Commission File Number: 001-07120
HARTE HANKS, INC.
(Exact name of registrant as specified in its charter)
Delaware | 74-1677284 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification Number) |
2800 Wells Branch Parkway, Austin, Texas 78216
(Address of principal executive offices, including zipcode)
(512) 434-1100
(Registrant’s telephone number including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock | HRTH | OTCQX |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging“emerging growth company"company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
The number of shares outstanding of each of the registrant’sissuer’s classes of common stock as of October 15, 20172020 was 62,068,179 6,549,309 shares of common stock, all of one class.
TABLE OF CONTENTS
FORM 10-Q REPORT
For the Quarterly Period Ended September 30, 2017
| Page | |||||
(Unaudited) | |||||
Condensed Consolidated Balance Sheets — September 30, 2020 and December 31, 2019 | 3 | ||||
| 4 | |||||
| 5 | |||||
| 33 | |||||
| 33 | |||||
| 33 | |||||
Harte Hanks, Inc. and Subsidiaries Condensed Consolidated Balance Sheets
(Unaudited)
September 30, | December 31, | |||||||
In thousands, except per share and share amounts | 2020 | 2019 | ||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 29,296 | $ | 28,104 | ||||
| Restricted cash | 2,489 | 6,018 | ||||||
Accounts receivable (less allowance for doubtful accounts of $766 at September 30, 2020 and $666 at December 31, 2019) | 46,006 | 38,972 | ||||||
Contract assets | 400 | 805 | ||||||
Inventory | 54 | 354 | ||||||
Prepaid expenses | 2,848 | 3,300 | ||||||
Prepaid taxes and income tax receivable | 9,062 | 78 | ||||||
Other current assets | 1,490 | 1,670 | ||||||
Total current assets | 91,645 | 79,301 | ||||||
Property, plant and equipment (less accumulated depreciation of $74,572 at September 30, 2020 and $133,559 at December 31, 2019) | 5,080 | 8,323 | ||||||
Right-of-use assets | 14,408 | 18,817 | ||||||
Other assets | 3,529 | 3,761 | ||||||
Total assets | $ | 114,662 | $ | 110,202 | ||||
LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
Current liabilities | ||||||||
Accounts payable and accrued expenses | $ | 17,629 | $ | 16,917 | ||||
Accrued payroll and related expenses | 5,079 | 4,215 | ||||||
Deferred revenue and customer advances | 5,952 | 4,397 | ||||||
Customer postage and program deposits | 4,971 | 9,767 | ||||||
Other current liabilities | 2,921 | 2,619 | ||||||
| Short-term debt | 6,681 | — | ||||||
Short-term lease liabilities | 6,803 | 7,616 | ||||||
Total current liabilities | 50,036 | 45,531 | ||||||
Long-term debt | 20,419 | 18,700 | ||||||
Pensions | 68,300 | 70,000 | ||||||
Deferred tax liabilities, net | 77 | 244 | ||||||
Long-term lease liabilities | 10,827 | 13,078 | ||||||
Other long-term liabilities | 4,240 | 2,609 | ||||||
Total liabilities | 153,899 | 150,162 | ||||||
Preferred Stock, $1 par value, 1,000,000 shares authorized; 9,926 shares of Series A Convertible Preferred Stock, issued and outstanding | 9,723 | 9,723 | ||||||
Stockholders’ deficit | ||||||||
Common stock, $1 par value, 25,000,000 shares authorized;12,121,484 shares issued, 6,549,309 and 6,302,936 shares outstanding at September 30, 2020 and December 31, 2019, respectively | 12,121 | 12,121 | ||||||
Additional paid-in capital | 393,545 | 447,022 | ||||||
Retained earnings | 795,079 | 797,817 | ||||||
Less treasury stock, 5,572,175 shares at cost at September 30, 2020 and 5,818,548 shares at cost at December 31, 2019 | (1,189,465 | ) | (1,243,509 | ) | ||||
Accumulated other comprehensive loss | (60,240 | ) | (63,134 | ) | ||||
Total stockholders’ deficit | (48,960 | ) | (49,683 | ) | ||||
Total liabilities, Preferred Stock and stockholders’ deficit | $ | 114,662 | $ | 110,202 | ||||
| In thousands, except per share and share amounts | September 30, 2017 | December 31, 2016 | ||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 11,403 | $ | 46,005 | ||||
| Accounts receivable (less allowance for doubtful accounts of $866 at September 30, 2017 and $1,028 at December 31, 2016) | 90,687 | 88,813 | ||||||
| Inventory | 796 | 838 | ||||||
| Prepaid expenses | 5,372 | 5,944 | ||||||
| Prepaid taxes and income tax receivable | 8,836 | 2,895 | ||||||
| Other current assets | 4,424 | 4,934 | ||||||
| Total current assets | 121,518 | 149,429 | ||||||
| Property, plant and equipment (less accumulated depreciation of $137,176 at September 30, 2017 and $141,388 at December 31, 2016) | 21,078 | 23,924 | ||||||
| Goodwill | 34,510 | 34,510 | ||||||
| Other intangible assets (less accumulated amortization of $2,015 at September 30, 2017 and $1,471 at December 31, 2016) | 2,758 | 3,302 | ||||||
| Other assets | 2,877 | 2,272 | ||||||
| Total assets | $ | 182,741 | $ | 213,437 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | 42,458 | $ | 45,563 | ||||
| Accrued payroll and related expenses | 10,332 | 9,990 | ||||||
| Deferred revenue and customer advances | 6,889 | 6,505 | ||||||
| Income taxes payable | 655 | 30,436 | ||||||
| Customer postage and program deposits | 6,961 | 7,985 | ||||||
| Other current liabilities | 4,225 | 4,188 | ||||||
| Total current liabilities | 71,520 | 104,667 | ||||||
| Long-term debt | 12,000 | — | ||||||
