Significant Accounting Policies (Policies) | 12 Months Ended |
Dec. 31, 2013 |
Principles of Consolidation | ' |
Principles of Consolidation |
All intercompany accounts and transactions have been eliminated in consolidation. |
Investment in Affiliates | ' |
Investment in Affiliates |
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Priority Fulfillment Services, Inc. (“PFS”), a wholly-owned subsidiary of PFSweb, has made advances to Supplies Distributors that are evidenced by a Subordinated Demand Note (the “Subordinated Note”). Under the terms of certain of the Company’s debt facilities, the outstanding balance of the Subordinated Note cannot be increased to more than $5.0 million or decreased to less than $2.5 million without prior approval of certain of the Company’s lenders (see Notes 3 and 4). As of both December 31, 2013 and 2012, the outstanding balance of the Subordinated Note was $3.5 million. The Subordinate Note is eliminated in the Company’s consolidated financial statements. |
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PFS has also made advances to Retail Connect, which aggregated $11.1 million as of both December 31, 2013 and 2012. Certain terms of the Company’s debt facilities provide that the total advances to Retail Connect may not be less than $2.0 million without prior approval of Retail Connect’s lender, if needed. PFS has received the approval of its lender to advance incremental amounts to certain of its subsidiaries and/or affiliates, including Retail Connect, if needed, subject to certain financial covenants, as defined. PFSweb, Inc. has also advanced to Retail Connect an additional $8.5 million and $8.2 million as of December 31, 2013 and 2012, respectively. As of December 31, 2013, PFSweb, Inc. has approximately $10.7 million available to be advanced to Retail Connect and/or other affiliates. All of these advances are eliminated upon consolidation. |
Use of Estimates | ' |
Use of Estimates |
The preparation of consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. The recognition and allocation of certain revenues and selling, general and administrative expenses in these consolidated financial statements also require management estimates and assumptions. |
Estimates and assumptions about future events and their effects cannot be determined with certainty. The Company bases its estimates on historical experience and various other assumptions believed to be applicable and reasonable under the circumstances. These estimates may change as new events occur, as additional information is obtained and as the operating environment changes. These changes have been included in the consolidated financial statements as soon as they became known. In addition, management is periodically faced with uncertainties, the outcomes of which are not within its control and will not be known for prolonged periods of time. Based on a critical assessment of accounting policies and the underlying judgments and uncertainties affecting the application of those policies, management believes the Company’s consolidated financial statements are fairly stated in accordance with US GAAP, and provide a fair presentation of the Company’s financial position and results of operations. |
Revenue and Cost Recognition | ' |
Revenue and Cost Recognition |
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 goods sold. |
Under its distributor agreements (see Note 6), Supplies Distributors bills Ricoh for reimbursements of certain expenses, including: pass-through customer marketing programs, including rebates and coop 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 includes these reimbursable amounts as they are incurred with a corresponding reduction in either inventory or cost of product revenue. Supplies Distributors also reflects pass-through customer marketing programs as a reduction of both product revenue and cost of product revenue. |
The Company’s service fee revenue relates to its distribution services, order management/customer care services, professional and technology services and the reimbursement of out-of-pocket and third-party expenses. The Company typically charges its service fee revenue on either a cost-plus basis, a percent of shipped revenue basis 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 605, “Revenue Recognition.” |
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 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 service and support of eCommerce platforms, website 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, a dedicated resource model, or a percent of merchandise shipped basis. Service fee revenue for this activity is generally recognized as the services are rendered. |
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. |
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 services under multiple year contracts, certain of which include early termination provisions. 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. The Company defers the start-up fees received, and the related costs, and recognizes them over the contract term. 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. The following summarizes the deferred implementation revenues and costs, excluding technology and development costs that are included in property and equipment (in thousands): |
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| December 31, | | | December 31, | | | | | |
2013 | 2012 | | | | |
Deferred implementation revenues | | | | | | | | | | | |
Current | $ | 8,181 | | | $ | 6,573 | | | | | |
Non-current | | 7,491 | | | | 7,562 | | | | | |
| $ | 15,672 | | | $ | 14,135 | | | | | |
Deferred implementation costs | | | | | | | | | | | |
Current | $ | 1,977 | | | $ | 1,833 | | | | | |
Non-current | | 1,780 | | | | 1,834 | | | | | |
| $ | 3,757 | | | $ | 3,667 | | | | | |
Current and non-current deferred implementation costs, excluding technology and development costs, are a component of prepaid expenses and other current assets and other assets, respectively. Current and non-current deferred implementation revenues may precede the timing of when the related implementation costs are incurred, and thus deferred. |
