessee to record a ROU asset~~liability for their lease obligations and a corresponding asset representing the right to use the underlying asset over the lease ~~liability~~term. Lease obligations are to be measured at their present value and accounted for using the effective interest method. The accounting for the leased asset will differ slightly depending on whether the ~~balance sheet for all leases with terms longer than 12 months. Leases will~~agreement is deemed to be ~~classified as either finance~~a financing or operating ~~with classification affecting~~lease. For financing leases, the ~~pattern of~~leased asset is depreciated on a straight-line basis and depreciation expense ~~recognition~~is recorded separately from the interest expense in the ~~income statement. The new standard~~statements of operations, resulting in higher expense in the earlier part of the lease term. For operating leases, the depreciation and interest expense components are combined, recognized evenly over the term of the lease, and presented as a reduction to operating income. ASU 2016-02 requires that assets and liabilities be presented or disclosed separately, and requires additional disclosure of certain qualitative and quantitative information related to these lease agreements. ASU 2016-02 is effective for ~~fiscal years~~annual and interim periods beginning after December 15, ~~2018, including interim periods within those fiscal years.~~2018. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently assessing the ASU’s impact on its consolidated financial statements, but does expect the adoption to have a material impact to the balance sheet through the addition of an ROU asset and corresponding lease liability.

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments - a consensus of the Emerging Issues Task ~~Force~~Force” (“ASU 2016-15”). The new guidance 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~~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 for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing this ASU’s impact on its unaudited condensed consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill impairment” (“ASU 2017-04”), which removes Step 2 of the goodwill impairment test. A goodwill impairment will now be determined by the amount by which a 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. The Company is currently assessing this ASU’s impact on its unaudited condensed consolidated financial statements.

In May 2017, the Financial Accounting Standards Board (the “FASB”) issued ASU 2017-09, “Compensation Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU 2017-09”). The amendments in this ASU affect any entity that changes the terms or conditions of a share-based payment award. The new guidance is intended to provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, to a change to the terms or conditions of a share-based payment award. ASU 2017-09 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing this ASU’s impact on its unaudited condensed consolidated financial statements.

Acquisitions have been recorded using the purchase method of accounting for business combinations.

The acquisitions discussed below are expected to enhance the Company’s overall service offering to its existing clients and customers as well as support anticipated growth opportunities. For the three months ended September 30, 2016 and 2015, acquisition related expenses were $0.1 million and $1.7 million, respectively, and for the nine months ended September 30, 2016 and 2015, acquisition related expenses were $1.7 million and $3.0 million, respectively, and recognized in selling, general and administrative expenses in the condensed consolidated statements of operations.

On June 8, 2016, PFSweb, Inc. acquired the outstanding capital stock of Conexus, an eCommerce system integrator that provides strategic consulting, system integration, and managed services for leading businesses and technology ~~companies. Conexus maintains~~companies from its primary operations in Basingstoke, Hampshire (U.K.). The purchase price for the shares ~~consists~~consisted of (i) an initial cash payment of £5,855,000 (approximately $8.5 ~~million)~~million at June 8, 2016), subject to a post-closing adjustment based upon a May 31, 2016 balance sheet analysis, and (ii) up to an aggregate maximum of £1,445,000 (approximately ~~$1.9~~$1.8 million at ~~September 30,~~December 31, 2016), subject to Conexus achieving certain operational and financial targets during the post-closing period ending December 31, 2016 (the “Earn-out ~~Payments”~~Payment”), subject to possible offsets for indemnification and other claims arising under the purchase agreement. ~~Up to 40% (but~~Conexus did not ~~to exceed £450,000) (approximately $0.6 million at September 30, 2016) of~~achieve the Earn-out Payments may be paid by the issuance of restricted shares of PFSweb common stock, based on its then current market value at the time of issuance. As of September 30, 2016, as a result of updated Conexusoperational and financial ~~projections for the 2016 earn-out period,~~targets so the Company ~~has~~did not ~~recorded a~~make any payments or record any liability ~~applicable to the estimated Earn-out Payments and the estimated performance-based liability was reduced from $0.6 million as of June 30, 2016 to $0~~ as of September 30, ~~2016.~~2017 or December 31, 2016 applicable to the Earn-out Payment.

The transaction was accounted for using the purchase method of accounting for business combinations and, accordingly, the assets acquired and liabilities assumed, including an allocation of purchase price, and the results of operations of Conexus, including the amortization of acquired intangible assets, have been included in the Company's ~~condensed~~ consolidated financial statements since the date of acquisition which, for the three and nine months ended September 30, 2016, includes $1.7 million and $2.2 million, respectively, of service fee revenue and approximately $41,000 and $0.4 million, respectively, of net loss. The net loss for Conexus for the nine months ended September 30, 2016 included approximately $0.5 million of acquisition related expenses. Additional acquisition related expenses applicable to the Conexus acquisition of approximately $0.1 million and $1.1 million were also incurred by the Company during the three and nine months ended September 30, 2016, respectively. acquisition.

The Company determined fair value using a combination of the discounted cash flow, market multiple and market capitalization valuation methods. The ~~Company is in the process of finalizing the purchase price allocation and, accordingly, the following preliminary~~ ~~allocation of the purchase price is subject to adjustment.~~

~~The~~ following table summarizes the ~~preliminary estimated~~ fair value of the tangible and intangible assets acquired and liabilities assumed (in thousands):

Cash	$	156	$	156
Accounts receivable, net		1,451		1,451
Other receivables		909		887
Property and equipment		200
Other assets		82		421
Intangible assets		2,181
Identifiable intangibles				2,035
Total assets acquired		4,979		4,950
Total liabilities assumed		2,254		2,218
Net assets acquired		2,725		2,732
Goodwill		6,055		6,336
Total purchase price	$	8,780	$	9,068

Aggregate cash payments	$	8,476		$	8,515
Performance-based contingent payments (based on estimated fair value at acquisition date)		553
Estimated post-closing balance sheet reconciliation adjustment		(249	)
Performance-based contingent payments (based on fair value at acquisition date)					553
Total purchase price	$	8,780		$	9,068

The excess of the purchase price over the fair value of the net identifiable assets acquired and liabilities assumed was allocated to goodwill. Total goodwill of ~~$6.1~~$6.3 million, none of which is deductible for tax purposes, is not being amortized but is subject to an annual impairment test using a fair-value-based approach.

The Company is amortizing the identifiable intangible assets acquired using a pattern in which the economic benefit of the assets are expected to be realized by the Company over their estimated remaining useful lives. There are no residual values for any of the intangible assets subject to amortization acquired during the Conexus acquisition. ~~Estimated definite~~

Definite lived intangible assets acquired in the Conexus acquisition consist of (in thousands):

			September 30, 2016					Estimated
	Fair Value		Accumulated			Net Carrying		Useful Life													Estimated
	at Acquisition		Amortization			Value		from Acquisition			September 30, 2017					December 31, 2016					Useful Life
									Fair Value at Acquisition		Accumulated Amortization			Net Carrying Value		Accumulated Amortization			Net Carrying Value		from Acquisition
Developed technology	$	727	$	(73	)	$	654	2.5 years	$	727	$	(392	)	$	335	$	(145	)	$	582	2.5 years
Customer relationships		1,454		(256	)		1,198	4.5 years		1,308		(853	)		455		(461	)		847	4.5 years
Total definite lived intangible assets	$	2,181	$	(329	)	$	1,852
Total definite lived identifiable intangible assets									$	2,035	$	(1,245	)	$	790	$	(606	)	$	1,429

~~On June 11, 2015, PFSweb, Inc. acquired the outstanding capital stock of Moda, an eCommerce system integrator and consultancy that provides unique digital experiences for fashion brands and retailers.~~ ~~Moda maintains primary operations in London.~~ ~~Consideration paid for the shares included an initial £650,000~~ ~~(approximately $1.0~~ ~~million) cash payment and~~ ~~16,116~~ ~~unregistered shares of Company stock (approximately $0.2 million in value as of the acquisition date). The purchase agreement provides for~~ ~~future earn-out payments (“Moda Earn-out~~ ~~Payments”) payable in 2017 based on Moda’s achievement of certain 2016 financial targets, with no~~ ~~guaranteed~~ ~~minimum and an aggregate maximum of £600,000~~ ~~(approximately $0.8 million), subject to possible offsets for indemnification and other claims arising under the~~ ~~purchase~~ ~~agreement. As of September 30, 2016,~~ ~~as a result of updated 2016 Moda financial projections,~~ ~~the Company has not recorded a liability applicable to the estimated Moda Earn-out Payments and~~ ~~the estimated performance-based contingent liability for the Moda Earn-out Payments was reduced from $0.3 million as of December 31, 2015 to $0 as of September 30, 2016 .~~

~~The~~Unaudited pro forma historical results of operations ~~of Moda~~related to the Conexus acquisition have not been ~~included in~~presented because they are not material to the ~~Company's~~Company’s condensed consolidated ~~financial~~ statements ~~since the date~~ of ~~acquisition.~~

The Company determines fair value using a combination of the discounted cash flow, market multiple and market capitalization valuation methods. The following table summarizes the fair value of the tangible and intangible assets acquired and liabilities assumed~~(in thousands):~~

~~Purchase price for Moda is as follows (in thousands, except share data and stock price):~~

The excess of the purchase price over the fair value of the net identifiable assets acquired and liabilities assumed was allocated to goodwill. Total goodwill of $1.3 million, none of which is deductible for tax purposes, is not being amortized but is subject to an annual impairment test using a fair-value-based approach.

