PFSWEB, INC. The following discussion and analysis of our results of operations and financial condition should be read in conjunction with the unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Form 10-Q. Forward-Looking Information This quarterly report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements that involve expectations, plans or intentions (such as those relating to future business, future results of operations or financial condition, new or planned features or services, or management strategies). You can identify these forward-looking statements by words such as "may," "will," "would," "should," "could," "expect," "anticipate," "believe," "estimate," "intend," "plan," "potential," "project," "predict," "future," "target," "seek," "continue" and other similar expressions. These forward-looking statements involve risks and uncertainties, and may include assumptions as to how we may perform in the future, including the impact of the COVID-19 pandemic on our business, results of operations and global economic conditions. Although we believe the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee these expectations will actually be achieved. In addition, some forward-looking statements are based upon assumptions about future events that may not prove to be accurate. Therefore, our actual results may differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include, among others, those discussed in "Part I, Item 1A: Risk Factors" of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 as supplemented by our Form 10-K/A filed onApril 29, 2020 (the "Annual Report"), as well as in our consolidated financial statements, related notes, and the other information appearing elsewhere in the Annual Report and our other filings with theSecurities and Exchange Commission , or theSEC , including any quarterly reports on Form 10-Q. We do not intend, and undertake no obligation, to update any of our forward-looking statements after the date of this report to reflect actual results or future events or circumstances. There may be additional risks we do not currently view as material or that are not presently known or that are beyond our ability to control or predict. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Key Events and Trends COVID-19 We continue to closely monitor the impact of the 2019 novel coronavirus, or COVID-19, pandemic on all aspects of our business. Our focus has been, and continues to be, on protecting our employees, while continuing to serve our clients. While the COVID-19 pandemic has not had a material adverse impact on our results of operations to date, the future impacts of the pandemic and any resulting economic impact are largely unknown and rapidly evolving. Beginning in lateMarch 2020 and continuing through the second quarter of 2020, we experienced an increase in demand from certain clients for our services in our PFS Operations segment, as more consumers around the world practiced social distancing, complied with stay-at-home restrictions and many retail stores were closed. This generated increased volume of online ordering. This trend has continued into the third quarter of 2020 but at a reduced rate from the first half of 2020. However, going forward there could be significant volatility in customer demand and buying habits as the pandemic continues and the resulting adverse economic impacts continue or deepen. We have begun experiencing labor rate increases in certain of our markets for fulfillment activities. We believe this will continue and that this could impact our overall fulfillment related costs and staffing. Both our LiveArea and PFS Operations business segments are engaged in the support of our clients' direct to consumer online business activity. Due to continuing restrictions on traditional brick and mortar activities, many businesses, including many of our clients, are migrating an incremental amount of their investments and business volumes to their online channel, including both website development and marketing activity as well as the physical movement of product. We believe this has resulted in, and is currently expected to continue to provide us with strong demand for our service offerings. As the restrictions on brick and mortar activities are lifted, this may lead to reduced demand for the services of LiveArea and PFS Operations as customers return to stores. Despite the unpredictability of volumes brought on by COVID-19, the contracts that had been secured during the pandemic with new clients and amended contracts with existing clients were entered into with the intention to support volumes post-COVID that are the same or higher than those pre-COVID. As a result of the increased volumes that are currently occurring and those potentially expected, we have secured additional warehouse space and headcount to meet the current and expected future volumes for the PFS Operations business. We are incurring additional costs related to the enhanced cleaning regimen implemented in our facilities and purchasing personal