Concentration of Business and Credit Risk | ' |
Concentration of Business and Credit Risk |
No product revenue customer or service fee client relationship represented more than 10% of the Company’s consolidated total net revenue during the years ended December 31, 2013 or 2012. One client exceeded 10% of the Company’s accounts receivable at December 31, 2013. A summary of the customer and client concentrations is as follows: |
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| December 31, | | | December 31, | | | | | |
2013 | 2012 | | | | |
Product Revenue (as a percentage of total Product Revenue, net): | | | | | | | | | | | |
Customer 1 | | 16 | % | | | 15 | % | | | | |
Customer 2 | | 12 | % | | | 12 | % | | | | |
Service Fee Revenue (as a percentage of total Service Fee Revenue): | | | | | | | | | | | |
Client 1 | | 7 | % | | | 15 | % | | | | |
Client 2 | | 7 | % | | | 14 | % | | | | |
The Company currently anticipates that its product revenue and service fee revenue from the customers and clients identified above will decline during the next twelve months and the contractual relationship with Client 1 ended during 2013. |
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, and is dependent upon the continuation of such arrangements. These arrangements, which are critical to the Company’s ongoing operations, include Supplies Distributors’ distributor agreements and certain of Supplies Distributors’ working capital financing agreements. Substantially all 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 in 2013 and beyond. |
Cash and Cash Equivalents | ' |
Cash and Cash Equivalents |
Cash equivalents are defined as short-term highly liquid investments with original maturities, when acquired, of three months or less. |
Other Receivables | ' |
Other Receivables |
Other receivables include $3.9 million and $6.5 million as of December 31, 2013 and 2012, respectively, primarily for amounts due from Ricoh for costs incurred by the Company under the distributor agreements (see Note 6). In addition, other receivables include $0.7 million and $0.6 million as of December 31, 2013 and 2012, respectively, applicable to value added tax receivables. |
Inventories | ' |
Inventories |
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 to inventories that are slow moving or obsolete, excess levels of inventory or values assessed at lower than cost. |
Supplies Distributors assumes responsibility for slow-moving inventory under its Ricoh distributor agreements, subject to certain termination rights, but has the right to return product rendered obsolete by engineering changes, as defined (see Note 6). In the event PFSweb, Supplies Distributors and Ricoh terminate the distributor agreements, the agreements provide for the parties to mutually agree on a plan of disposition of Supplies Distributors’ then existing inventory. |
Supplies Distributors’ inventories include merchandise in-transit that has not been received by the Company but that has been shipped and invoiced by Supplies Distributors’ vendors. The corresponding payable for inventories in-transit is included in accounts payable in the accompanying consolidated financial statements. |
The Company reviews inventory for impairment on a periodic basis, but at a minimum annually. The provision for excess and obsolete inventory in the years ended December 31, 2013 and 2012 was $0.1 million and $0.4 million, respectively. Recoverability of the inventory on hand is measured by comparison of the carrying value of the inventory to the fair value of the inventory. The reserve for slow moving or excess inventory was $1.0 million and $1.8 million as of December 31, 2013 and 2012, respectively. |
Property and Equipment | ' |
Property and Equipment |
The components of property and equipment as of December 31, 2013 and 2012 are as follows (in thousands): |
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| December 31, | | | December 31, | | | Depreciable | |
2013 | 2012 | Life |
Purchased and capitalized software costs | $ | 39,829 | | | $ | 35,024 | | | | 1-5 years | |
Furniture and fixtures | | 23,158 | | | | 22,378 | | | | 2-10 years | |
Computer equipment | | 11,050 | | | | 14,035 | | | | 3-5 years | |
Leasehold improvements | | 13,648 | | | | 13,229 | | | | 3-10 years | |
Other | | 2,520 | | | | 2,953 | | | | 3-5 years | |
| | 90,205 | | | | 87,619 | | | | | |
Less-accumulated depreciation and amortization | | (63,015 | ) | | | (59,702 | ) | | | | |
Property and equipment, net | $ | 27,190 | | | $ | 27,917 | | | | | |
The Company makes judgments and estimates in conjunction with the carrying value of these assets, including amounts to be capitalized, depreciation and amortization methods and useful lives. Additionally, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. The Company records impairment losses, if any, in the period in which the Company determines the carrying amount is not recoverable. Recoverability of any assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. This may require the Company to make judgments regarding long-term forecasts of future revenues and costs related to the assets subject to review. During 2013 and 2012, no impairment of property and equipment was identified or recorded. |
Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the respective assets. Capitalized implementation costs are depreciated over the respective client contract term. Leasehold improvements are amortized over the shorter of the useful life of the related asset or the remaining lease term. Depreciation and amortization expense related to property and equipment, excluding capital leases, during 2013 and 2012 was $7.6 million and $7.0 million, respectively. |
The Company’s property held under capital leases amount to approximately $4.0 million and $5.1 million, net of accumulated amortization of approximately $4.4 million and $2.6 million, at December 31, 2013 and 2012, respectively. Depreciation and amortization expense related to capital leases during 2013 and 2012 was $2.6 million and $2.2 million, respectively. In addition, during 2012, PFS incurred approximately $6.0 million of leasehold improvements at certain of its leased facilities that is being amortized over the shorter of the asset’s useful lives or the lease terms and were primarily financed via tenant allowances that are also being amortized over the lease terms. |