| Pensions | 59,723 | 60,836 | ||||||
| Contingent consideration | 32,847 | 29,725 | ||||||
| Deferred tax liabilities, net | 9,893 | 11,044 | ||||||
| Other long-term liabilities | 3,154 | 4,509 | ||||||
| Total liabilities | 189,137 | 210,781 | ||||||
| Stockholders’ (deficit) equity | ||||||||
| Common stock, $1 par value, 250,000,000 shares authorized 120,746,615 shares issued at September 30, 2017 and 120,436,735 shares issued at December 31, 2016 | 120,747 | 120,437 | ||||||
| Additional paid-in capital | 348,159 | 350,245 | ||||||
| Retained earnings | 823,924 | 837,316 | ||||||
| Less treasury stock, 58,678,436 shares at cost at September 30, 2017 and 58,791,630 shares at cost at December 31, 2016 | (1,254,889 | ) | (1,259,164 | ) | ||||
| Accumulated other comprehensive loss | (44,337 | ) | (46,178 | ) | ||||
| Total stockholders’ (deficit) equity | (6,396 | ) | 2,656 | |||||
| Total liabilities and stockholders’ equity | $ | 182,741 | $ | 213,437 | ||||
See Accompanying Notes to Condensed Consolidated Financial Statements
Harte Hanks, Inc. and Subsidiaries Condensed Consolidated Statements of Comprehensive LossIncome (Loss)
(Unaudited)
Three Months Ended September 30, | ||||||||
In thousands, except per share amounts | 2020 | 2019 | ||||||
Operating revenues | $ | 47,702 | $ | 51,414 | ||||
Operating expenses | ||||||||
Labor | 27,041 | 28,589 | ||||||
Production and distribution | 13,176 | 17,314 | ||||||
Advertising, selling, general and administrative | 4,540 | 5,623 | ||||||
Restructuring expense | 1,419 | 3,080 | ||||||
Depreciation expense | 741 | 1,283 | ||||||
Total operating expenses | 46,917 | 55,889 | ||||||
Operating income (loss) | 785 | (4,475 | ) | |||||
Other expenses (income), net | ||||||||
Interest expense, net | 274 | 330 | ||||||
Other, net | 2,185 | 1,081 | ||||||
Total other expenses, net | 2,459 | 1,411 | ||||||
Loss before income taxes | (1,674 | ) | (5,886 | ) | ||||
Income tax (benefit) expense | (53 | ) | 102 | |||||
Net loss | $ | (1,621 | ) | $ | (5,988 | ) | ||
Less: Preferred Stock dividends | 125 | 125 | ||||||
Loss attributable to common stockholders | $ | (1,746 | ) | $ | (6,113 | ) | ||
Loss per common share | ||||||||
| Basic | $ | (0.27 | ) | $ | (0.97 | ) | ||
| Diluted | $ | (0.27 | ) | $ | (0.97 | ) | ||
Weighted average shares used to compute loss per share attributable to common shares | ||||||||
Basic | 6,523 | 6,291 | ||||||
Diluted | 6,523 | 6,291 | ||||||
Comprehensive income (loss), net of tax: | ||||||||
Net loss | $ | (1,621 | ) | $ | (5,988 | ) | ||
Adjustment to pension liability, net: | 609 | 549 | ||||||
Foreign currency translation adjustment | 1,129 | (660 | ) | |||||
Total other comprehensive income (loss), net of tax | $ | 1,738 | $ | (111 | ) | |||
Comprehensive income (loss) | $ | 117 | $ | (6,099 | ) | |||
| Three Months Ended September 30, | ||||||||
| In thousands, except per share amounts | 2017 | 2016 | ||||||
| Operating revenues | $ | 94,424 | $ | 97,425 | ||||
| Operating expenses | ||||||||
| Labor | 55,047 | 59,484 | ||||||
| Production and distribution | 26,726 | 27,275 | ||||||
| Advertising, selling, general and administrative | 9,145 | 11,586 | ||||||
| Depreciation, software and intangible asset amortization | 2,556 | 3,166 | ||||||
| Total operating expenses | 93,474 | 101,511 | ||||||
| Operating income (loss) | 950 | (4,086 | ) | |||||
| Other expenses | ||||||||
| Interest expense, net | 1,285 | 704 | ||||||
| Other, net | 1,763 | 596 | ||||||
| Total other expenses | 3,048 | 1,300 | ||||||
| Loss from continuing operations before income taxes | (2,098 | ) | (5,386 | ) | ||||
| Income tax expense (benefit) | 382 | (1,101 | ) | |||||
| Loss from continuing operations | $ | (2,480 | ) | $ | (4,285 | ) | ||
| Income from discontinued operations, net of income taxes | $ | — | $ | 1,244 | ||||
| Net loss | $ | (2,480 | ) | $ | (3,041 | ) | ||
| Basic earnings (loss) per common share | ||||||||
| Continuing operations | $ | (0.04 | ) | $ | (0.07 | ) | ||
| Discontinued operations | — | 0.02 | ||||||
| Basic loss per common share | $ | (0.04 | ) | $ | (0.05 | ) | ||
| Weighted-average common shares outstanding | 62,012 | 61,543 | ||||||
| Diluted earnings (loss) per common share | ||||||||
| Continuing operations | $ | (0.04 | ) | $ | (0.07 | ) | ||
| Discontinued operations | — | 0.02 | ||||||
| Diluted loss per common share | $ | (0.04 | ) | $ | (0.05 | ) | ||
| Weighted-average common and common equivalent shares outstanding | 62,012 | 61,543 | ||||||
| Net loss | $ | (2,480 | ) | $ | (3,041 | ) | ||
| Other comprehensive income (loss), net of tax | ||||||||
| Adjustment to pension liability | $ | 413 | $ | 358 | ||||
| Foreign currency translation adjustment | 33 | (437 | ) | |||||
| Other comprehensive income (loss), net of tax | 446 | (79 | ) | |||||
| Comprehensive loss | $ | (2,034 | ) | $ | (3,120 | ) | ||
See Accompanying Notes to Condensed Consolidated Financial Statements
Harte Hanks, Inc. and Subsidiaries Condensed Consolidated Statements of Comprehensive LossIncome (Loss)
(Unaudited)
Nine Months Ended September 30, | ||||||||
In thousands, except per share amounts | 2020 | 2019 | ||||||
Operating revenues | $ | 129,825 | $ | 165,250 | ||||
Operating expenses | ||||||||
