1. OVERVIEW AND BASIS OF PRESENTATION

PFSweb, Inc. and its subsidiaries are collectively referred to as the “Company”; “Supplies Distributors” 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, and “PFSweb” refers to PFSweb, Inc. and its subsidiaries, excluding Supplies Distributors and Retail Connect.

PFSweb Overview

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 Overview

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 to fund the 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.

All of the agreements between PFSweb and Supplies Distributors were made in the context of a related party relationship and were negotiated in the overall context of PFSweb’s and Supplies Distributors’ arrangement with Ricoh. 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.

Acquisition of REV

On September 3, 2014, Priority Fulfillment Services, Inc. (“PFS”), a wholly-owned subsidiary of PFSweb, acquired the outstanding capital stock of REV, which provides eCommerce website technical design, development and support services, enabling retailers, manufacturers and suppliers to optimize the customer experience across multiple channels. REV maintains operations in the United States and India. The initial consideration paid for the shares was $3.2 million in cash payments. The purchase agreement provides for future earn-out payments (“REV Earn-out Payments”) payable in 2015 and 2016 based on REV’s achievement of certain 2014 and 2015 financial targets (the “2014 REV Earn-out Payments” and “2015 REV Earn-out Payments”, respectively), in each case, subject to guaranteed minimum and maximum payments and possible offsets for indemnification and other claims arising under the purchase agreement. During the three months ended June 30, 2015, the Company paid $1.1 million and issued 27,407 shares of common stock of the Company (approximately $0.3 million in value as of payment date) in payment of the 2014 REV Earn-out Payments. At PFS’ election, up to $0.2 million of the 2015 REV Earn-out Payments are payable in unregistered shares of common stock of the Company. As of June 30, 2015, the Company has recognized a total current liability of $1.7 million applicable to the 2015 REV Earn-out Payments which have a guaranteed minimum of $0.7 million and maximum of $1.8 million.

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

Cash and cash equivalents	$	765
Accounts receivable		1,753
Property and equipment		289
Identifiable intangibles		1,019
Other assets		16
Total assets acquired		3,842
Total liabilities assumed		655
Net assets acquired		3,187
Goodwill		2,756
Total purchase price	$	5,943

Purchase price for REV is as follows (in thousands):

Number of shares of common stock issued		27,407
Multiplied by PFSweb Inc.'s stock price	$	10.95
Share consideration for settlement of performance-based contingent payments	$	300
Aggregate cash payments		4,254
Performance-based contingent payments (based on fair value at acquisition date)		1,389
Total purchase price	$	5,943

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 $2.8 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 REV acquisition.

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

			June 30, 2015					Estimated
	Fair Value		Accumulated			Net Carrying		Useful Life
	at Acquisition		Amortization			Value		from Acquisition

Non-compete agreements	$	94	$	(37	)	$	57	1-3.5 years
Leasehold		45		(15	)		30	2.5 years
Customer relationships		880		(233	)		647	6 years
Total definite lived intangible assets	$	1,019	$	(285	)	$	734

Acquisition of LAL

On September 22, 2014, PFS acquired the outstanding capital stock of LAL, which provides digital agency services including strategy, branding, website design, visual design, copywriting, interactive development and support services primarily to manufacturers and retailers. LAL operates in the United States. Consideration paid for the shares included an initial $4.0 million cash payment and 54,604 unregistered shares of common stock of the Company (approximately $0.5 million in value as of acquisition date). The purchase agreement provides for future earn out payments (“LAL Earn-out Payments”) payable in 2015 and 2016 based on LAL’s achievement of certain 2014 and 2015 financial targets (the “2014 LAL Earn-out Payments” and “2015 LAL Earn-out Payments,” respectively), in each case, subject to a maximum payment and possible offsets for indemnification and other claims arising under the purchase agreement. During the three months ended June 30, 2015, the Company paid $1.0 million for the 2014 LAL Earn-out Payments. As of June 30, 2015, the Company has recognized a total current liability of $1.8 million applicable to the projected 2015 LAL Earn-out Payments with a maximum payment of $2.0 million. At PFS’ election, up to 25% of the 2015 LAL Earn-out Payments are payable in unregistered shares of common stock of the Company.

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

Cash	$	30
Accounts receivable, net		1,299
Property and equipment		253
Identifiable intangibles		1,290
Other assets		28
Total assets acquired		2,900
Total liabilities assumed		1,617
Net assets acquired		1,283
Goodwill		5,610
Total purchase price	$	6,893

Purchase price for LAL is as follows (in thousands, except share data):

Number of shares of common stock issued		54,604
Multiplied by PFSweb Inc.'s stock price	$	9.96
Share consideration	$	544
Aggregate cash payments		4,950
Performance-based contingent payments (based on fair value at acquisition date)		1,399
Total purchase price	$	6,893

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 $5.6 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.