On August 5, 2015, PFSweb, Inc. 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, Inc. (“CrossView”) an ecommerce systems integrator and provider of a wide range of ecommerce services in the U.S. and Canada.

Consideration paid by the Company included an initial cash payment of $~~30.7~~$30.7 million and 553,223 unregistered shares of Company common stock (approximately $~~6.3~~$6.3 million in value as of the acquisition date). The initial cash payment was subject to adjustment based upon a post-closing balance sheet reconciliation. In addition, the purchase agreement provides 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. The CrossView Earn-out Payments have no guaranteed minimum and an aggregate maximum of $~~18.0~~$18.0 million and are subject to possible offsets for indemnification and other claims. ~~In the quarter~~During ~~ended June 30,~~ 2016, the Company paid an aggregate of $7.9 million in settlement of the 2015 CrossView Earn-out ~~Payments,~~Payment, of which $1.6 million was paid by the issuance of 122,066 restricted shares of Company stock.

During 2017, the Company paid an aggregate of $2.4 million in settlement of the 2016 CrossView Earn-out Payment, of which $0.4 million was paid by the issuance of 48,173 restricted shares of Company stock. The Company will pay 15% of any ~~2016 and~~ 2017 ~~earn-outs payments~~CrossView Earn-out Payment in restricted shares of Company common stock, based on its current market value at the time of issuance. As of September 30, ~~2016,~~2017, the Company ~~has~~had recorded a ~~total~~ liability of ~~$0.4~~$3.9 million applicable to the ~~remaining projected~~estimated 2017 CrossView Earn-out ~~Payments,~~Payment, which is included in ~~other liabilities~~performance-based contingent payments in the condensed consolidated balance sheets. ~~This~~The estimated performance-based contingent payment liability ~~was reduced~~decreased from ~~$10.2~~ $4.1 million as of December 31, ~~2015 to $0.4 million as of September 30,~~ 2016 ~~following $7.9 million of payments during the nine months ended September 30, 2016 and~~ as a result of the payment of the 2016 CrossView Earn-out Payment partially offset by an increase in the estimated 2017 CrossView Earn-Out Payment resulting from updated CrossView financial projections for the ~~2016 and~~ 2017 earn-out ~~periods.~~ period.

The following table presents the change in the acquisition related performance-based contingent payments for the periods presented (in thousands):

Goodwill acquired through acquisitions is recognized as part of ~~operations of CrossView have been included in~~ the ~~Company's condensed consolidated financial statements since the date of acquisition.~~

PFSweb segment. The Company determined fair value using a combination of the discounted cash flow, market multiple and market capitalization valuation methods. ~~The following table summarizes the fair value of the tangible and intangible assets acquired and liabilities assumed (in thousands):~~

~~Purchase price for CrossView is as follows (in thousands, except share data and stock price):~~

The excess of the purchase price over the fair value of the net identifiable assets acquired and liabilities assumed was allocated to goodwill. Total goodwill of $30.2 million, which, given the structure of the acquisition, is expected to be deductible for tax purposes over 15 years.

~~The following table presents the change in the acquisition related performance-based contingent payments for the periods presented:~~

The following table presents selected pro forma information, for comparative purposes, assuming the acquisitions of Conexus and CrossView had occurred on January 1, 2015 (in thousands, except per share amounts):

The unaudited pro forma total revenues and pro forma net loss are not necessarily indicative of the consolidated results of operations for future periods or the results of operations that would have been realized had the Company consolidated Conexus and CrossView during the periods noted. Moda did not meet the significance test requirements and thus is not included in the pro forma presentation above.

~~Goodwill acquired through acquisitions is recognized as part of the PFSweb segment and was~~ ~~$45.9 million and $39.8 million as of September 30, 2016 and December 31, 2015, respectively~~. As discussed in note 3, the Company acquired Conexus in June of 2016 and recognized goodwill of $6.1 million. The Company determined fair value using a combination of the discounted cash flow, market multiple and market capitalization valuation methods.

The following table presents the gross carrying value and accumulated amortization for identifiable ~~intangibles:~~intangibles (in thousands):

	September 30, 2016							December 31, 2015
	Fair Value		Accumulated			Net Carrying		Fair Value		Accumulated			Net Carrying		Estimated Useful Life			September 30, 2017
	at Acquisition		Amortization			Value		at Acquisition		Amortization			Value		from Acquisition	Fair Value		Accumulated			Net Carrying		Estimated Useful Life
																at Acquisition		Amortization			Value		from Acquisition
Trade names	$	1,250	$	(719	)	$	531	$	1,250	$	(266	)	$	984	2.25 - 2.5 years	$	1,250	$	(1,103	)	$	147	2.25 - 2.5 years
Non-compete agreements		575		(296	)		279		575		(159	)		416	1- 3.5 years		575		(462	)		113	1- 3.5 years
Leasehold		45		(38	)		7		45		(24	)		21	2.5 years		45		(45	)		—	2.5 years
Customer relationships		10,433		(4,367	)		6,066		8,979		(2,378	)		6,601	1.6 - 9 years		10,287		(6,608	)		3,679	1.6 - 9 years
Developed technology		1,577		(393	)		1,184		850		(140	)		710	2.5-3 years		1,577		(1,122	)		455	2.5-3 years
Other intangibles		492		(434	)		58		468		(390	)		78	9 years		493		(477	)		16	9 years
Total definite lived intangible assets	$	14,372	$	(6,247	)	$	8,125	$	12,167	$	(3,357	)	$	8,810
Total definite lived identifiable intangible assets																$	14,227	$	(9,817	)	$	4,410

For the three months ended September 30, ~~2016~~2017 and ~~2015,~~2016, amortization expense related to acquired definite lived intangible assets was ~~$1.2~~$0.8 million and ~~$1.0~~$1.2 million, respectively, and for the nine months ended September 30, ~~2016~~2017 and ~~2015,~~2016 amortization expense was $2.3 million and $2.9 million, ~~and $1.5 million,~~ respectively, ~~and recognized~~which are included in selling, general and administrative expenses in the unaudited condensed consolidated statements of operations. The estimated amortization expense for each of the next five years is as follows (in thousands):

Remaining 2016	$	1,186
2017		3,220
Remaining 2017			$	760
2018		1,780		1,671
2019		748		750
2020		526		521
2021 and thereafter		665
2021				282
2022				220

Basic and diluted net loss per common share are computed by dividing net loss by the weighted-average number of common shares outstanding for the reporting period.

The following equity awards have been excluded from the calculation of diluted net loss per share as their effect would be anti-dilutive ~~as of September 30, 2016:~~(in thousands):

	As of September 30,				As of September 30,
(shares in thousands)	2016		2015
					2017		2016
Stock options		1,209		1,371		1,053		1,209
Performance shares		273		545		421		273
Restricted stock units						183		-
Deferred stock units		104		65		167		104
Total anti-dilutive stock options, performance shares and deferred stock units		1,586		1,981
Total						1,824		1,586

The Company has an Employee Stock and Incentive Plan, as amended and restated (the “Employee Plan”). The 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 uses newly issued shares of common stock to satisfy awards under the Plan.

Total stock-based compensation expense was ~~$0.3~~$0.8 million and ~~$1.5~~$0.3 million for the three months ended September 30, 2017 and ~~$1.4~~2016, respectively, and $2.5 million and ~~$3.4~~$1.7 million for the nine months ended September 30, 2017 and 2016, ~~and 2015,~~ respectively, ~~and were~~which is included as a component of selling, general and administrative expenses in the unaudited condensed consolidated statements of operations.