protective equipment ("PPE") we are providing to our employees. As ofJune 30, 2020 , these costs have not been material and we do not anticipate them being material through 2020. Beginning inApril 2020 , we began to receive requests from a limited number of our clients to assist them with extended payment terms and/or pricing adjustments for a short time period. For the six months endedJune 30, 2020 , this has not resulted in a material impact to cash flows. We have also begun to see delays in 16 -------------------------------------------------------------------------------- certain limited projects and requests from certain clients to reduce current staffing on our time and materials projects. While we believe this will have a short-term impact on cash flow and revenues, we do not currently anticipate these identified modifications to date will have a material impact to our overall business and financial results. We will continue to monitor these for potential impacts to future cash flow. Overall, while there is an increased level of uncertainty in our financial forecasts for the remainder of 2020 due to the macro-economic uncertainty related to COVID-19, we currently continue to target growth in service fee revenues for both of our business segments for the remainder of the year as compared to 2019. For our LiveArea business, we expect some short-term impact on revenue and profitability in the third quarter of 2020, as a result of the client requested project deferrals and adjustments, but we expect to have continued ongoing success in winning new or expanded client relationships that are expected to offset this impact. For our PFS business segment, we are expecting an overall stronger level of service fees from existing clients who have migrated more of their business to the online channel that we support. However, we expect some shortfalls versus our original projections in winning new client opportunities due to COVID-19 related restrictions on our prospects' abilities to adjust their business operations in the near term and implement such business within 2020. As a result of the impact of COVID-19, many businesses have or will be experiencing short-term or long-term liquidity issues. Based on our current expectations, we believe we have the appropriate financial structure in place to support our own business operations. However, we do expect increased potential risk from the viability of clients and their ability to make payments on time. We have and will continue to closely monitor our clients' financial results, payment patterns and business updates in an effort to minimize the potential impact of our credit risk. While the COVID-19 pandemic has not yet had a material adverse impact on our operations to date, the extent and duration of future impacts of the pandemic and any resulting economic impact on our business are largely unknown and difficult to predict. We recommend that you review Item 1A. "Risk Factors" in the Annual Report on Form 10-K for fiscal year endedDecember 31, 2019 , as supplemented by our Form 10-K/A filed onApril 29, 2020 for a description of the risks related to COVID-19. OnMarch 27, 2020 , the Coronavirus Aid, Relief and Economic Security ("CARES") Act was enacted and signed into law. The Company has made use of the allowance granted under section 2302 of the CARES Act, which permits employers to forgo timely payment of the employer portions ofSocial Security and RRTA taxes that would otherwise be due fromMarch 27 through December 31, 2020 , without penalty or interest charges. We have elected this option and it has resulted in deferred payments throughJune 30, 2020 totaling$1.2 million , due in equal payments onDecember 31, 2021 andDecember 31, 2022 . We expect to defer between$3.5 million and$4.0 million throughDecember 31, 2020 . Similarly, theUK andBelgium governments have granted businesses the option to defer the payment of certain value-added tax ("VAT") amounts. We have elected to take advantage of the options available to us but the effects have been immaterial. We continue to examine the impact that the CARES Act and similar international statutes may have on our business. InMarch 2020 , we established a COVID-19 task force, comprised of leaders from a cross function of each of our operational sites and business units. The objectives of the task force are to: •Gather daily key information from each site regarding risks, opportunities and developments related to the pandemic's impact and Company's response to ensure unfiltered access to information for the Company's leadership. •Identify and accumulate data required for decision making at the leadership level, including providing recommended courses of action. •Coordinate communication plans for all of our geographic locations. •Access, establish, monitor and adjust our business operations continuity plans for each geographic location. •Ensure formal tracking of any known or suspected employee cases of COVID-19. We have taken a number of precautionary measures designed to help