Labor | 76,601 | 94,034 | ||||||
Production and distribution | 36,940 | 58,130 | ||||||
Advertising, selling, general and administrative | 15,582 | 20,225 | ||||||
Restructuring expense | 8,005 | 10,867 | ||||||
Depreciation expense | 2,905 | 4,022 | ||||||
Total operating expenses | 140,033 | 187,278 | ||||||
Operating loss | (10,208 | ) | (22,028 | ) | ||||
Other expenses (income), net | ||||||||
Interest expense, net | 882 | 938 | ||||||
Gain on sale from 3Q Digital | — | (5,000 | ) | |||||
Other, net | 4,511 | 4,512 | ||||||
Total other expenses, net | 5,393 | 450 | ||||||
Loss before income taxes | (15,601 | ) | (22,478 | ) | ||||
Income tax (benefit) expense | (12,863 | ) | 840 | |||||
Net loss | (2,738 | ) | (23,318 | ) | ||||
Less: Preferred stock dividends | 372 | 371 | ||||||
Loss attributable to common stockholders | $ | (3,110 | ) | $ | (23,689 | ) | ||
Loss per common share | ||||||||
Basic | $ | (0.48 | ) | $ | (3.77 | ) | ||
Diluted | $ | (0.48 | ) | $ | (3.77 | ) | ||
Weighted-average shares used to compute loss per share attributable to common shares | ||||||||
Basic | 6,432 | 6,277 | ||||||
Diluted | 6,432 | 6,277 | ||||||
Comprehensive income (loss) | ||||||||
Net loss | $ | (2,738 | ) | $ | (23,318 | ) | ||
Adjustment to pension liability | 1,827 | 1,648 | ||||||
Foreign currency translation adjustment | 1,067 | (311 | ) | |||||
Adoption of ASU 2018-02 | — | (11,355 | ) | |||||
Total other comprehensive income (loss), net of tax | $ | 2,894 | $ | (10,018 | ) | |||
Comprehensive income (loss) | $ | 156 | $ | (33,336 | ) | |||
| Nine Months Ended September 30, | ||||||||
| In thousands, except per share amounts | 2017 | 2016 | ||||||
| Operating revenues | $ | 284,040 | $ | 294,305 | ||||
| Operating expenses | ||||||||
| Labor | 172,500 | 184,480 | ||||||
| Production and distribution | 80,125 | 84,581 | ||||||
| Advertising, selling, general and administrative | 30,431 | 35,162 | ||||||
| Depreciation, software and intangible asset amortization | 8,166 | 9,403 | ||||||
| Total operating expenses | 291,222 | 313,626 | ||||||
| Operating loss | (7,182 | ) | (19,321 | ) | ||||
| Other expenses | ||||||||
| Interest expense, net | 3,543 | 2,399 | ||||||
| Other, net | 5,087 | 944 | ||||||
| Total other expenses | 8,630 | 3,343 | ||||||
| Loss from continuing operations before income taxes | (15,812 | ) | (22,664 | ) | ||||
| Income tax benefit | (3,293 | ) | (5,778 | ) | ||||
| Loss from continuing operations | $ | (12,519 | ) | $ | (16,886 | ) | ||
| Income from discontinued operations, net of income taxes | $ | — | $ | 3,980 | ||||
| Net loss | $ | (12,519 | ) | $ | (12,906 | ) | ||
| Basic earnings (loss) per common share | ||||||||
| Continuing operations | $ | (0.20 | ) | $ | (0.27 | ) | ||
| Discontinued operations | — | 0.06 | ||||||
| Basic loss per common share | $ | (0.20 | ) | $ | (0.21 | ) | ||
| Weighted-average common shares outstanding | 61,866 | 61,445 | ||||||
| Diluted earnings (loss) per common share | ||||||||
| Continuing operations | $ | (0.20 | ) | $ | (0.27 | ) | ||
| Discontinued operations | — | 0.06 | ||||||
| Diluted loss per common share | $ | (0.20 | ) | $ | (0.21 | ) | ||
| Weighted-average common and common equivalent shares outstanding | 61,866 | 61,445 | ||||||
| Net loss | $ | (12,519 | ) | $ | (12,906 | ) | ||
| Declared dividends per share | $ | — | $ | 0.09 | ||||
| Other comprehensive income (loss), net of tax | ||||||||
| Adjustment to pension liability | $ | 1,164 | $ | 1,238 | ||||
| Foreign currency translation adjustment | 677 | (1,856 | ) | |||||
| Other comprehensive income (loss), net of tax | 1,841 | (618 | ) | |||||
| Comprehensive loss | $ | (10,678 | ) | $ | (13,524 | ) | ||
See Accompanying Notes to Condensed Consolidated Financial Statements
| Nine Months Ended September 30, | ||||||||
| In thousands | 2017 | 2016 | ||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | (12,519 | ) | $ | (12,906 | ) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities | ||||||||
| Income from discontinued operations, net of tax | — | (3,980 | ) | |||||
| Depreciation and software amortization | 7,622 | 8,787 | ||||||
| Intangible asset amortization | 544 | 616 | ||||||
| Stock-based compensation | 1,818 | 2,373 | ||||||
| Net pension cost (payments) | 827 | 297 | ||||||
| Interest accretion on contingent consideration | 3,122 | 1,730 | ||||||
| Adjustments to fair value of contingent consideration | — | (247 | ) | |||||
| Amortization of debt issuance costs | — | 495 | ||||||
| Deferred income taxes | (1,917 | ) | (3,243 | ) | ||||
| Loss on disposal of assets | 135 | — | ||||||
| Other, net | — | 28 | ||||||
| Changes in assets and liabilities, net of acquisitions: | ||||||||
| Decrease (increase) in accounts receivable, net | (1,874 | ) | 25,979 | |||||
| Decrease (increase) in inventory | 42 | (58 | ) | |||||
| Decrease (increase) in prepaid expenses and other current assets | (4,864 | ) | 2,887 | |||||
| Increase (decrease) in accounts payable | (3,840 | ) | 1,662 | |||||
| Decrease in other accrued expenses and liabilities | (31,062 | ) | (2,667 | ) | ||||
| Net cash provided by (used in) continuing operations | (41,966 | ) | 21,753 | |||||
| Net cash provided by discontinued operations | — | 4,774 | ||||||