On March 23, 2015, ~~pursuant to the Company’s Employee Stock and Incentive Plan, as amended and restated (“the Plan”),~~ the Company issued approximately 12,000 Other Stock-Based Awards and approximately 38,000 Restricted Stock Unit Awards (as such terms are defined in the Plan) to certain of the Company’s executive officers and senior management. The Restricted Stock Unit Awards are subject to three year vesting beginning in 2015 based on continued employment. The Company also issued additional Restricted Stock Units and Performance-Based Share Awards (as such terms are defined in the Employee Plan) to the Company’s executives and senior management. Under the terms of these ~~additional~~ 2015 awards, the ~~determination of the~~ number of ~~Restricted Stock Units and Performance Shares~~performance shares that each such individual received was subject to, and calculated by reference to, the achievement by the Company of a performance goal measured by a range of targeted financial performance, as defined, for ~~2015, as well as, for certain of the Restricted Stock Units, individual performance goals, as defined.~~ 2015. Based on the Company’s 2015 financial results, the Company issued an aggregate of approximately ~~283,000~~ 283,100 Performance Shares ~~and 84,000 Restricted Stock Units for 2015.~~(“2015 Performance Shares”). The 2015 Performance Shares are subject to four year annual vesting based upon continued employment and ~~either~~ the achievement of a defined annual financial target, orand for certain of the ~~Performance Shares,~~performance shares, the comparative performance (on an annual and cumulative basis) of the Company’s common stock on NASDAQ compared to the Russell Micro Cap Index. The actual number of shares issued on each annual vesting date could range from zero to 100%, depending on the satisfaction of the vesting criteria. 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. Based upon achievement of the respective vesting criteria, 70,800 of the 2015 Performance Shares vested as of December 31, 2016. As of September 30, 2017, 113,312 of the 2015 Performance Shares did not vest and were forfeited.

~~During~~In March 2016, pursuant to the Employee Plan, the Company issued additional Restricted Stock Units and ~~Performance-Based~~2016 Performance Share Awards (as such terms are defined in the Employee Plan) to ~~certain of~~ the Company’s ~~executives~~executive officers and certain senior ~~management. Under the terms of these 2016 awards,~~management under which the number of ~~restricted stock units and~~ performance shares ~~that each such individual may receive is~~to be issued was subject to, and calculated by reference to, the achievement by the Company of a performance goal measured by a range of targeted financial performance, as defined, for 2016 as well as, for certain of the ~~restricted stock units,~~Restricted Stock Units, individual performance goals, as defined. Based on the Company’s 2016 financial performance, no performance shares were awarded under the 2016 Restricted Stock Units and 2016 Performance Based Share Awards.

On March 31, 2017, the Company issued Restricted Stock Units and Performance-Based Share Awards (as such terms are defined in the Employee Plan) to the Company’s executives and senior management pursuant to which such employees are eligible to receive future grants of shares of the Company’s stock subject to various vesting and/or performance criteria, including the achievement by the Company of certain performance goals measured by defined ranges of targeted financial performance for 2017 and/or future years, the achievement of certain defined total stockholder return targets using the companies in the Russell Micro Cap Index as a comparative group for 2017 and/or future years and/or continued employment through one to three year vesting dates. Assuming ~~achievement~~

achievement of the highest ~~financial and individual~~ performance ~~goal,~~targets, the aggregate maximum number of ~~restricted stock units~~shares that could be awarded under these 2017 awards is approximately ~~91,000~~692,000. Shares that do not vest on a scheduled vesting date due to a failure to satisfy vesting or performance criteria are forfeited and the aggregate maximum number of performance shares is approximately 282,000, which performance shares are subject to annual vesting based upon continued employment and, for certain of the performance shares, the achievement of a defined annual financial target or the comparative performance (on an annual and cumulative basis) of the Company’s common stock on NASDAQ compared to the Russell Micro Cap Index.do not vest in future periods.

Supplies Distributors has a short-term credit facility with IBM Credit LLC (“IBM Credit”) to finance its purchase and distribution of Ricoh products in the United States, providing financing for eligible Ricoh inventory and certain receivables up to $13.0 million. 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, the Company has classified the outstanding amounts under this facility, which were ~~$8.3~~$6.5 million and ~~$8.2~~$7.3 million as of September 30, ~~2016~~2017 and December 31, ~~2015,~~2016, respectively, as accounts payable in the condensed consolidated balance sheets. As of September 30, ~~2016,~~2017, Supplies Distributors had no$0.1 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, ~~PFS~~PFSweb is required to maintain a minimum Subordinated Note receivable balance from Supplies Distributors of $2.5 million. Borrowings under the credit facility accrue interest, after a defined free financing period, at prime rate plus 0.5% ~~(4.00%~~(4.75% as of September 30, 2017 and 4.25% as of December 31, 2016). The facility also includes a monthly

service fee. As of and for the three and nine months ended September 30, ~~2016,~~2017, the Company was in compliance with all financial covenants.

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

	September 30,			December 31,			September 30,			December 31,
	2016			2015			2017			2016
U.S. Credit Agreement
Revolver	$	23,000		$	19,283		$	15,500		$	20,825
Term loan		30,000			10,000			27,750			29,438
Equipment loan		1,824			—			4,434			3,596
Debt issuance costs		(562	)		(671	)		(415	)		(525	)
Master lease agreements		6,042			6,644			3,875			6,277
Other		117			135			39			88
Total		60,421			35,391			51,183			59,699
Less current portion of long-term debt		5,672			3,153			6,648			7,300
Long-term debt, less current portion	$	54,749		$	32,238		$	44,535		$	52,399

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 including Bank of America N.A. and HSBC Bank USA, National Association ~~(“the Lenders”~~(the “Lenders”). Under the Credit Agreement, and subject to the terms set forth therein, the Lenders have agreed to provide PFS with a revolving loan facility for up to $32.5 million and a term loan facility for up to $30 million through August 5, 2020. Subject to the terms of the Credit Agreement, PFS has the ability to increase the total loan facilities to $75 million. Availability under the revolving loan facility may not exceed a borrowing base of eligible accounts receivable (as defined). As of September 30, ~~2016,~~2017, the Company had ~~$9.5~~$11.3 million of available credit under the revolving ~~loan facility and no remaining available credit under the term~~ loan facility. Advances under the revolving loan portion of the Credit Agreement are due and payable on August 5, 2020. Term loan advances amortize during the five year term of the Credit Agreement based upon scheduled percentage payments with the then remaining outstanding balance (potentially up to 65% of the amount borrowed) due on August 5, 2020. Borrowings under the Credit Agreement accrue interest at a variable rate based on prime rate or Libor, plus an applicable margin. As of September 30, 2017 and December 31, 2016, the weighted average interest rate on the revolving loan facility was 4.50% and 3.79%, respectively. As of September 30, 2017 and December 31, 2016, the weighted average interest ~~rates~~rate on ~~the revolving loan facility and~~ the term loan facility ~~were 3.28%~~was 3.97% and ~~2.90%~~2.93%, respectively. In connection with

the Credit Agreement, the Company paid $0.7 million of fees, which are being amortized through the life of the Credit Agreement and are reflected as a net reduction in debt. The Credit Agreement is secured by a lien on substantially all of ~~the~~the assets of Company and its U.S. subsidiaries and a pledge of 65% of the shares of certain of the Company’s foreign subsidiaries. The Credit Agreement 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. In June 2016, PFSweb also entered into a Master Agreement with Regions Bank to provide equipment loans financing for certain capital expenditures. ~~As of September 30, 2016, there was approximately $1.8 million outstanding under the Equipment Loans Master Agreement.~~

To the extent the Company or any of its subsidiaries fail to comply with its covenants applicable to its debt or vendor 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 and for ~~the~~three and nine months ended September 30, ~~2016,~~2017, the Company was in compliance with all debt covenants.

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.

The Company is currently organized into two primary operating segments, which generally align with its corporate organization structure. In the first segment, PFSweb is a global provider of various infrastructure, technology, and digital agency solutions and operates as a service fee business. In the second operating segment (“Business and Retail Connect”), subsidiaries of the Company purchase inventory from clients and resell the inventory to client customers. In this segment, the Company recognizes product revenue when it operates as a principal in the arrangement and service fee revenue when it operates as an agent.