minimize the risk of the spread of the virus to our employees, including suspending all non-essential travel worldwide for our employees, and adjusting our operations wherever necessary to help ensure a safe environment for our staff across business functions. We have transitioned our professional staff and contact center agents to a work-from-home solution, with only a few exceptions. While all of our distribution facilities are considered essential businesses in the jurisdictions in which they are located and have continued to operate, we have established procedures to ensure the safety of our distribution facility staff, including: •Employees are not required to come to work if they are not comfortable doing so. •Employees that are experiencing or have been exposed to anyone exhibiting symptoms of COVID-19 have been told not to come to work and to seek medical attention and/or testing and stay home until they receive a negative test result, have self-quarantined for 14 days and/or receive clearance from a medical professional. 17 -------------------------------------------------------------------------------- •Performing temperature checks at entry doors. Employees exhibiting any symptoms of COVID-19 or who have an elevated temperature are not allowed in the facility. •Provide PPE for employees including gloves, face masks and in certain facilities, face shields. We have provided training for proper use of the equipment. •Require distancing among employees inside of the working areas of the distribution facilities and require that all employees use the greatest social distancing available inside of the facilities with constant enforcement being maintained. •Provide mobile cleaning stations for employee use at any time and access to hand sanitizer stations. •Increased and enhanced cleaning regimen in all facilities. Facilities are cleaned on a daily basis, as well as a nightly cleaning that includes disinfectant fogging at some facilities. •Facilitating virtual focus groups with employees to seek out ways to provide suggestions to the task force. Overview We are a global commerce services company. We manage the entire commerce customer experience for major branded manufacturers and retailers through two business segments, LiveArea Professional Services ("LiveArea") and PFS Operations. LiveArea provides a comprehensive set of services to support and improve B2B, B2C and B2B2C digital and physical shopping experiences or eCommerce. Service areas include eCommerce strategy and consulting, omni-channel experience design, digital marketing, data strategy and technology services including development and system integration. PFS Operations provides services to support and improve the physical experience, such as order management, order fulfillment, customer care and payment services. We offer our services on an a la carte basis or as a complete end-to-end solution. Operating Results The following table discloses certain financial information for the periods presented, expressed in terms of dollars, dollar change, percentage change and as a percentage of total revenues (in thousands, except percentages): Three Months Ended % of Total Six Months Ended % of TotalJune 30 , RevenuesJune 30 , Revenues 2020 2019 Change 2020 2019 2020 2019 Change 2020 2019 Revenues Service fee revenue$ 61,996 $ 50,331 $ 11,665 75.2 % 73.5 %$ 116,294 $ 101,769 $ 14,525 73.1 % 72.4 % Product revenue, net 5,915 6,138 (223) 7.2 % 9.0 % 13,447 13,638 (191) 8.5 % 9.7 % Pass-through revenue 14,524 12,041 2,483 17.6 % 17.6 % 29,393 25,253 4,140 18.5 % 18.0 % Total revenues 82,435 68,510 13,925 100.0 % 100.0 % 159,134 140,660 18,474 100.0 % 100.0 % Costs of Revenues Cost of service fee revenue 40,765 32,809 7,956 65.8 % (1) 65.2 % 75,481 66,767 8,714 64.9 % (1) 65.6 % Cost of product revenue 5,590 5,791 (201) 94.5 % (2) 94.3 % 12,713 12,868 (155) 94.5 % (2) 94.4 % Cost of pass-through revenue 14,524 12,041 2,483 100.0 % (3) 100.0 % 29,393 25,253 4,140 100.0 % (3) 100.0 % Total costs of revenues 60,879 50,641 10,238 73.9 % 73.9 % 117,587 104,888 12,699 73.9 % 74.6 % Service fee gross profit 21,231 17,522 3,709 34.2 % (1) 34.8 % 40,813 35,002 5,811 35.1 % (1) 34.4 % Product revenue gross profit 325 347 (22) 5.5 % (2) 5.7 % 734 770 (36) 5.5 % (2) 5.6 % Total gross profit 21,556 17,869 3,687 26.1 % 26.1 % 41,547 35,772 5,775 26.1 % 25.4 % Selling, General and Administrative expenses 21,541 18,096 3,445 26.1 % 26.4 % 40,911 36,443 4,468 25.7 % 25.9 % Income (loss) from operations 15 (227) 242 - % (0.3) % 636 (671) 1,307 0.4 % (0.5) % Interest expense, net 375 448 (73) 0.5 % 0.7 % 788 959 (171) 0.5 % 0.7 % Income (loss) before income taxes (360) (675) 315 (0.4) % (1.0) % (152) (1,630) 1,478 (0.1) % (1.2) % Income tax expense, net 627 300 327 0.8 % 0.4 % 1,066 509 557 0.7 % 0.4 % Net loss$ (987) $ (975) $ (12) (1.2) % (1.4) %$ (1,218) $ (2,139) $ 921 (0.8) % (1.5) %
(1) Represents the percent of Service fee revenue. (2) Represents the percent of Product revenue, net. (3) Represents the percent of Pass-through revenue.