| Net cash provided by (used in) operating activities | (41,966 | ) | 26,527 | |||||
| Cash flows from investing activities | ||||||||
| Acquisitions, net of cash acquired | — | (3,500 | ) | |||||
| Purchases of property, plant and equipment | (4,112 | ) | (6,870 | ) | ||||
| Proceeds from sale of property, plant and equipment | 18 | 280 | ||||||
| Net cash used in investing activities within continuing operations | (4,094 | ) | (10,090 | ) | ||||
| Net cash used in investing activities within discontinued operations | — | (2,431 | ) | |||||
| Net cash used in investing activities | (4,094 | ) | (12,521 | ) | ||||
| Cash flows from financing activities | ||||||||
| Borrowings | 27,000 | 160,570 | ||||||
| Repayment of borrowings | (15,211 | ) | (174,828 | ) | ||||
| Debt financing costs | (515 | ) | (2,189 | ) | ||||
| Issuance of common stock | (110 | ) | (229 | ) | ||||
| Issuance of treasury stock | — | 130 | ||||||
| Payment of capital leases | (383 | ) | — | |||||
| Dividends paid | — | (5,285 | ) | |||||
| Net cash provided by (used in) financing activities of continuing operations | 10,781 | (21,831 | ) | |||||
| Effect of exchange rate changes on cash and cash equivalents | 677 | (1,856 | ) | |||||
| Net decrease in cash and cash equivalents | (34,602 | ) | (9,681 | ) | ||||
| Cash and cash equivalents at beginning of period | 46,005 | 16,564 | ||||||
| Cash and cash equivalents at end of period | $ | 11,403 | $ | 6,883 | ||||
| Supplemental disclosures | ||||||||
| Cash paid for interest | $ | 172 | $ | 4,252 | ||||
| Cash paid for income taxes, net of refunds | $ | 34,723 | $ | 2,248 | ||||
| Non-cash investing and financing activities | ||||||||
| Purchases of property, plant and equipment included in accounts payable | $ | 1,174 | $ | 264 | ||||
| New capital lease obligations | $ | 58 | $ | 274 | ||||
Harte Hanks, Inc. and Subsidiaries Condensed Consolidated Statements of Changes in EquityStockholders' Deficit
(Unaudited)
Accumulated | ||||||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||||||
Preferred | Common | Paid-in | Retained | Treasury | Comprehensive | Stockholders’ | ||||||||||||||||||||||
In thousands | Stock | Stock | Capital | Earnings | Stock | Loss | Deficit | |||||||||||||||||||||
Balance at December 31, 2018 | $ | 9,723 | $ | 12,115 | $ | 453,868 | $ | 812,704 | $ | (1,251,388 | ) | $ | (46,483 | ) | $ | (19,184 | ) | |||||||||||
Cumulative effect of accounting change | — | — | — | 11,377 | — | (11,355 | ) | 22 | ||||||||||||||||||||
Stock-based compensation | — | — | 151 | — | — | — | 151 | |||||||||||||||||||||
Treasury stock issued | — | — | (1,968 | ) | — | 1,984 | — | 16 | ||||||||||||||||||||
Net loss | — | — | — | (13,527 | ) | — | — | (13,527 | ) | |||||||||||||||||||
Other comprehensive income | — | — | — | — | — | 522 | 522 | |||||||||||||||||||||
Balance at March 31, 2019 | $ | 9,723 | $ | 12,115 | $ | 452,051 | $ | 810,554 | $ | (1,249,404 | ) | $ | (57,316 | ) | (32,000 | ) | ||||||||||||
| Stock Option activities | — | 6 | (8 | ) | — | — | — | (2 | ) | |||||||||||||||||||
| Stock-based compensation | — | — | 239 | — | — | — | 239 | |||||||||||||||||||||
| Treasury stock issued | — | — | (345 | ) | — | 343 | — | (2 | ) | |||||||||||||||||||
| Net loss | — | — | — | (3,803 | ) | — | — | (3,803 | ) | |||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | 926 | 926 | |||||||||||||||||||||
| Balance at June 30, 2019 | $ | 9,723 | $ | 12,121 | $ | 451,937 | $ | 806,751 | $ | (1,249,061 | ) | $ | (56,390 | ) | $ | (34,642 | ) | |||||||||||
| Stock-based compensation | — | — | 312 | — | — | — | 312 | |||||||||||||||||||||
| Treasury stock issued | — | — | (5,005 | ) | — | 5,005 | — | — | ||||||||||||||||||||
| Net loss | — | — | — | (5,988 | ) | — | — | (5,988 | ) | |||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | (111 | ) | (111 | ) | |||||||||||||||||||
| Balance at September 30, 2019 | $ | 9,723 | $ | 12,121 | $ | 447,244 | $ | 800,763 | $ | (1,244,056 | ) | $ | (56,501 | ) | $ | (40,429 | ) | |||||||||||
Accumulated | ||||||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||||||
Preferred | Common | Paid-in | Retained | Treasury | Comprehensive | Stockholders’ | ||||||||||||||||||||||
In thousands | Stock | Stock | Capital | Earnings | Stock | Loss | Deficit | |||||||||||||||||||||
Balance at December 31, 2019 | $ | 9,723 | $ | 12,121 | $ | 447,022 | $ | 797,817 | $ | (1,243,509 | ) | $ | (63,134 | ) | $ | (49,683 | ) | |||||||||||
Stock-based compensation | — | — | 223 | — | — | — | 223 | |||||||||||||||||||||
Treasury stock issued | — | — | (29,667 | ) | — | 29,667 | — | — | ||||||||||||||||||||
Net income | — | — | — | 5,118 | — | — | 5,118 | |||||||||||||||||||||
Other comprehensive income | — | — | — | — | — | 51 | 51 | |||||||||||||||||||||
Balance at March 31, 2020 | $ | 9,723 | $ | 12,121 | $ | 417,578 | $ | 802,935 | $ | (1,213,842 | ) | $ | (63,083 | ) | $ | (44,291 | ) | |||||||||||
| Stock-based compensation | — | — | 81 | — | — | 81 | ||||||||||||||||||||||
| Treasury stock issued | — | — | (7,416 | ) | — | 7,416 | — | — | ||||||||||||||||||||
| Net loss | — | — | — | (6,235 | ) | — | — | (6,235 | ) | |||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | 1,105 | 1,105 | |||||||||||||||||||||