	Three Months Ended						Nine Months Ended						Three Months Ended						Nine Months Ended
	September 30,						September 30,						September 30,						September 30,
	2016			2015			2016			2015			2017			2016			2017			2016
Revenues (in thousands):
PFSweb	$	67,768		$	56,897		$	194,239		$	153,040		$	66,935		$	67,768		$	201,423		$	194,239
Business and Retail Connect		15,351			17,975			48,425			55,870			14,053			15,351			44,993			48,425
Eliminations		(3,209	)		(3,689	)		(10,476	)		(10,705	)		(3,670	)		(3,209	)		(12,264	)		(10,476	)
	$	79,910		$	71,183		$	232,188		$	198,205		$	77,318		$	79,910		$	234,152		$	232,188
Income (loss) from operations (in thousands):
PFSweb	$	(447	)	$	(2,757	)	$	(2,516	)	$	(6,288	)	$	543		$	(447	)	$	(5,364	)	$	(2,516	)
Business and Retail Connect		441			31			1,323			948			624			441			1,517			1,323
	$	(6	)	$	(2,726	)	$	(1,193	)	$	(5,340	)	$	1,167		$	(6	)	$	(3,847	)	$	(1,193	)
Depreciation and amortization (in thousands):
PFSweb	$	3,797		$	4,086		$	11,188		$	10,607		$	3,527		$	3,797		$	11,083		$	11,188
Business and Retail Connect		6			15			18			38			4			6			13			18
	$	3,803		$	4,101		$	11,206		$	10,645		$	3,531		$	3,803		$	11,096		$	11,206
Capital expenditures (in thousands):
PFSweb	$	1,049		$	1,522		$	7,532		$	3,468		$	1,748		$	1,049		$	3,965		$	7,532
Business and Retail Connect	—			—			—			—			—			—			—			—
	$	1,049		$	1,522		$	7,532		$	3,468		$	1,748		$	1,049		$	3,965		$	7,532

	September 30,			December 31,			September 30,			December 31,
	2016			2015			2017			2016
Assets (in thousands):
PFSweb	$	155,888		$	151,064		$	146,192		$	167,152
Business and Retail Connect		37,501			50,682			31,164			55,559
Eliminations		(10,245	)		(10,456	)		(11,996	)		(11,375	)
	$	183,144		$	191,290		$	165,360		$	211,336

In September 2014, the Company purchased all of the stock of REV Solutions, Inc. and REVTech Solutions India Private Limited from Mr. Steven Stephan, an officer of the Company until September 30 2016, and other shareholders in a transaction which, in addition to a closing payment, provided for earn-out payments based on the achievement of certain metrics for each of calendar years 2014 and 2015. Since January 1, 2015, the Company paid Mr. Stephan an aggregate of $2.4 million and issued 38,574 shares of common stock as the final purchase price earn-out payments associated with such transaction.

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.

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 September 30, ~~2016,~~2017, the Company believes it has adequately accrued for the expected assessment.

In connection with a client project, the Company has provided a $1.3 million performance bond which may be drawn upon in the event of a default by the Company of its obligations under the project, or, in the absence of a default, upon successful completion of the project, the bond will be returned.

The Company is subject to claims in the ordinary course of business, including claims by terminated employees, claims relating to invoice disputes and 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.

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.

We have made forward-looking statements in this Report on Form 10-Q. These statements are subject to risks and uncertainties, and there can be no guarantee that these statements will prove to be correct. Forward-looking statements include assumptions as to how we may perform in the future. When we use words like “seek,” “strive,” “believe,” “expect,” “anticipate,” “predict,” “potential,” “continue,” “will,” “may,” “could,” “intend,” “plan,” ~~“target”~~“target,” “project” and “estimate” or similar expressions, we are making forward-looking statements. You should understand that the following important factors, in addition to ~~those~~the Risk Factors set forth above or elsewhere in this Report on Form ~~10-Q and our Form~~ 10-K for the year ended December 31, ~~2015,~~2016, could cause our results to differ materially from those expressed in our forward-looking statements. These factors include:

We have based these statements on our current expectations about future events. Although we believe ~~that~~ the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee these expectations will actually be achieved. In addition, some forward-looking statements are based upon assumptions as to future events that may not prove to be accurate. Therefore, actual outcomes and results may differ materially from what is expected or forecasted in such forward-looking statements. We undertake no obligation to update publicly any forward-looking statement for any reason, even if new information becomes available or other events occur in the future.

During ~~2015,~~2016, we were impacted by the following key transactions and events that also affect comparability of our results to prior periods and are discussed further in our Form 10-K for the year ended December 31, ~~2015:~~2016.

~~During 2016, we acquired~~ the outstanding capital stock of Conexus Limited (“Conexus”) on June 8, 2016. The results of operations of Conexus have been included in our condensed consolidated financial statements since the acquisition date.

We are a global provider of omni-channel commerce solutions. Comprised of a broad range of technology, critical infrastructure and professional services, we provide our clients with best-of-breed capabilities offered as a complete end-to-end solution or on an à la carte basis. We provide these solutions and 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. We derive our revenues from providing a broad range of services using three different seller services financial models: 1) the Service Fee model, 2) the Agent (or Flash) model and 3) the Retail model.

Service Fee Model.We refer to ~~the~~our standard ~~PFSweb~~ seller services financial model as the Service Fee model. In this model, our clients own the inventory and are the merchants of record and engage us to provide various infrastructure, technology and digital agency services in support of their business operations. We derive our service fee revenues from a broad range of service offerings that include digital agency and marketing, eCommerce technologies, system integration, order management, customer care, logistics and fulfillment, financial management and professional consulting. We offer our services as an integrated solution, which enables our clients to outsource their complete ecommerce needs to a single source and to focus on their core competencies, though clients are also able to select individual or groupings of our various service offerings on an à la carte basis. We currently provide services to clients that operate in a range of vertical markets, including technology manufacturing, computer products, cosmetics, fragile goods, coins and collectibles, apparel, telecommunications, consumer electronics and consumer packaged goods, among others.

In the Service Fee model, we typically charge for our services on a cost-plus basis, a percent of shipped revenue basis, a time and materials, project or retainer basis for our professional services or a per-transaction basis, such as a per-labor hour basis for web-enabled customer contact center services and a per-item basis for fulfillment services. Additional fees are billed for other services. We price our services based on a variety of factors, including the depth and complexity of the services provided, the amount of capital expenditures or systems customization required, the length of contract and other factors.

Many of our service fee contracts involve third-party vendors who provide additional services, such as package delivery. The costs we are charged by these third-party vendors for these services are often passed on to our clients. Our billings for reimbursements of these costs and other ‘out-of-pocket’ expenses include travel, shipping and handling costs and telecommunication charges and are included in pass-through revenue.

Agent (Flash) Model.As an additional service, we offer the Agent, or Flash, financial model, in which our clients maintain ownership of the product inventory stored at our locations as in the Service Fee model. When a customer orders the product from our clients, a “flash” sale transaction passes product ownership to us for each order and we in turn immediately re-sell the product to the customer. The “flash” ownership exchange establishes us as the merchant of record, which enables us to use our existing merchant infrastructure to process sales to end customers, removing the need for the clients to establish these business processes internally, but permitting them to control the sales process to end customers. In this model, based on the terms of our current client arrangements, we record product revenue net of cost of product revenue as a component of service fee revenue in our ~~condensed~~ consolidated statement of operations.

~~Finally, our~~Retail Model. Our Retail model allows us to purchase inventory from the client. In this model, we place the initial and replenishment purchase orders with the client and take ownership of the product upon delivery to our facility. In this model, depending on the terms of our client arrangements, we may own the inventory and the accounts receivable arising from our product sales. Under the Retail model, depending upon the product category and sales characteristics, we may require the client to provide product price protection as well as product purchase payment terms, right of return, and obsolescence protection appropriate to the product sales profile. Depending on the terms of our client arrangements in the Retail model, we record in our ~~condensed~~ consolidated statement of operations either: 1) product revenue as a component of product revenue, or 2) product revenue net of cost of product revenue as a component of service fee revenue. In general, we seek to structure client relationships in our Retail model under the net revenue approach to more closely align with our service fee revenue financial presentation and mitigate inventory ownership, although we have one client still utilizing the gross revenue approach. Freight costs billed to customers are reflected as components of product revenue. This business model generally requires significant working capital, for which we have credit available either through credit terms provided by our clients or under senior credit facilities.

In general, we provide the Service Fee model through ~~our~~ all of our subsidiaries, the Agent (or Flash) model through our ~~PFS~~PFSweb and Supplies Distributors subsidiaries and the Retail model through our Supplies Distributors subsidiary.

Growth is a key element to achieving our future goals, including achieving and maintaining sustainable profitability. Growth in our Service Fee and Agent models is driven by two main elements: new client relationships and organic growth from existing clients. We focus our sales efforts on larger contracts with brand-name companies within four primary target markets, health and beauty, home goods and collectibles, fashion and consumer packaged goods, which, by nature, require a longer duration to close but also have the potential to be higher quality and longer duration engagements. ~~The~~Through recent acquisitions, ~~of Moda in June 2015, CrossView in August 2015 and Conexus in June 2016~~we have expanded our service offering capabilities and added new client relationships, which we currently expect to enhance our growth opportunities.

Currently, we are targeting ~~any~~ growth within our Retail model to be through relationships with clients under which we can record service fee revenue (product revenue net of ~~product~~ cost of product revenue) in our ~~condensed~~ consolidated statement of operations as opposed to product revenue as generated in the Agent or Flash model above. These relationships are often driven by the sales and marketing efforts of the manufacturers and third party sales partners. In addition, as a result of certain operational restructuring of its business, our primary client relationship operating in the Retail model, Ricoh, has implemented, and will continue to implement, certain changes in the sale and distribution of Ricoh products. ~~These~~The changes have resulted, and are expected to continue to result, in reduced product revenues and profitability under our Retail model.

We continue to monitor and control our costs to focus on profitability. While we are targeting our new service fee contracts to yield incremental gross profit, we also expect to incur incremental investments in technology development, operational and support management and sales and marketing expenses to help generate growth.