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Segment Operating Data
PFS Operations (in thousands, except percentages)
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 Change Change % 2020 2019 Change Change %
Revenues
Service fee revenue $ 41,414 $ 31,700 $ 9,714 31 % $ 74,845 $ 64,754 $ 10,091 16 %
Product revenue, net 5,915 6,138 (223) - 13,447 13,638 (191) -
Pass-through revenue 13,916 11,412 2,504 22 % 27,873 24,289 3,584 15 %
Total revenues 61,245 49,250 11,995 24 % 116,165 102,681 13,484 13 %
Costs of Revenues
Cost of service fee revenue 29,434 22,755 6,679 29 % 52,739 46,675 6,064 13 %
Cost of product revenue 5,590 5,791 (201) (3) % 12,713 12,868 (155) (1) %
Cost of pass-through revenue 13,916 11,412 2,504 22 % 27,873 24,289 3,584 15 %
Total costs of revenues 48,940 39,958 8,982 22 % 93,325 83,832 9,493 11 %
Gross Profit 12,305 9,292 3,013 32 % 22,840 18,849 3,991 21 %
Direct operating expenses 7,903 7,163 740 10 % 15,348 14,195 1,153 8 %
Direct contribution $ 4,402 $ 2,129 $ 2,273 107 % $ 7,492 $ 4,654 $ 2,838 61 %
PFS Operations total revenues for the three and six months ended June 30, 2020
increased by $12.0 million and $13.5 million , respectively, compared with the
corresponding periods in 2019. Service fee revenue for the three and six months
ended June 30, 2020 increased $9.7 million and $10.1 million , respectively,
compared to the prior year. The service fee revenue increase was primarily due
to growth from new and existing clients, driven by increases in on-line spending
as a result of COVID-19, offset by client terminations or bankruptcies. For the
three and six months ended June 30, 2019 , we had service fee revenues totaling
approximately $0.6 million and $2.8 million , respectively, related to two
clients that filed bankruptcy and subsequently liquidated their operations in
2019. Excluding the decrease from these clients, service fee revenues would have
increased by $10.3 million and $12.9 million for the three and six months ended
June 30, 2020 , respectively.
Product revenue, net, for the three and six months ended June 30, 2020 , remained
largely consistent with the corresponding period in 2019. We had expected
product revenue to decline, as it is primarily dependent on one client, which
restructured its operations and discontinued certain product lines. However,
during the three months ended March 31, 2020 , we had an increase in orders as
certain customers ordered incremental product to minimize the risk of product
not being available during this time. This was offset during the three months
ended June 30, 2020 , whereby product revenue returned to an expected decline. We
expect to see reduced product revenue as the year continues, as a result of the
restructuring of our client.
Pass-through revenue, primarily related to freight activity, increased by $2.5
million and $3.6 million for the three and six months ended June 30, 2020
compared to the corresponding periods in 2019 primarily due to incremental
activity with both new and existing clients partially offset by the impact of a
client's transition of their freight management activities.
PFS Operations gross margin increased to 20.1% and 19.7% for the three and six
months ended June 30, 2020 , respectively, from 18.9% and 18.4% for the same
periods of the prior year. The increased margin is due to the increased service
fee margins of 28.9% and 29.5% for the three and six months ended June 30, 2020 ,
respectively, from 28.2% and 27.9% for the same periods of the prior year
primarily as a result of operating cost efficiencies. This was partially offset
by the impact from increased pass-through revenue with zero margin.
Direct operating expenses for the three and six months ended June 30, 2020
increased by $0.7 million and $1.2 million compared to the corresponding periods
in 2019. The increase was primarily due to increased personnel costs arising
from stock compensation expense of $0.9 million for the three and six months
ended June 30, 2020 , compared to $0.1 million and $0.2 million for the same
periods of the prior year. The increased stock compensation expense arose from
the issuance of incremental awards after the approval of a new Stock and
Incentive Plan by shareholders on June 30, 2020 . Excluding the impact of stock
based compensation, direct operating expenses decreased by $0.1 million for the
three months ended June 30, 2020 and increased by $0.5 million for the six
months ended June 30, 2020 . This increase was primarily due to increased
personnel related costs (including variable compensation expense), facility
costs, and sales and marketing related spend, partially offset by the prior year
amount including a higher provision for doubtful accounts due to a 2019 client
bankruptcy.