| Balance at June 30, 2020 | $ | 9,723 | $ | 12,121 | $ | 410,243 | $ | 796,700 | $ | (1,206,426 | ) | $ | (61,978 | ) | $ | (49,340 | ) | |||||||||||
| Stock-based compensation | — | — | 277 | — | — | 277 | ||||||||||||||||||||||
| Treasury stock issued | — | — | (16,975 | ) | — | 16,961 | — | (14 | ) | |||||||||||||||||||
| Net loss | — | — | — | (1,621 | ) | — | — | (1,621 | ) | |||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | 1,738 | 1,738 | |||||||||||||||||||||
| Balance at September 30, 2020 | $ | 9,723 | $ | 12,121 | $ | 393,545 | $ | 795,079 | $ | (1,189,465 | ) | $ | (60,240 | ) | $ | (48,960 | ) | |||||||||||
| In thousands, except per share amounts | Common Stock | Additional Paid-in Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | Total Stockholders’ Equity | ||||||||||||||||||
| Balance at December 31, 2015 | $ | 120,147 | $ | 353,050 | $ | 973,538 | $ | (1,262,859 | ) | $ | (43,560 | ) | $ | 140,316 | ||||||||||
| Exercise of stock options and release of unvested shares | 284 | (284 | ) | — | (229 | ) | — | (229 | ) | |||||||||||||||
| Net tax effect of stock options exercised and release of unvested shares | — | (1,091 | ) | — | — | — | (1,091 | ) | ||||||||||||||||
| Stock-based compensation | — | 2,241 | — | — | — | 2,241 | ||||||||||||||||||
| Dividends paid ($0.085 per share) | — | — | (5,285 | ) | — | — | (5,285 | ) | ||||||||||||||||
| Treasury stock issued | — | (2,905 | ) | — | 3,035 | — | 130 | |||||||||||||||||
| Net loss | — | — | (12,906 | ) | — | — | (12,906 | ) | ||||||||||||||||
| Other comprehensive loss | — | — | — | — | (618 | ) | (618 | ) | ||||||||||||||||
| Balance at September 30, 2016 | $ | 120,431 | $ | 351,011 | $ | 955,347 | $ | (1,260,053 | ) | $ | (44,178 | ) | $ | 122,558 | ||||||||||
| In thousands, except per share amounts | Common Stock | Additional Paid-in Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | Total Stockholders’ Deficit | ||||||||||||||||||
| Balance at December 31, 2016 | $ | 120,437 | $ | 350,245 | $ | 837,316 | $ | (1,259,164 | ) | $ | (46,178 | ) | $ | 2,656 | ||||||||||
| Cumulative effect of accounting change | — | 709 | (873 | ) | — | — | (164 | ) | ||||||||||||||||
| Exercise of stock options and release of unvested shares | 310 | (310 | ) | — | (110 | ) | — | (110 | ) | |||||||||||||||
| Stock-based compensation | — | 1,760 | — | — | — | 1,760 | ||||||||||||||||||
| Treasury stock issued | — | (4,245 | ) | — | 4,385 | — | 140 | |||||||||||||||||
| Net loss | — | — | (12,519 | ) | — | — | (12,519 | ) | ||||||||||||||||
| Other comprehensive income | — | — | — | — | 1,841 | 1,841 | ||||||||||||||||||
| Balance at September 30, 2017 | $ | 120,747 | $ | 348,159 | $ | 823,924 | $ | (1,254,889 | ) | $ | (44,337 | ) | $ | (6,396 | ) | |||||||||
See Accompanying Notes to Condensed Consolidated Financial Statements
Harte Hanks, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30, | ||||||||
In thousands | 2020 | 2019 | ||||||
Cash flows from operating activities | ||||||||
Net loss | $ | (2,738 | ) | $ | (23,318 | ) | ||
Adjustments to reconcile net loss to net cash (used in) provided by operating activities | ||||||||
Depreciation expense | 2,905 | 4,022 | ||||||
Restructuring | 3,113 | 5,812 | ||||||
Stock-based compensation | 590 | 739 | ||||||
Net pension cost | 736 | 1,501 | ||||||
Deferred income taxes | (776 | ) | 426 | |||||
Changes in assets and liabilities: | ||||||||
(Increase) decrease in accounts receivable, net and contract assets | (6,752 | ) | 15,039 | |||||
Decrease in inventory | 300 | 41 | ||||||
(Increase) decrease in prepaid expenses, income tax receivable and other assets | (7,603 | ) | 20,131 | |||||
Decrease (increase) in accounts payable and accrued expenses | 692 | (12,591 | ) | |||||
Increase in accrued payroll, deferred revenue, lease liabilities and other long-term liabilities | (1,900 | ) | (2,427 | ) | ||||
Net cash (used in) provided by operating activities | (11,433 | ) | 9,375 | |||||
| Cash flows from investing activities | ||||||||
Purchases of property, plant and equipment | (1,374 | ) | (1,655 | ) | ||||
Proceeds from sale of property, plant and equipment | 1,891 | 15 | ||||||
Net cash provided by (used in) investing activities | 517 | (1,640 | ) | |||||
Cash flows from financing activities | ||||||||
Borrowings | 10,000 | 4,500 | ||||||
| Repayment of borrowings | (1,600 | ) | — | |||||
Debt financing costs | (517 | ) | (477 | ) | ||||
| Issuance of common stock | — | (2 | ) | |||||
Issuance of treasury stock | (14 | ) | 14 | |||||
Payment of finance leases | (357 | ) | (603 | ) | ||||
Net cash provided by financing activities | 7,512 | 3,432 | ||||||
Effect of exchange rate changes on cash, cash equivalents and restricted cash | 1,067 | (311 | ) | |||||
Net (decrease) increase in cash and cash equivalents and restricted cash | (2,337 | ) | 10,856 | |||||
Cash and cash equivalents and restricted cash at beginning of period | 34,122 | 20,882 | ||||||
Cash and cash equivalents and restricted cash at end of period | $ | 31,785 | $ | 31,738 | ||||
Supplemental disclosures | ||||||||
Cash paid for interest | $ | 547 | $ | 643 | ||||
Cash received for income taxes, net of payments | $ | 3,295 | $ | 19,329 | ||||