Our expenses comprise primarily four categories: 1) cost of service fee revenue, 2) cost of product revenue, 3) cost of pass-through revenue and 4) selling, general and administrative expenses.

Cost of service fee revenue - – consists primarily of compensation and related expenses for our web-enabled customer contact center services, international fulfillment and distribution services and professional, digital agency and technology services, and other fixed and variable expenses directly related to providing services under the terms of fee based contracts, including certain occupancy and information technology costs and depreciation and amortization expenses.

Cost of product revenue - – consists of the purchase price of product sold and freight costs, which are reduced by certain reimbursable expenses. These reimbursable expenses include pass-through customer marketing programs, direct costs incurred in passing on any price decreases offered by vendors to cover price protection and certain special bids, the cost of products provided to replace defective product returned by customers and certain other expenses as defined under the distributor agreements.

Cost of pass-through revenue - – the related reimbursable costs for pass-through expenditures are reflected as cost of pass-through revenue.

Selling, General and Administrative expenses - – consist of expenses such as compensation and related expenses for sales and marketing staff, distribution costs (excluding freight) applicable to the Supplies Distributors business and the Retail model, executive, management and administrative personnel and other overhead costs, including certain occupancy and information technology costs and depreciation and amortization ~~expenses.~~expenses and acquisition related costs.

Monitoring and controlling our available cash balances and our expenses continues to be a primary focus. Our cash and liquidity positions are important components of our financing of both current operations and our targeted growth.

Results of Operations for the Interim Periods Ended September 30, ~~2016~~2017 and ~~2015~~2016

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

	For the Three Months Ended September 30,															For the Nine Months Ended September 30,															For the Three Months Ended September 30,															For the Nine Months Ended September 30,
										% of Net Revenues															% of Net Revenues															% of Net Revenues															% of Net Revenues
	2016			2015			Change			2016			2015			2016			2015			Change			2016			2015			2017			2016			Change			2017			2016			2017			2016			Change			2017			2016
Revenues
Service fee revenue	$	53.8		$	45.5		$	8.3			67.3	%		64.0	%	$	154.2		$	121.3		$	32.9			66.4	%		61.2	%	$	54.5		$	53.8		$	0.7			70.5	%		67.3	%	$	166.5		$	154.3		$	12.2			71.1	%		66.4	%
Product revenue, net		11.7			14.4			(2.7	)		14.6	%		20.3	%		36.7			44.7			(8.0	)		15.8	%		22.6	%		9.6			11.7			(2.1	)		12.4	%		14.6	%		30.9			36.7			(5.8	)		13.2	%		15.8	%
Pass-through revenue		14.5			11.2			3.3			18.1	%		15.8	%		41.3			32.2			9.1			17.8	%		16.2	%		13.2			14.5			(1.3	)		17.1	%		18.1	%		36.8			41.3			(4.5	)		15.7	%		17.8	%
Total net revenues		80.0			71.1			8.9			100.0	%		100.1	%		232.2			198.2			34.0			100.0	%		100.0	%		77.3			80.0			(2.7	)		100.0	%		100.0	%		234.2			232.3			1.9			100.0	%		100.0	%
Cost of Revenues
Cost of service fee revenue (1)		36.9			30.2			6.7			68.6	%		66.3	%		103.5			82.0			21.5			67.1	%		67.6	%		35.7			36.9			(1.2	)		65.6	%		68.6	%		111.3			103.5			7.8			66.9	%		67.1	%
Cost of product revenue (2)		11.0			13.7			(2.7	)		94.2	%		95.0	%		34.6			42.3			(7.7	)		94.5	%		94.6	%		9.0			11.0			(2.0	)		93.5	%		94.2	%		29.2			34.6			(5.4	)		94.6	%		94.5	%
Pass-through cost of revenue (3)		14.5			11.2			3.3			100.0	%		100.0	%		41.3			32.2			9.1			100.0	%		100.0	%		13.2			14.5			(1.3	)		100.0	%		100.0	%		36.8			41.3			(4.5	)		100.0	%		100.0	%
Total cost of revenues		62.4			55.1			7.3			78.0	%		77.4	%		179.4			156.5			22.9			77.3	%		78.9	%		57.9			62.4			(4.5	)		74.9	%		78.0	%		177.3			179.4			(2.1	)		75.7	%		77.3	%
Service fee gross profit		16.9			15.3			1.6			31.4	%		33.7	%		50.7			39.3			11.4			32.9	%		32.4	%		18.8			16.9			1.9			34.4	%		31.4	%		55.2			50.8			4.4			33.1	%		32.9	%
Product revenue gross profit		0.7			0.7			—			5.8	%		5.0	%		2.1			2.4			(0.3	)		5.5	%		5.4	%		0.6			0.7			(0.1	)		6.5	%		5.8	%		1.7			2.1			(0.4	)		5.4	%		5.5	%
Pass-through gross profit		—			—			—			—			—			—			—			—			—			—			—			—			—			—			—			—			—			—			—			—
Total gross profit		17.6			16.0			1.6			22.0	%		22.6	%		52.8			41.7			11.1			22.7	%		21.1	%		19.4			17.6			1.8			25.1	%		22.0	%		56.9			52.9			4.0			24.3	%		22.7	%
Selling General and Administrative expenses		17.6			18.8			(1.2	)		22.0	%		26.4	%		53.9			47.1			6.8			23.2	%		23.7	%
Loss from operations		—			(2.8	)		2.8			—			(3.9	)%		(1.1	)		(5.4	)		4.3			(0.5	)%		(2.6	)%
Selling, General and Administrative expenses																																18.2			17.6			0.6			23.6	%		22.0	%		60.7			53.9			6.8			25.9	%		23.2	%
Income (loss) from operations																																1.2			-			1.2			0.0			(0.1	)%		(3.8	)		(1.0	)		(2.8	)		(1.6	)%		(0.5	)%
Interest expense, net		0.7			0.6			0.1			0.9	%		1.0	%		1.9			1.2			0.7			0.8	%		0.6	%		0.8			0.7			0.1			1.0	%		0.9	%		2.2			2.0			0.2			0.9	%		0.8	%
Loss before income taxes		(0.7	)		(3.4	)		2.7			(0.9	)%		(4.8	)%		(3.0	)		(6.6	)		3.6			(1.3	)%		(3.2	)%
Income (loss) before income taxes																																0.4			(0.7	)		1.1			0.5	%		(0.9	)%		(6.0	)		(3.0	)		(3.0	)		(2.6	)%		(1.3	)%
Income tax expense, net		0.3			0.3			—			0.4	%		0.3	%		1.0			0.7			0.3			0.4	%		0.3	%		0.5			0.3			0.2			0.6	%		0.4	%		1.6			1.0			0.6			0.7	%		0.4	%
Net loss	$	(1.0	)	$	(3.7	)	$	2.7			(1.3	)%		(5.1	)%	$	(4.0	)	$	(7.3	)	$	3.3			(1.7	)%		(3.5	)%	$	(0.1	)	$	(1.0	)	$	0.9			(0.1	)%		(1.3	)%	$	(7.6	)	$	(4.0	)	$	(3.6	)		(3.2	)%		(1.7	)%

Service Fee Revenue. The increase in service fee revenue for the three and nine months ended September 30, ~~2016,~~2017, as compared to the same ~~period~~periods of the prior year, was primarily due to the impact of ~~expanded and~~ new client relationships ~~including service fee revenues generated by our acquired subsidiaries Moda in June 2015, CrossView in August 2015 and Conexus in June 2016,~~ partially offset by the conclusion or reduction of operations of several client programs that were in effect during the three and nine months ended September ~~30.~~30, 2016.

The change in service fee revenue, excluding pass-through revenue, is shown below (millions):

	Three			Nine			Three			Nine
	Months			Months			Months			Months
Period ended September 30, 2015	$	45.5		$	121.3
Period ended September 30, 2016							$	53.8		$	154.3
New service contract relationships		10.6			19.6			9.0			18.0
Change in existing client service fees		1.9			20.4			(1.6	)		(0.2	)
Terminated client relationships not included in 2016 revenue		(4.2	)		(7.1	)
Period ended September 30, 2016	$	53.8		$	154.2
Terminated client relationships not included in 2017 revenue								(6.7	)		(5.6	)
Period ended September 30, 2017							$	54.5		$	166.5

When considering client relationships, we define an existing client to be a client from whom we earned revenue in both the current and prior period; we define a new client to be a client from whom we only earned revenue in the current period; and we define a terminated client as a client from whom we only earned revenue in the prior period. The growth of existing client relationships includes the benefit, in the three and nine months ended September 30, 2016 periods, of a full period of client activity applicable to client relationships acquired in conjunction with the Moda acquisition in June 2015 and CrossView acquisition in August 2015, as opposed to only a partial period of revenue in the related 2015 periods. The new service contract relationships include an aggregate of approximately $1.7 million and $2.1 million of revenue applicable to Conexus in the three and nine months ended September 30, 2016, respectively. Service fee revenue for the three and nine month ended September 30, 2016 includes approximately $1.4 million and $3.8 million, respectively, of service fee revenues from clients who concluded their relationship with us during 2016. Based on current client projections, during 2017 we expect the reduction in revenue from terminated client programs to be more than offset by service fee revenue generated in ~~2016~~2017 by new or expanded client ~~opportunities and revenues generated by our newly acquired subsidiaries.~~opportunities. For calendar year ~~2016,~~2017, we are currently targeting ana slight increase in service fee revenues ~~of approximately 20-23%~~ as compared to the calendar year ~~2015,~~2016 including the impact of a full year of operations ~~for our CrossView and Moda subsidiaries versus a partial year in 2015 and the impact of~~from our Conexus ~~acquisition~~entity versus partial year in 2016.