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--------------------------------------------------------------------------------LiveArea Professional Services (in thousands, except percentages)
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 Change Change % 2020 2019 Change Change %
Revenues
Service fee revenue $ 20,582 $ 18,631 $ 1,951 10 % $ 41,449 $ 37,015 $ 4,434 12 %
Pass-through revenue 608 629 (21) (3) % 1,520 964 556 58 %
Total revenues 21,190 19,260 1,930 10 % 42,969 37,979 4,990 13 %
Costs of revenues
Cost of service fee revenue 11,331 10,054 1,277 13 % 22,742 20,092 2,650 13 %
Cost of pass-through revenue 608 629 (21) (3) % 1,520 964 556 58 %
Total costs of revenues 11,939 10,683 1,256 12 % 24,262 21,056 3,206 15 %
Gross profit 9,251 8,577 674 8 % 18,707 16,923 1,784 11 %
Direct operating expenses 8,802 6,276 2,526 40 % 15,076 12,749 2,327 18 %
Direct contribution $ 449 $ 2,301 $ (1,852) (80) % $ 3,631 $ 4,174 $ (543) (13) %
LiveArea Professional Services revenues for the three and six months ended June
30, 2020 increased by $1.9 million and $5.0 million , respectively, compared to
the corresponding periods in 2019. The increase in revenues are primarily due to
the higher level of new and existing client activity and related pass through
revenues, as a result of increased success in booking new projects and
engagements during late 2019 and continuing into 2020.
LiveArea Professional Services gross margin decreased to 43.7% from 44.5% in the
three months ended June 30, 2019 and decreased to 43.5% from 44.6% in the six
months ended June 30, 2020 , compared to the corresponding periods of the prior
year. The decrease in gross margin is primarily attributable to higher than
expected costs incurred on certain client projects for the six months ended June
30, 2020 , increased levels of zero margin pass-through revenue activity as well
as the prior year including a higher level of monies earned on direct and
indirect technology related product sales.
Direct operating expenses increased by $2.5 million and $2.3 million for the
three and six months ended June 30, 2020 , respectively, compared to the
corresponding periods in 2019. The increase was primarily attributable to
increased stock based compensation of $2.3 million and $2.4 million for the
three and six months ended June 30, 2020 , respectively, compared to $0.1 million
and $0.3 million for the same periods in 2019. Excluding this expense, direct
operating expenses increased by $0.3 million and $0.2 million for the three and
six months ended June 30, 2020 , respectively. The increase arose primarily as a
result of incremental sales and marketing personnel costs and increased variable
compensation expense, partially offset by reduced travel related spend.
Corporate (in thousands, except percentages)
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 Change Change % 2020 2019 Change Change %
Unallocated corporate
expenses $ 4,836 $ 4,657 $ 179 4 % $ 10,487 $ 9,499 $ 988 10 %
Unallocated corporate expenses increased by $0.2 million and $1.0 million for
the three and six months ended June 30, 2020 , respectively, compared to the
corresponding periods in 2019. There were incremental increases in stock based
compensation of $1.6 million , offset by a $1.7 million and $1.1 million
reduction to vacation expense for the three and six months ended June 30 ,
respectively. The decrease to vacation expense was primarily related to a change
in policy to allow for the introduction of a flexible vacation policy that is
not restricted to time earned by the Company for US employees in the second
quarter of 2020. Excluding the impacts of these factors, unallocated corporate
expenses increased by $0.3 million and $0.5 million for the three and six months
ended June 30, 2020 , respectively, primarily as a result of increased personnel
related costs.
Income Taxes
During the three months ended June 30, 2019 , we recorded a tax expense of $0.6
million comprised primarily of $0.4 million related to the majority of our
international operations, $0.1 million related to state income taxes, and $0.1
million associated with the tax amortization of goodwill in relation to our 2015
acquisition. A valuation allowance has been provided for the majority of our
domestic net deferred tax assets, which are primarily related to our net
operating loss carryforwards, and for certain foreign deferred tax assets.
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During the six months ended June 30, 2020 , we recorded a tax expense of $1.1
million comprised primarily of $0.5 million related to the majority of our
international operations, $0.3 million related to state income taxes, and $0.3
million associated with the tax amortization of goodwill in relation to our 2015
acquisition. A valuation allowance has been provided for the majority of our
domestic net deferred tax assets, which are primarily related to our net
operating loss carryforwards, and for certain foreign deferred tax assets.