Non-cash investing and financing activities | ||||||||
Purchases of property, plant and equipment included in accounts payable | $ | 1,651 | $ | 489 | ||||
| Proceeds from sale of property, plant and equipment and inventory included in accounts receivable | $ | 302 | — | |||||
See Accompanying Notes to Condensed Consolidated Financial Statements
Harte Hanks, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note A — Basis- Overview and Significant Accounting Policies
Background
Harte Hanks, Inc., together with its subsidiaries (“Harte Hanks,” “Company”, “we,” “our,” or “us”) is a purveyor of Presentation
The Company operates as one reportable segment. Our Chief Executive Officer is our chief operating decision maker. He reviews our operating results on an aggregate basis for purposes of allocating resources and evaluating financial performance.
The Company is closely monitoring the impact of the 2019 novel coronavirus (“COVID-19”) on all aspects of its business. In connection with the pandemic, some of our customers have reduced the amount of work we provide to them while other customers have requested accommodations including extensions of payment or restructuring of agreements. In addition, some of our customers have declared bankruptcy and we expect additional customers to file for bankruptcy in the coming months. We have also seen a number of wins for our contact centers solutions services as well as increased volume for existing customers as a result of the environment caused by the pandemic including an increased need for contact center services. While the COVID-19 pandemic has not had a material adverse impact on the Company’s operations to date, the pandemic has caused significant volatility in the global markets and has caused many companies to slow production or find alternative means for employees to perform their work. It is possible that the COVID-19 pandemic, the measures taken by governments around the globe, which as a result of increasing infection rates have become more restrictive, and the resulting economic impact may materially and adversely affect the Company’s results of operations, cash flows and financial position as well as the financial stability of its customers. The COVID-19 pandemic may also exacerbate other risks discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, which could materially affect our business, financial condition, or future results. Refer to “Item 1A. Risk Factors” in this Quarterly Report on Form 10-Q for a further discussion on COVID-19 and the risks the Company currently faces.
Related Party Transactions
From 2016 until October 2020, we conducted business with Wipro LLC (“Wipro”), whereby Wipro provided us with a variety of technology-related services. We have since terminated all service agreements.
Effective January 30, 2018, Wipro became a related party when it purchased 9,926 shares of our Series A Preferred Stock (which are convertible at Wipro’s option into 1,001,614 shares, or 16% of our common stock as of January 30, 2018), for aggregate consideration of $9.9 million. For information pertaining to the Company’s Series A Preferred Stock, See Note E, Convertible Preferred Stock.
In the third quarter of 2019, we entered into a business relationship with Snap Kitchen, the founder of which is a 9% owner of Harte Hanks. We recorded $164,000 of revenue earned from Snap Kitchen in the nine months ended September 30, 2020.
Accounting Principles
Our unaudited interim condensed consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management, the unaudited interim condensed consolidated financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with information included in the Harte Hanks Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (the “ 2019 10-K”) filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 19, 2020.
Consolidation
The accompanying unaudited Condensed Consolidated Financial Statementsinterim condensed consolidated financial statements include the accounts of Harte Hanks, Inc. and subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. As used in this report, the terms “Harte Hanks,” “the company,” “we,” “us,” or “our” may refer to Harte Hanks, Inc., one or more
Interim Financial Information
The condensed consolidated financial statements have been prepared in accordance with United States Generally Accepted Accounting Principles ("U.S. GAAP")GAAP for interim financial information and with the instructions to Form 10-Q and Rule 10-018-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. The information included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2016.
Use of Estimates
The preparation of condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Actual results and outcomes could differ from those estimates and assumptions. Such estimates include, but are not limited to, estimates related to lease accounting; pension accounting; fair value for purposes of assessing goodwill, long-lived assets, and intangible assets for impairment; income taxes; stock-based compensation; and contingencies. On an ongoing basis, management reviews its estimates based on currently available information. Changes in facts and circumstances could result in revised estimates and assumptions.