Product Revenue, net. Product revenue ~~was $11.7~~decreased $2.1 million and $5.8 million, or 17.6% and 15.8% for the three and nine months ended September 30, ~~2016, which represents a decrease of $2.7 million, or 19.1%~~2017, respectively as compared to the same ~~quarter of the prior year. In the nine months ended September 30, 2016 product revenue was $36.7 million, which represents a decrease of $8.0 million, or 18.0%, as compared to the same period of~~periods the prior year. This reduction in revenue is primarily due to the operational restructuring by Ricoh of its business, including discontinuance of certain product lines, which has resulted, and is expected to continue to result, in lower product revenue from the sale of Ricoh ~~products~~. products. We currently expect product revenue to continue to decline and be approximately ~~$45~~$40 million to ~~$50~~$42 million for the calendar year ~~2016.~~2017.

Cost of Service Fee ~~Revenue~~Revenue. . Gross profit as a percentage of service fees decreased to 31.4% in three month period ended September 30, 2016 from 33.7% in the same period of 2015. During 2016, we have implemented three new, large fulfillment solutions in the U.S. along with several other engagements. The decline in gross margin for the three months ended September 30, 2016 is primarily due to incremental facility, labor and other costs incurred to support the setup and launch of new client relationships, especially for one of these new clients whose unique business model led to unanticipated operational requirements requiring remediation to the solution while also supporting the client’s seasonal peak. The impact of these higher labor and operating costs was partially offset by the benefit of higher margin project activity and higher margin professional services activity, including our agency and technology services, which have been further bolstered by our acquisition of Conexus in June 2016.

~~In the nine months ended September 30, 2016,~~Service fee gross profit as a percentage of service fees increased to ~~32.9% compared to 32.4%~~34.4% in three months ended September 30, 2017 from 31.4% in the same period of 2016. The improved gross margin is ~~benefitted by the~~partially due to an increased percentage of our service fees being generated from our higher margin professional services activity, including our agency and technology ~~services, which have been further bolstered by our acquisitions of Moda and CrossView in mid-2015 and Conexus in June 2016.~~services. The ~~gross profit percentage in each period included the benefit of higher margin project~~ ~~activity. The improvement~~increase in gross profit ~~percentage was partially offset by certain facility and client start-up expenses incurred related~~is also due to ~~new service~~the termination of a large fulfillment contract ~~relationships and,~~earlier this year that operated at a loss during the prior year period. Service fee gross profit as a percentage of service fees increased to33.1% in nine months ended September 30, ~~2016, higher than expected labor and operating costs incurred for~~2017 from 32.9%in the same period of 2016.

Wefull calendar year basis, we target to earn an overall average gross profit on our service fee activity of 27-32% on existing and new service fee contracts, but we have accepted, and may continue to accept, lower gross margin percentages on certain contracts depending on contract scope and other factors, including projected volumes. We are currently projecting our gross profit for calendar year 2017 to be toward the high end of the above targeted range. As we look ahead, we are focused on continuing to increase our level of higher margin service fee activity, including our professional and technology ~~services,~~services. Through various initiatives, the Company is also targeting to ~~help offset~~improve the financial performance of its fulfillment operations, including improving efficiencies of two other ~~lower margin activities. Based on our currently projected continued growth~~large fulfillment contracts which started in the professional services area of our business, including the benefit of our acquisitions, we are projecting to be in the middle to high end of the targeted gross profit percentage range for calendar yearlate 2016. Our service fee gross profit will continue to be impacted by the ~~relative-proportion~~relative proportion of our infrastructure related services versus our professional services ~~activity, as well as project work.~~activity.

Cost of Product Revenue. Cost of product revenue decreased by ~~$2.7~~$2.0 million, or ~~19.8%~~18.2%, ~~to $11.0 million~~ in the three months ended September 30, ~~2016~~2017, which resulted in a gross profit margin of ~~$0.7~~$0.6 million, or ~~5.8%~~6.5% of product revenue, for the three months ended September 30, ~~2016,~~2017, compared to $0.7 million gross profit margin, or ~~5.0%~~ 5.8%of product revenue, for the comparable ~~2015~~2016 period. Cost of product revenue decreased by ~~$7.7~~$5.4 million, or ~~18.0%~~15.7%, in the nine months ended September 30, ~~2016.~~2017. The resulting gross profit margin was ~~$2.1~~$1.7 million, or ~~5.5%~~5.4% of product revenue, for the nine months ended September 30, ~~2016~~2017 and ~~$2.4~~$2.1 million, or ~~5.4%~~5.5% of product revenue, for the comparable ~~2015~~2016 period. We currently expect our product revenue gross profit margin to be ~~approximately~~between 5% and 6% for calendar year ~~2016.~~2017.

Selling, General and Administrative (“SG&A”) Expenses. SG&A expenses for the three months ended September 30, 2017 and 2016 ~~and 2015~~ were ~~$17.6~~$18.2 million and ~~$18.8~~$17.6 million, respectively. As a percentage of total net revenues, SG&A expenses were ~~22.0%~~23.6% in the

three months ended September 30, ~~2016~~2017 and ~~26.4%~~22.0% in the corresponding prior year period. InThe increase in SG&A in the ~~nine~~three months ended September ~~30, 2016, SG&A~~2017 is primarily due to approximately $0.4 million of incremental stock based compensation expense and approximately $0.1 million of acquisition and restructuring related expenses ~~were $53.9 million, or 23.2% of total net revenue, as compared to $47.1 million, or 23.7% of total net revenue~~ in the ~~comparable 2015 period. The~~ three months ended September 30, ~~2016 include approximately $2.7 million applicable~~2017 compared to our new Conexus and CrossView subsidiaries (including $1.0 million of amortization of acquisition related intangible assets) which were either not yet acquired as of September 30, 2015 or not included for the full quarter ended ~~September 30, 2015. Acquisition and restructuring related expenses were~~ a ~~net~~ benefit of $0.5 million in the three months ended September 30, 2016, including a $1.0 million benefit resulting from revised estimates of certain performance-based contingent payments based on our current 2016 and 2017 projections results for Moda, CrossView and Conexus, and a $2.6 million expense in the three months ended September 30, 2015. Excluding the acquisition and restructuring related activity and amortization of acquired identifiable intangibles assets in the three months ended September 30, 2016 and 2015, SG&A expenses were 21.2% and 21.1% of total revenues in the three months ended September 30, 2016 and 2015, respectively. The remaining increases in SG&A percentage are primarily due to increases in personnel related expenses to support our professional services business activity, as well as an sales and marketing activities and facility costs to support our growth, partially offset by a reduction ~~in stock-based compensation expense.~~of amortization of acquisition-related intangibles of $0.4 million.

SG&A expenses for the nine months ended September 30, 2017 and 2016, ~~includes $9.4~~were $60.7 million ~~applicable to our new Conexus, CrossView~~ and ~~Moda subsidiaries (including $2.5~~$53.9 million, ~~of amortization of acquisition related intangible assets) which were either not yet acquired as of September 30, 2015 or not included for the full~~respectively. The nine months ended September ~~30, 2015. Acquisition~~2017 includes $3.9 million of acquisition and restructuring costs, primarily including $2.2 million related ~~expenses were~~to revised higher estimates of certain performance-based contingent payments and $1.6 million of severance related costs. The nine months ended September 2016 included a net benefit of approximately $0.5 million inof acquisition and restructuring related costs, primarily including a $2.9 million benefit related to revised lower estimates of certain performance-based contingent payments partially offset by costs applicable to the Conexus acquisition. Excluding the impact of acquisition and restructuring related costs, SG&A was $56.8 million and $54.4 million for the nine months ended September 30, ~~2016, including a $2.9 million benefit resulting from revised estimates of certain performance-based contingent payments based on our current 2016~~2017 and 2017 projections results for Moda, CrossView and Conexus, and a $4.5 million expense in the nine months ended September 30, 2015. Excluding the acquisition and restructuring related activity and amortization of acquired identifiable intangibles assets in the nine months ended September 30, 2016, ~~and 2015, SG&A expenses were 22.9% and 20.4% of total revenues in the nine months ended September 30, 2016 and 2015,~~ respectively. The remaining increase in the SG&A ~~percentage~~ is primarily due to ~~increases~~$1.1 million of incremental SG&A costs for the Conexus business, which we only operated for a partial period in ~~personnel~~the nine months ended September 2016, and an increase of $0.8 million related to ~~support our professional services business activity related expenses, as well as sales and marketing activities and facility costs to support our growth, partially offset by a reduction in~~ stock-based compensation.