For the three and six months ended June 30, 2020 and 2019, we have utilized the
discrete effective tax rate method, as allowed by Accounting Standards
Codification ("ASC") 740-270-30-18, "Income Taxes-Interim Reporting," to
calculate the interim income tax provision. The discrete method is applied when
the application of the estimated annual effective tax rate is impractical
because it is not possible to reliably estimate the annual effective tax rate.
The discrete method treats the year to date period as if it was the annual
period and determines the income tax expense or benefit on that basis. We
believe that, at this time, the use of this discrete method is more appropriate
than the annual effective tax rate method as (i) the estimated annual effective
tax rate method is not reliable due to the high degree of uncertainty in
estimating annual pretax earnings by jurisdiction and (ii) our ongoing
assessment that the recoverability of our deferred tax assets is not likely in
several jurisdictions.
The CARES Act, among other things, permits net operating loss ("NOL") carryovers
and carrybacks to offset 100% of taxable income for taxable years beginning
before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and
2020 to be carried back to each of the five preceding taxable years. Due to the
company's historical NOLs, the NOL carryback provision of the CARES Act would
not result in a benefit.
Liquidity and Capital Resources
We currently believe our cash position, financing available under our credit
facilities and funds generated from operations will satisfy our 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. However, our
assumptions and expectations may be impacted by the uncertain duration and
extent of the adverse economic conditions caused by the COVID-19 pandemic.
Our cash position decreased in the six months ended June 30, 2020 primarily from
cash used in operating activities and purchases of property and equipment,
partially offset by borrowing on our revolving loan.
Cash Flows from Operating Activities
During the six months ended June 30, 2020 , net cash used in operations was $2.8
million , compared to net cash provided by operations of $4.9 million in the same
period of the prior year. Both periods included benefits from cash income
generated from operations before changes in operating assets and liabilities.
Such benefits were then either increased or decreased, depending on period, by
the net impact of changes in assets and liabilities, primarily related to the
amount and timing of client revenue billings and collections as well as vendor
purchasing and payment activity. In the six months ended June 30, 2020 , there
was a reduced cash flow benefit from a seasonality driven reduction in accounts
receivable. In addition, one of our clients began to transition away from our
service offering of credit card collections from this client's customers which
further increased our net cash used in operations. We expect the impact from the
change in this client's service offering to have a reduced impact on cash flows
from operating activities for the remainder of 2020.
We have deferred payment of the employer portions of Social Security and RRTA
taxes that would otherwise be due from March 27 through December 31, 2020 , by
election of the option provided in terms of the CARES Act. This has resulted in
deferred payments through June 30, 2020 totaling $1.2 million , due in equal
payments on December 31, 2021 and December 31, 2022 and we expect to defer
between $3.5 million and $4.0 million through December 31, 2020 .
Cash Flows from Investing Activities
Cash used in investing activities included capital expenditures of $1.7 million
and $1.9 million during the six months ended June 30, 2020 and 2019,
respectively, exclusive of property and equipment acquired under debt and
finance lease financing, which consisted primarily of capitalized software costs
and equipment purchases.
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Capital expenditures have historically consisted of additions to upgrade our
management information systems, development of customized technology solutions
to support and integrate with our service fee clients and general expansion and
upgrades to our facilities, both domestic and foreign. We expect to incur
capital expenditures to support new facilities, contracts and anticipated future
growth opportunities. Based on our current client business activity and our
targeted growth plans, we anticipate our total investment in upgrades and
additions to facilities and information technology solutions and services for
the upcoming twelve months, including costs to implement new clients, will be
approximately $7.0 million to $9.0 million , although additional capital
expenditures may be necessary to support the infrastructure requirements of new
clients. To maintain our current operating cash position, a portion of these
expenditures may be financed through client reimbursements, debt, operating or
finance leases or additional equity. We may elect to modify or defer a portion
of such anticipated investments in the event that we do not obtain the financing
results necessary to support such investments.
Cash Flows from Financing Activities
During the six months ended June 30, 2020 , cash provided by financing activities
was $1.8 million and during the six months ended June 30, 2019 , cash used in
financing activities was $6.7 million . The balances in both periods were
primarily due to net borrowing and payment activity on our revolving loan and
other debt.
