eCOSTs $7.5 million credit line, as well
as certain of its vendor trade payables. We currently expect that it may be necessary to provide
additional guarantees of certain eCOST vendor trade payables in the future.
Risks Related to Our PFS and Supplies Distributors Operating Segments
Our business is subject to the risk of customer and supplier concentration.
For the nine months ended
September 30, 2010, a consumer packaged goods
company, a technology company and a consumer products
company represented the source of approximately 12%, 10% and 9%, respectively, of our total service fee
revenue, excluding pass-through revenue and approximately 3%, 2% and 4%, respectively, of our total
consolidated revenue. For the nine months ended September 30,
2009 these three clients represented
0%, 16% and 11%, respectively, of our total service fee revenue, excluding pass-through revenue and
represented 0%, 3% and 3% of our total consolidated revenue,
respectively. PFS previously operated three distinct geographical contract
arrangements with the technology company which are aggregated in the service fee revenue
percentages reflected above. As of September 30, 2010, substantially all of the contracts with the
technology company expired in accordance with their terms and have not been renewed. The non-renewal of these contracts has had, and may continue to have, a
material adverse effect upon our business.
A substantial portion of our Supplies Distributors product revenue is generated by sales of
product purchased under master distributor agreements with IPS. These agreements are terminable at
will and no assurance can be given that IPS will continue the master distributor agreements with
Supplies Distributors. Supplies Distributors does not have its own sales force and relies upon IPS
sales force and product demand generation activities for its sale of IPS product. Discontinuance
of such activities would have a material adverse effect on Supplies Distributors business and our
overall financial condition.
Sales by Supplies Distributors to three customers accounted for, in the aggregate,
approximately 39% and 40% of Supplies Distributors total product revenue for the nine months ended
September 30, 2010 and 2009, respectively, (20% of our
consolidated net revenues in the nine month
period ended September 30, 2010 and 21% in the same period last year). The loss of any one or all of such customers, or non-payment of any material amount by
these or any other customer, are likely to have a material adverse effect upon Supplies
Risks Related to eCOST, our Online Discount Retailer Segment
Our business is subject to the risk of supplier concentration.
Our business is dependent on sales of Hewlett Packard (HP) and HP-related products, which
represented approximately 57% of eCOSTs net revenues (12% of our consolidated net revenues) in the
nine months ended September 30, 2010 and 45% of eCOSTs net revenues (11% of our consolidated net
revenues) in the comparable period of 2009. If our ability to purchase direct from HP is
terminated or restricted, or if the demand for HP and HP-related products declines, our business
will be materially adversely affected.
Risks Related to Our Stock
Our stock price could decline if a significant number of shares become available for sale.
As of September 30, 2010, we have an aggregate of 2.3 million stock options outstanding to
employees, directors and others with a weighted average exercise price of $4.29 per share. The
shares of common stock that may be issued upon exercise of these options may be resold into the
public market. Sales of substantial amounts of common stock in the public market as a result of the
exercise of these options, 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
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
ITEM 3. Defaults Upon Senior Securities