Operating Leases | ' |
Operating Leases |
The Company leases certain real estate for its warehouse, call center and corporate offices, as well as certain equipment under non-cancelable operating leases that expire at various dates through 2024. 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, with the difference between cash payments and rent expense recognized being recorded as deferred rent in the accompanying consolidated balance sheets. |
Foreign Currency Translation and Transactions | ' |
Foreign Currency Translation and Transactions |
For the Company’s Canadian and European operations, the local currency is the functional currency. All assets and liabilities are translated at exchange rates in effect at the end of the period, and income and expense items are translated at the average exchange rates on a monthly basis. |
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The Company includes currency gains and losses on short-term intercompany advances in the determination of net income and loss. The Company reports gains and losses on intercompany foreign currency transactions that are of a long-term investment nature as a separate component of shareholders’ equity. |
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Stock-Based Compensation | ' |
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Stock-Based Compensation |
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The Company uses stock-based compensation, including stock options, deferred stock units and other stock-based awards to provide long-term performance incentives for its executives, key employees and non-employee directors. From the service inception date to the grant date, the Company recognizes compensation cost for all share-based payments based on the reporting date fair value of the award. After the grant date, compensation cost is measured based on the grant date fair value. Depending on the conditions associated with the vesting of the award, compensation cost is recognized on a straight-line or graded basis, net of estimated forfeitures, over the requisite service period of each award. The Company records compensation cost as a component of selling, general and administrative expenses in the consolidated statements of operations. |
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The Company estimates the fair value of each option grant on the date of grant using the Black-Scholes option-pricing model and estimates the compensation cost for certain of the awards that have a performance condition using a Monte-Carlo simulation. The estimated fair value for awards involves assumptions for expected dividend yield, stock price volatility, risk-free interest rates and the expected life of the award. |
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Income Taxes | ' |
Income Taxes |
For federal income tax purposes, tax years that remain subject to examination include years 2010 through 2013. However, the utilization of net operating loss (“NOL”) carryforwards that arose prior to 2010 remain subject to examination through the years such carryforwards are utilized. For Europe, tax years that remain subject to examination include years 2011 to 2013. However, the utilization of NOL carryforwards that arose prior to 2011 remain subject to examination through the years such carryforwards are utilized. For Canada, tax years that remain subject to examination include years 2005 to 2013, depending on the subsidiary. For state income tax purposes, the tax years that remain subject to examination include years 2009 to 2013, depending upon the jurisdiction in which the Company files tax returns. The Company and its subsidiaries have various income tax returns in the process of examination. The Company does not expect these examinations will result in unrecognized tax benefits. |
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amount more likely than not to be realized. |
The Company recognizes interest and penalties related to certain tax positions in income tax expense. |
Self Insurance | ' |
Self Insurance |
The Company is self-insured in the U.S. for medical insurance benefits up to certain stop-loss limits. Such costs are accrued based on known claims and an estimate of incurred, but not reported (“IBNR”) claims. IBNR claims are estimated using historical lag information and other data provided by claims administrators. |
Fair Value of Financial Instruments | ' |
Fair Value of Financial Instruments |
The carrying value of the Company’s financial instruments, which include cash and cash equivalents, accounts receivable, accounts payable, debt and capital lease obligations, approximate their fair values based on short terms to maturity or current market prices and interest rates. |
Comprehensive Income (Loss) | ' |
Comprehensive Income (Loss) |
Comprehensive income (loss) is defined as the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Comprehensive income (loss) consists of net income (loss) and foreign currency translation adjustments. |
Net Loss Per Common Share | ' |
Net Loss Per Common Share |
Basic and diluted net loss per share are computed by dividing net loss by the weighted-average number of common shares outstanding for the reporting period. Stock options not included in the calculation of diluted net loss per share for the years ended December 31, 2013 and 2012, were 1.8 million and 2.1 million, respectively, as the effect would be anti-dilutive. |
Cash Paid for Interest and Taxes During Year | ' |
Cash Paid For Interest and Taxes During Year |
The Company made payments for interest of approximately $0.7 million and $1.0 million in the years ended December 31, 2013 and 2012, respectively (see Notes 3 and 4). Income tax payments of approximately $0.5 million and $0.6 million were made during each of the years ended December 31, 2013 and 2012, respectively (see Note 8). |