Operating Expense Presentation in Condensed Consolidated Statements of Comprehensive Loss
The “Labor” line in the Condensed Consolidated Statements of Comprehensive LossIncome (Loss) includes all employee payroll and benefits costs, including stock-based compensation, along with temporary labor costs. The “Production and distribution” and “Advertising, selling, general and administrative” lines do not include labor, depreciation, or amortization.amortization expense.
Revenue Recognition
We recognize revenue upon the transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to be entitled to receive in exchange for such products or services based on the relevant contract. We apply the following five-step revenue recognition model:
Identification of the contract, or contracts, with a customer
Identification of the performance obligations in the contract
Determination of the transaction price
Allocation of the transaction price to the performance obligations in the contract
Recognition of revenue when (or as) we satisfy the performance obligation
Certain client programs provide for adjustments to billings based upon whether we achieve certain performance criteria. In these circumstances, revenue is recognized when the foregoing conditions are met. We record revenue net of any taxes collected from customers and subsequently remitted to governmental authorities. Any payments received in advance of the performance of services or delivery of the product are recorded as deferred revenue until such time as the services are performed or the product is delivered. Costs incurred for search engine marketing solutions payable to the engine host and postage costs of mailings are billed to our clients and are not directly reflected in our revenue.
Revenue from agency and digital services, direct mail, logistics, fulfillment and contact center is recognized as the work is performed. Fees for these services are determined by the terms set forth in each contract. These fees are typically set at a fixed price or rate by transaction occurrence, service provided, time spent, or product delivered.
For arrangements requiring design and build of a database, revenue is not recognized until client acceptance occurs. Up-front fees billed during the setup phase for these arrangements are deferred and direct build costs are capitalized. Pricing for these types of arrangements is typically based on a fixed price determined in the contract. Revenue from other database marketing solutions is recognized ratably over the contractual service period. Pricing for these services is typically based on a fixed price per month or per contract.
Fair Value of Financial Instruments
FASB ASC 820, Fair Value Measurements and Disclosures, (“ASC 820”) defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a fair value hierarchy that prioritizes the inputs used in valuation methodologies into three levels:
Level 1 | Quoted prices in active markets for identical assets or liabilities. |
Level 2 | Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
Level 3 | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
Because of their maturities and/or variable interest rates, certain financial instruments have fair values approximating their carrying values. These instruments include cash and cash equivalents and restricted cash, accounts receivable, trade payable, and long-term debt.
Leases
We determine if an arrangement is a lease at its inception. Operating and finance leases are included in the lease right-of-use (“ROU”) assets and in the current portion and long-term portion of lease obligations on our condensed consolidated balance sheets. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date of each lease based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit interest rate, we use our incremental borrowing rate based on the information available at the commencement date of each lease to determine the present value of lease payments. The operating lease ROU assets also include any lease payments made and exclude lease incentives. Our lease terms may include options to extend or terminate the lease, which are included in the lease ROU assets when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. We have lease agreements with lease and non-lease components, which are generally accounted for separately. For certain real estate leases, we account for the lease and non-lease components as a single lease component.
During the nine months ended September 30, 2020, we modified the terms of some of our existing leases. We accounted for such changes as lease modifications under ASC Topic 842 which resulted in the re-measurement of the related ROU assets and lease liabilities.
See Note B, — Recent Accounting Pronouncements - Recently adopted accounting pronouncements.
Note B - Recent Accounting Pronouncements
Recently issued accounting pronouncements not yet adopted
In May 2017,December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU 2019-12, which enhances and simplifies various aspects of the income tax accounting guidance, including requirements such as a tax basis step-up in goodwill obtained in a transaction that is not a business combination, ownership changes in investments, and interim-period accounting for enacted changes in tax law. The standard will be effective for us in the fiscal year 2021, although early adoption is permitted. We have not elected early adoption and we do not expect that the adoption of this accounting standard update (“ASU”) will have a significant impact on our condensed consolidated financial statements.
In August 2018, the FASB issued ASU 2017-09,
Recently adopted accounting pronouncements
Reference Rate Reform
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848) – Facilitation of the Effects of Reference Rate Reform on Financial Reporting Summary”. This ASU provides clarifiedtemporary optional guidance on applying modificationto ease the potential burden in accounting to changesfor reference rate reform. London Inter-bank Offered Rate (“LIBOR”) and other inter-bank offered rates are widely used benchmarks or reference rates in the termsUnited States and globally. With global capital markets expected to move away from LIBOR and other inter-bank offered rates and toward more observable or conditions oftransaction-based rates that are less susceptible to manipulation, the FASB launched a share-based payment award.broad project in late 2018 to address potential accounting challenges expected to arise from the transition. The new guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. This ASU is effective March 12, 2020 through December 31, 2022. We adopted this ASU on March 12, 2020 and it did not have a material impact on our condensed consolidated financial statements.
Income taxes
In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU allows for reclassification of stranded tax effects on items resulting from the change in the corporate tax rate as a result of H.R. 1, originally known as the Tax Cuts and Jobs Act of 2017 (the “Tax Reform Act”), from accumulated other comprehensive income to retained earnings. Tax effects unrelated to H.R. 1 are permitted to be released from accumulated other comprehensive income using either the specific identification approach or the portfolio approach, based on the nature of the underlying item. ASU 2018-02 is effective for interim and annual periods, and interim periods within those annualreporting periods beginning after December 15, 2017,2018, with early adoption permitted. This change is required to be applied prospectively to an award modified on or afterWe adopted ASU 2018-02 in the adoption date. We are evaluatingfirst quarter of 2019. See Note I, Income Taxes, for a discussion of the effect thatimpacts of this will have on our consolidated financial statements and related disclosures.