Working Capital
During the six months ended June 30, 2020 , our working capital increased to
$22.4 million compared to $14.3 million at December 31, 2019 . This increase was
primarily related to income generated from operations before working capital
changes, plus net borrowings on our revolving debt facility, partially offset by
capital expenditures.
To obtain 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 may have a material adverse impact on our financial
condition and results of operations. We can provide no assurance we will have
the financial ability to repay all such obligations. As of June 30, 2020 , we
were in compliance with all debt covenants. Further, non-renewal of any of our
credit facilities may have a material adverse impact on our business and
financial condition.
Inventory Financing
To finance its distribution of Ricoh products in the U.S. , Supplies Distributors
has a short-term credit facility with IBM Credit LLC and its assignees ("IBM
Credit") that provides financing for eligible inventory and certain receivables
for up to $7.5 million . We have provided a collateralized guarantee to secure
the repayment of this credit facility. The IBM Credit facility does not have a
stated maturity and both parties have the ability to exit the facility following
a 90-day notice.
This credit facility contains various restrictions upon the ability of Supplies
Distributors and its subsidiaries to, among other things, merge, consolidate,
sell assets, incur indebtedness, make loans, investments and payments to related
parties (including entities directly or indirectly owned by PFSweb, Inc. ),
provide guarantees, make investments and loans, pledge assets, make changes to
capital stock ownership structure and pay dividends, as well as financial
covenants, such as annualized revenue to working capital, net profit after tax
to revenue and total liabilities to tangible net worth, as defined, and are
secured by all of the assets of Supplies Distributors, as well as a
collateralized guaranty of PFSweb . Additionally, we are required to maintain a
subordinated loan to Supplies Distributors of no less than $1.0 million , not
maintain restricted cash of more than $5.0 million , are restricted with regard
to transactions with related parties, indebtedness and changes to capital stock
ownership. Furthermore, we are obligated to repay any over-advance made to
Supplies Distributors or its subsidiaries under these facilities if they are
unable to do so. We have also provided a guarantee of substantially all of the
obligations of Supplies Distributors and its subsidiaries to IBM and Ricoh.
Debt and Finance Lease Obligations
U.S. Credit Agreement. In August 2015 , we entered into a credit agreement
("Credit Agreement") with Regions Bank , as agent for itself and one or more
future lenders (the "Lenders"). Under the Credit Agreement, and subject to the
terms set forth therein, the Lenders provided us with a revolving loan facility
for up to $32.5 million and a term loan facility for up to $30 million .
Borrowings under the Credit Agreement accrued interest at a variable rate based
on prime rate or Libor, plus an applicable margin.
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On November 1, 2018 , we entered into Amendment No. 1 to our credit agreement
with Regions Bank (the "Amended Facility"). The Amended Facility provided for an
increase in availability of our revolving loans to $60.0 million , with the
ability for a further increase of $20.0 million to $80.0 million , and the
elimination of the term loan. Amounts outstanding under the term loan were
reconstituted as revolving loans. The Amended Facility also extended the
maturity date to November 1, 2023 .
As of June 30, 2020 and December 31, 2019 , the weighted average interest rate on
the revolving loan facility was 2.76% and 3.96%, respectively. The Amended
Facility is secured by a lien on substantially all of the operating assets of
the US entities and a pledge of 65% of the shares of certain of our foreign
subsidiaries. The Amended Facility contains cross default provisions, various
restrictions upon the Company's ability to, among other things, merge,
consolidate, sell assets, incur indebtedness, make loans and payments to
subsidiaries, affiliates and related parties, make capital expenditures, make
investments and loans, pledge assets, make changes to capital stock ownership
structure, as well as financial covenants, as defined, of a minimum consolidated
fixed charge ratio and a maximum consolidated leverage ratio.
Master Lease Agreements. We have various agreements that provide for leasing or
financing transactions of equipment and other assets and will continue to enter
into such arrangements as needed to finance the purchasing or leasing of certain
equipment or other assets. Borrowings under these agreements, which generally
have terms of three to five years, are generally secured by the related
equipment, and in certain cases, by a Company parent guarantee.
Other than our finance and operating lease commitments, we do not have any other
material financial commitments, although future client contracts may require
capital expenditures and lease commitments to support the services provided to
such clients.
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