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

			June 30, 2015					Estimated
	Fair Value		Accumulated			Net Carrying		Useful Life
	at Acquisition		Amortization			Value		from Acquisition

Non-compete agreements	$	150	$	(32	)	$	118	3.5 years
Trade name		150		(50	)		100	2.25 years
Customer relationships		990		(234	)		756	6 years
Total definite lived intangible assets	$	1,290	$	(316	)	$	974

Acquisition of Moda

On June 11, 2015, PFS 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 $0.3 million in value as of the acquisition date). The purchase agreement provides for (i) a further adjustment based on Moda’s shareholders’ equity balance as of the date of acquisition and (ii) future earn-out payments (“Moda Earn-out Payments”) payable in 2016 and 2017 based on Moda’s achievement of certain 2015 and 2016 financial targets, with no guaranteed minimum and an aggregate maximum each year of £500,000 (approximately $0.8 million), in each case, subject to possible offsets for indemnification and other claims arising under the purchase agreement. At PFS’ election, up to 25% of each of the 2015 and 2016 Moda Earn-out Payments are payable in restricted shares of common stock of the Company.

The transaction was accounted for using the purchase method of accounting for business combinations and, accordingly, the assets acquired and liabilities assumed, including a preliminary allocation of purchase price, and the results of operations of Moda have been included in the Company's consolidated financial statements since the date of acquisition. The following table summarizes the preliminary unaudited, estimated fair value of the tangible and intangible assets acquired and liabilities assumed. This allocation requires the significant use of estimates and is based on the information available to management at the time these financial statements were prepared. As the acquisition was only recently completed, the Company has not yet completed its assessment of the fair value of the tangible and intangible assets acquired, nor recorded the potentially related amortization expense applicable to such assets, and liabilities assumed. As such, the estimated purchase price in excess of net assets acquired and liabilities assumed has initially been recorded as goodwill and intangible assets. Goodwill is not deductible for tax purposes and will not be amortized but is subject to annual impairment tests using a fair-value-based approach. 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 unaudited estimated fair value of the tangible and intangible assets acquired and liabilities assumed (in thousands):

Cash and cash equivalents	$	126
Accounts receivable		335
Property and equipment		27
Other assets		23
Total assets acquired		511
Total liabilities assumed		542
Net liabilities assumed		(31	)
Goodwill and intangible assets		1,957
Total purchase price	$	1,926

The estimated purchase price for Moda is as follows (in thousands, except share data):

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 fair value at acquisition date)		686
Total purchase price	$	1,926

Pro Forma Information

The following table presents selected pro forma information, for comparative purposes, assuming the acquisitions of REV and LAL had occurred on January 1, 2014 (unaudited) and now include the impact of the acquisition related amortization of intangible assets (approximately $0.2 million per quarter), which were previously omitted (in thousands, except per share amounts):

	Three Months Ended			Six Months Ended
	June 30,			June 30,
	2014			2014
Total revenues	$	58,239		$	118,780
Net loss		(1,934	)		(3,938	)
Basic and diluted net loss per share		(0.12	)		(0.24	)

The unaudited pro forma information combines the historical unaudited consolidated results of the Company’s operations and REV’s and LAL’s operations for the three and six months ended June 30, 2014 giving effect to the acquisitions and related events as if they had been consummated on January 1, 2014. 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 REV and LAL during the period noted. Moda did not meet the significance test requirements in order to be included in the pro forma presentation above.

Definite Lived Intangible Asset Amortization

The Company recognized $0.2 million and $0.5 million of amortization expense, related to the REV and LAL definite lived intangible assets in selling, general and administrative expenses in three and six months ended June 30, 2015, respectively. The estimated amortization expense for each of the next five years is as follows (in thousands):

2015	$	951
2016		533
2017		345
2018		200
2019		138

Basis of Presentation

The interim consolidated financial statements as of June 30, 2015, and for the three and six months ended June 30, 2015 and 2014, 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 consolidated financial statements of the Company include all adjustments necessary for a fair presentation of the Company’s financial position as of June 30, 2015, its results of operations for the three and six months ended June 30, 2015 and 2014 and its cash flows for the six months ended June 30, 2015 and 2014. Results of the Company’s operations for interim periods may not be indicative of results for the full fiscal year.