Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. PFSWEB INC (1095315) 10-Q published on Aug 09, 2019 at 4:09 pm
Reporting Period: Jun 29, 2019
We account for leases in accordance with Accounting Standard Codification (“ASC”) No. 842 ("ASC 842"), Leases. Lease assets and liabilities are recognized at the commencement date of an arrangement where it is determined at inception that a lease exists. Lease assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. These assets and liabilities are initially recognized based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use an incremental borrowing rate based on the information available at the lease commencement date to discount payments to the present value. Some of these leases contain rent escalation clauses either fixed or adjusted periodically for inflation or market rates that are factored into our determination of lease payments. We also have variable lease payments that do not depend on a rate or index, primarily for items such as common area maintenance and real estate taxes, which are recorded as variable cost when incurred. The lease asset excludes incentives and initial direct costs incurred. Lease terms include options to extend or terminate the lease when it is reasonably certain that we will exercise that option.
Changes in costs to fulfill contract assets during the period decreased $0.7 million from December 31, 2018 to June 30, 2019, primarily due to an increase of approximately $2.6 million from new projects, offset by approximately $3.3 million of amortization and recognition of costs in the six months ended June 30, 2019. Costs to fulfill contract assets relate to deferred costs, which are included within other current assets and or other assets, and software development costs, which are included within property and equipment, in our condensed consolidated balance sheets.
Direct operating expenses increased by $0.4 million and $1.7 million for the three and six months ended June 30, 2019, respectively, compared to the corresponding periods in 2018. The increase was primarily due to increased sales and marketing costs and facility costs, as well as a higher provision for doubtful accounts due to a client bankruptcy, partially offset by certain personnel related and other cost reductions.
LiveArea Professional Services revenues for the three and six months ended June 30, 2019 decreased by $1.2 million and $4.4 million, respectively, compared to the corresponding periods in 2018. The decrease in revenues are primarily due to reduced technology services project activity, as well as client terminations. We expect this trend of lower period over period sales to continue for the remainder of 2019 as we work to rebuild the sales pipeline.
LiveArea Professional Services gross margin decreased to 44.5% from 47.1% in the three months ended June 30, 2019 and decreased to 44.6% from 49.4% in the six months ended June 30, 2019, compared to the corresponding periods of the prior year. The decrease in gross margin is primarily attributable to increased labor costs, including higher than expected costs incurred on certain client projects. The LiveArea Professional Services revenue and gross margin in the three and six months ended June 30, 2019, were partially impacted by increased monies earned on direct and indirect technology related product sales.