We currently expect our SG&A expenses will continue to increase in ~~2016,~~2017, as compared to ~~2015, due to acquisitions~~2016 as we include a full year of expenses for ~~Moda and CrossView and include the impact of~~ Conexus, incur a full year of amortization for identifiable intangible assets acquired in our Conexus acquisition, incur incremental personnel related costs applicable to our professional services business activity, incur incremental incentive based cash and stock compensation, and incur additional expenditures related to our sales and marketing activities and facility costs. We expect these increases to be partially offset by cost reduction efforts in other areas as we continue to focus on overall cost control. Additionally, future adjustments in fair value estimates of our performance-based contingent payments, if any, applicable to our ~~Moda,~~ CrossView ~~and Conexus acquisitions~~acquisition will continue to be reflected as increases or decreases in SG&A expense.

Income Taxes. We recorded a tax provision associated primarily with state income taxes and the majority of our international operations. A valuation allowance has been provided for the majority of our ~~U.S.~~ domestic net deferred tax assets, which are primarily related to our net operating loss carryforwards, and for certain foreign deferred tax assets. We also recorded a deferred tax provision associated with the tax amortization of goodwill related to our CrossView acquisition. We expect we will continue to record an income tax provision associated with state income taxes and our foreign operations, as well as the deferred tax provision for tax amortization of goodwill.

~~During~~In addition to cash income from operations before working capital changes, our operating cash flows are impacted by various factors. For each of the ~~nine months~~periods ended September 30, 2017 and 2016, ~~net~~our cash ~~used~~flows from operations were impacted primarily by decreases in ~~operations was $2.4 million, primarily due to a:~~

~~The use of~~ Under certain contractual client arrangements, we have historically received an incremental cash ~~was partially offset by a:~~

~~During the nine months ended September 30, 2015, we generated $8.3 million of cash from operating activities, primarily due to a:~~

~~The generation of cash~~September 2017 quarter, this benefit was ~~partially offset by a:~~

Cash proceeds from debt, net of any debt and capital lease payments, was $21.1 million and $24.2 million during the nine months ended September 30, 2016 and 2015, respectively. Proceeds in 2016 were used to primarily fund working capital, capital expenditures, performance-based contingent payments related to prior year acquisitions and to purchase Conexus in June 2016. In the nine months ended September 30, 2015, we paid $31.6 million of cash to purchase Moda and CrossView, net of cash acquired and an additional $2.0 million related to the REV and LAL earn-out payments.

~~We incurred capital expenditures, which consisted primarily of capitalized software costs and equipment purchases, of $7.5 million and $3.5 million in the nine month~~ periods ended September 30, 2017 and 2016, ~~and 2015, respectively,~~ ~~exclusive~~our cash used in investing activities included cash payments for the purchase of ~~$3.9 million~~ ~~and $3.7 million in each period, respectively,~~capital expenditures, exclusive of property and equipment acquired under debt and capital lease ~~financing.~~financing, which consisted primarily of capitalized software costs and equipment purchases. The 2016 capital expenditures include leasehold improvements and other expenditures for expansion at certain of our facilities, of which, approximately $0.6 million were financed via tenant allowances that ~~will also be~~are being amortized over the underlying lease ~~terms.~~term. Also in the nine months ended September 30, 2016, our cash used in investing activities included cash payments of $8.3 million for the acquisition of Conexus, net of cash acquired.

Aggregate net cash payments on debt were $7.3 million in the nine months ended September 30, 2017 compared to aggregate net cash proceeds from debt of $23.3 million during the nine months ended September 30, 2016.

Capital expenditures have historically consisted of additions to upgrade our management information systems, development of customized technology solutions to support and integrate with our service fee clients and general expansion and upgrades to our facilities, both domestic and foreign. We expect to incur capital expenditures to support new contracts and anticipated future growth opportunities. Based on our current client business activity and our targeted growth plans, we anticipate our total investment in upgrades and additions to facilities and information technology solutions and services for the upcoming twelve months, including costs to implement new clients, will be approximately $9$7 million to ~~$12~~$10 million, although additional capital expenditures may be necessary to support the infrastructure requirements of new clients. To maintain our current operating cash position, a portion of these expenditures may be financed through client reimbursements, debt, operating or capital leases or additional equity. We may elect to modify or defer a portion of such anticipated investments in the event we do not obtain the financial results necessary to support such investments.

During the nine months ended September 30, ~~2016,~~2017 our working ~~capital increased~~capital decreased to ~~$22.8~~$14.1 million from ~~$12.4~~$18.6 million at December 31, ~~2015,~~2016, primarily due to ~~utilization~~payments of long-term financing under the Company’s senior bank facility, to support a portion of our financing needs, including performance-based contingent payments related to prior year acquisitions and the purchase of Conexus, including its working capital, in June 2016, as well as proceeds from the issuance of common stock, partially offset by cash used to support certain purchases of property and ~~equipment.~~

~~The purchase price for Moda includes~~equipment, and the impact of performance-based contingent payments for future earn-out payments payable in 2017 based on Moda’s 2016 financial targets, with no guaranteed minimum and a maximum of £600,000 (approximately $0.8 million). The purchase price for CrossView includes performance-based contingent payments for future earn-out payments payable in 2017 and 2018 based on CrossView’s achievement of certain 2016 and 2017 financial targets, of which $8.3 million is the aggregate maximum contractual earn-out. The June 2016 purchase of Conexus provides for future contingent and earn-out payments based on Conexus’ achievement of certain 2016 operational and financial targets, with no guaranteed minimum and a maximum of £1,445,000 (approximately $1.9 million). As of September 30, 2016, based on current financial projections, we have not recorded a liability applicable to the estimated Earn-out Payments for the purchase of Moda or Conexus, but we have accrued $0.4 million for future performance-based contingent payments applicable to the CrossView acquisition.payments.

To obtain additional financing in the future, in addition to our current cash position, we plan to evaluate various financing alternatives including the sale of equity, utilizing capital or operating leases, borrowing under our credit facilities, expanding our current credit facilities or entering into new debt agreements. No assurances can be given we will be successful in obtaining any additional financing or the terms thereof. We currently believe our cash position, financing available under our credit facilities and funds generated from operations will satisfy our presently known operating cash needs, our working capital and capital expenditure requirements, our current debt and lease obligations, and additional loans to 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 ~~will~~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, ~~2016,~~2017, 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. Other than performance-based contingent payments applicable to our acquisitions, and our capital and operating lease commitments, we do not have any other material financial commitments, although future client contracts may require capital expenditures and lease commitments to support the services provided to such clients.

We receive municipal tax abatements in certain locations. In prior ~~year~~s,years, we received notice from a municipality that we did not satisfy certain criteria necessary to maintain the abatements and that the municipal authority planned to make an adjustment to our tax abatement. We disputed the adjustment and such dispute has been settled with the municipality. However, the amount of additional property taxes to be assessed against us and the timing of the related payments has not been finalized. As of September 30, ~~2016,~~2017, we believe we have adequately accrued for the expected assessment.

To finance its distribution of Ricoh products in the U.S., Supplies Distributors has a short-term credit facility with IBM Credit LLC (“IBM Credit”) that provides financing for eligible inventory and certain receivables for up to $13.0 million. We have provided a collateralized guarantee to secure the repayment of this credit facility. The IBM Credit facility does not have a stated maturity and both parties have the ability to exit the facility following a 90-day notice. The Company has direct vendor credit terms with Ricoh to finance Supplies Distributors European subsidiary’s inventory purchases.

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 $2.5 million, not maintain restricted cash of more than $5.0 million, are restricted with regard to transactions with related parties, indebtedness and changes to capital stock ownership. 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.

We have a credit agreement (“Credit Agreement”) with Regions Bank, as agent for itself, Bank of America N.A., HSBC Bank USA, National Association and one or more future lenders (the “Lenders”). Under this Credit Agreement, and subject to the terms set forth therein, the Lenders have agreed to provide a revolving loan facility for up to $32.5 million and a term loan facility for up to $30 million. Subject to the terms of the Credit Agreement, we have the ability to increase the total loan facilities to $75 million. Availability under the revolving loan facility, which was approximately $11.3 million as of September 30, 2017, may not exceed a borrowing base of eligible accounts receivable (as defined). Advances under the Credit Agreement accrue interest at a variable rate, plus an applicable margin, and have a five year maturity, with scheduled amortization payments for term loan advances. The Credit Agreement is secured by a lien on substantially all of the assets of the Company and its U.S. subsidiaries and a pledge of 65% of the shares of certain of the Company’s foreign subsidiaries. The Credit Agreement contains cross default provisions, various restrictions upon our ability to, among other things, merge, consolidate, sell assets, incur indebtedness, make loans and payments to subsidiaries, affiliates and related parties, make 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 fixed charge ratio and a maximum leverage ratio.

On June 8, 2016, PFSweb, Inc. purchased all of the outstanding shares of Conexus, Inc. (“Conexus”), an eCommerce system integrator that provides strategic consulting, system integration, and managed services for leading businesses and technology companies. Conexus maintains primary operations in Basingstoke, Hampshire (U.K.). We paid an aggregate cash payment at closing of £5,855,000 (approximately $8.5 ~~million)~~million as of June 8, 2016), subject to a post-closing adjustment ~~to be~~ based upon a May 31, 2016 balance sheet. In addition, we will pay up to an aggregate maximum of £1,445,000 (approximately $1.9 million at September 30, 2016) subject to Conexus achieving certain operational and financial targets during the post-closing period ending December 31, 2016 (the “Earn-out

~~Payments”) and subject to~~ ~~possible offsets for indemnification and other claims~~. Up to 40% (but not to exceed £450,000) (approximately $0.6 million at September 30, 2016) of the Earn-out Payments may be paid by the issuance of restricted shares of Company common stock, based on its then current market value at the time of issuance.

The seasonality of our service fee business is dependent upon the seasonality of our clients’ business and sales of their products. Accordingly, we must rely upon the projections of our clients in assessing quarterly variability. We believe that with our current client mix and their current business volumes, our run rate service fee business activity will generally be highest induring the quarter ended December 31. We believe our historical revenue pattern makes it difficult to predict the effect of seasonality on our future revenues and results of operations.

We believe results of operations for a quarterly period may not be indicative of the results for any other quarter or for the full year.

Management believes that inflation has not had a material effect on our operations.

A description of our critical accounting policies is included in Note 2 of the ~~condensed~~ consolidated financial statements in our December 31, ~~2015~~2016 Annual Report on Form 10-K and Note 2 of this report.

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, ~~2016,~~2017, 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.

During the period that ended on September 30, ~~2016,~~2017, 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.

In addition to the risk factors set forth in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, ~~2015~~2016 filed with the Securities and Exchange Commission, our business, financial condition and operating results could be adversely affected by any or all of the following factors.

We operate with significant levels of indebtedness and are required to comply with certain financial and non-financial covenants; and we have guaranteed certain indebtedness and obligations of our subsidiaries.

As of September 30, ~~2016,~~2017, our total credit facilities outstanding, including debt, capital lease obligations and our vendor accounts payable related to financing of Ricoh product inventory, was approximately ~~$68.7~~$57.7 million. We cannot provide assurance that our credit facilities will be renewed by the lending parties. Additionally, these credit facilities include both financial and non-financial covenants, many of which also include cross default provisions applicable to other agreements. These covenants also restrict our ability to transfer funds among our various subsidiaries, which may adversely affect the ability of our subsidiaries to operate their businesses or comply with their respective loan covenants. We cannot provide assurance that we will be able to maintain compliance with these covenants. A non-renewal, default under or acceleration of any of our credit facilities may have a material adverse impact upon our business and financial condition. We have guaranteed most of the indebtedness of Supplies Distributors. Furthermore, we are obligated to repay any over-advance made to Supplies Distributors by its lenders to the extent Supplies Distributors is unable to do so.

For the nine months ended September 30, 2016, one client represented approximately 10% of our service fee revenue and we currently expect this client to represent approximately 10% of our service fee revenue for calendar year 2016. Most of our client agreements state a contract expiration date, but many also include an early termination clause permitting the client to terminate the contract for convenience prior to its stated expiration date or to reduce the scope of services or delay the commencement of services to be provided under the contract. Termination, reduction, or delay of our services under a contract could result from factors unrelated to our work product or the progress of the project, such as factors related to business or financial conditions of the client, changes in client strategies or the domestic or global economy generally. The early termination, reduction or substantial delay of services with any significant client, or nonrenewal of any significant client contract, or the nonpayment of a material amount of our service fees by a significant client, could have a material adverse effect upon our business, results of operation and financial condition.

The majority of our Supplies Distributors product revenue is generated by sales of product purchased under distributor agreements with Ricoh. These agreements are terminable at will and no assurance can be given that Ricoh will continue the distributor agreements with Supplies Distributors. Supplies Distributors does not have its own sales force and relies upon Ricoh’s sales force and product demand generation activities for its sale of Ricoh product. As a result of certain operational restructuring of its business and its discontinuance of certain product lines, Ricoh has implemented, and will continue to implement, certain changes in the sale and distribution of Ricoh products. The changes have resulted, and are expected to continue to result, in reduced revenues and profitability for Supplies Distributors. Further material reduction in the Ricoh business may have a material adverse effect on Supplies Distributors’ business and ~~may~~the termination of the Ricoh business would adversely affect our overall ~~financial condition.~~profitability.

Sales by Supplies Distributors to ~~two~~three customers ~~in the aggregate~~ accounted for approximately ~~29%~~31% of Supplies Distributors’ total product revenue for the nine months ended September 30, ~~2016~~2017 and 5%approximately 4% of consolidated net revenue. The loss of one or ~~both~~more of such customers, or non-payment of any material amount by these or any other customer, ~~would~~may have a material adverse effect upon Supplies Distributors’ business, results of operations and financial condition.

Our stock price could decline if a significant number of shares become available for sale.

As of September 30, ~~2016,~~2017, we have issued an aggregate of (i) ~~1.2 million~~1,053,000 stock options outstanding to employees, directors and others with a weighted average exercise price of ~~$7.52~~$7.87 per share (ii) ~~626,000~~421,000 performance shares of common stock that may vest, subject to satisfaction of vesting conditions, over the next one to three years, (iii) ~~118,000~~183,000 restricted stock units that may vest subject

to satisfaction of vesting conditions over the next ~~two~~three years, and (iv) ~~104,000~~167,000 deferred stock units to the non-employee members of our Board of Directors under which the underlying shares will be issued upon the termination of service of the holder. The current and future issuance and/or vesting of shares of our common stock under the foregoing stock awards, performance shares and deferred stock units, sales of substantial amounts of common stock in the public market following the issuance and/or vesting of such shares, and/or the perception that future sales of these shares could occur, could reduce the market price of our common stock and make it more difficult to sell equity securities in the future.

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.

Delaware		75-2837058
(State of Incorporation)		(I.R.S. Employer I.D. No.)
505 Millennium Drive, Allen, Texas		75013
(Address of principal executive offices)		(Zip Code)

PART I. FINANCIAL INFORMATION		Page Number
Item 1.	Financial ~~Statements:~~Statements:
	Condensed Consolidated Balance Sheets as of September 30, ~~2016~~2017 (Unaudited) and December 31, ~~2015~~2016	3

	Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, ~~2016~~2017 and ~~2015~~2016	4

	Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, ~~2016~~2017 and ~~2015~~2016	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2219
Item 3.	Quantitative and Qualitative Disclosure about Market Risk	3026
Item 4.	Controls and Procedures	3026
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	3127
Item 1A.	Risk Factors	3127
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3228
Item 3.	Defaults Upon Senior Securities	3228
Item 4.	Mine Safety Disclosure	3228
Item 5.	Other Information	3228
Item 6.	Exhibits	3329
SIGNATURES		3430

Number of shares of common stock issued		16,116
Multiplied by PFSweb Inc.'s stock price	$	14.60
Share consideration	$	235
Aggregate cash payments		1,005
Performance-based contingent payments (based on estimated fair value at acquisition date)		240
Total purchase price	$	1,480

Number of shares of common stock issued		553,223
Multiplied by PFSweb Inc.'s stock price	$	11.40
Share consideration	$	6,307
Aggregate cash payments		30,740
Performance-based contingent payments (based on estimated fair value at acquisition date)		9,195
Post-closing balance sheet reconciliation adjustment		(1,387	)
Total purchase price	$	44,855

	2016			2015
As of January 1,	$	14,157		$	5,392
CrossView earn-out payment in common stock and cash		(7,942	)		—
LAL earn-out payment in common stock and cash		(2,000	)		(950	)
REV earn-out payment in common stock and cash		(1,750	)		(1,393	)
Value recorded at acquisition - CrossView		—			12,723
Value recorded at acquisition - Conexus		553			—
Value recorded at acquisition - Moda		—			480
Change in balance due		(2,638	)		403
As of September 30,	$	380		$	16,655

Accounts receivable	$	7,550
Property and equipment		441
Other assets		149
Identifiable intangibles		9,050
Total assets acquired		17,190
Total liabilities assumed		2,556
Net assets acquired		14,634
Goodwill		30,221
Total purchase price	$	44,855

PFSweb, Inc.

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