Stock-based Compensation
In March 2017,June 2018, the FASB issued ASU 2017-07,
Leases
In February 2016, the FASB issued ASU 2016-02,
LeasesWe are evaluatingadopted the effect that this willstandard effective January 1, 2019, and we elected the optional transition method and the practical expedients permitted under the transition guidance within the standard. Accordingly, we accounted for our existing operating leases as operating leases under the new guidance, without reassessing (a) whether the contracts contain a lease under ASC Topic 842, (b) whether classification of the operating leases would be different in accordance with ASC Topic 842, or (c) whether the unamortized initial direct costs before transition adjustments (as of December 31, 2019) would have met the definition of initial direct costs in ASC Topic 842 at lease commencement.
The standard had a material impact on our condensed consolidated balance sheets, but did not have an impact on our Condensed Consolidated Statements of Comprehensive Income (Loss) or cash flows from operations. The cumulative effect of the changes on our retained earnings was $22,000 associated with capital gain. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases. Our accounting for finance leases remained substantially unchanged. See Note D, Leases for further discussion.
Restricted Cash
In the first quarter of 2019, the Company adopted ASU 2016-18, Statement of Cash flows (Topic 230): Restricted Cash, which enhances and clarifies the guidance on the classification and presentation of restricted cash in the statement of cash flows and requires additional disclosures about restricted cash balances. The adoption of ASU 2016-18 did not have a material impact on our condensed consolidated financial statements and related disclosures.
Note C - Revenue from Contracts with Customers
In May 2014, the FASB issued ASU No. 2014-09,
Under ASC 606, revenue is recognized when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration we expect to be entitled to in exchange for fiscal years,those goods or services. Our contracts with customers state the terms of sale, including the description, quantity, and interim periodsprice of the product or service purchased. Payment terms can vary by contract, but the period between invoicing and when payment is due is not significant. At September 30, 2020 and December 31, 2019, our contracts do not include any significant financing components.
Consistent with legacy GAAP, we present sales taxes assessed on revenue-producing transactions on a net basis.
Disaggregation of Revenue
We disaggregate revenue by vertical market and key revenue stream. The following table summarizes revenue from contracts with customers for the three and nine months ended September 30, 2020 and 2019 by our key vertical markets:
In thousands | Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, 2020 | September 30, 2019 | September 30, 2020 | September 30, 2019 | |||||||||||||
B2B | $ | 17,050 | $ | 11,290 | $ | 42,462 | $ | 35,149 | ||||||||
Consumer Brands | 14,087 | 11,171 | 37,727 | 35,222 | ||||||||||||
Financial Services | 6,531 | 11,635 | 21,513 | 36,850 | ||||||||||||
Healthcare | 4,111 | 5,257 | 12,283 | 14,946 | ||||||||||||
Retail | 5,392 | 8,803 | 14,014 | 31,752 | ||||||||||||
Transportation | 531 | 3,258 | 1,826 | 11,331 | ||||||||||||
Total Revenues | $ | 47,702 | $ | 51,414 | $ | 129,825 | $ | 165,250 | ||||||||
The nature of the services offered by each key revenue stream is different. The following tables summarize revenue from contracts with customers for the three and nine months ended September 30, 2020 and 2019 by our four major revenue streams and the pattern of revenue recognition:
Three Months Ended September 30, 2020 | ||||||||||||
In thousands | Revenue for performance obligations recognized over time | Revenue for performance obligations recognized at a point in time | Total | |||||||||
Agency & Digital Services | $ | 4,845 | $ | 87 | $ | 4,932 | ||||||
Contact Centers | 21,032 | — | 21,032 | |||||||||
Database Marketing Solutions | 4,341 | 800 | 5,141 | |||||||||
Direct Mail, Logistics, and Fulfillment | 13,697 | 2,900 | 16,597 | |||||||||
Total Revenues | $ | 43,915 | $ | 3,787 | $ | 47,702 | ||||||
Three Months Ended September 30, 2019 | ||||||||||||
In thousands | Revenue for performance obligations recognized over time | Revenue for performance obligations recognized at a point in time | Total | |||||||||
Agency & Digital Services | $ | 6,286 | $ | 276 | $ | 6,562 | ||||||
Contact Centers | 14,618 | — | 14,618 | |||||||||
Database Marketing Solutions | 5,272 | 1,170 | 6,442 | |||||||||
Direct Mail, Logistics, and Fulfillment | 20,775 | 3,017 | 23,792 | |||||||||
Total Revenues | $ | 46,951 | $ | 4,463 | $ | 51,414 | ||||||
Nine Months Ended September 30, 2020 | ||||||||||||
In thousands | Revenue for performance obligations recognized over time | Revenue for performance obligations recognized at a point in time | Total | |||||||||
Agency & Digital Services | $ 14,318 | $ 310 | $ 14,628 | |||||||||
Contact Centers | 51,274 | — | 51,274 | |||||||||
Database Marketing Solutions | 13,347 | 2,103 | 15,450 | |||||||||
Direct Mail, Logistics, and Fulfillment | 40,064 | 8,409 | 48,473 | |||||||||
Total Revenues | $ 119,003 | $ 10,822 | $ 129,825 | |||||||||
Nine Months Ended September 30, 2019 | ||||||||||||
In thousands | Revenue for performance obligations recognized over time | Revenue for performance obligations recognized at a point in time | Total | |||||||||
Agency & Digital Services | $ | 18,793 | $ | 407 | $ | 19,200 | ||||||
Contact Centers | 46,688 | — | 46,688 | |||||||||
Database Marketing Solutions | 16,745 | 2,537 | 19,282 | |||||||||
Direct Mail, Logistics, and Fulfillment | 67,853 | 12,227 | 80,080 | |||||||||
Total Revenues | $ | 150,079 | $ | 15,171 | $ | 165,250 | ||||||
Our contracts with customers may consist of multiple performance obligations. If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price (“SSP”) basis unless the transaction price is variable and meets the criteria to be allocated entirely to a performance obligation or to a distinct good or service that forms part of a single performance obligation. For most performance obligations, we determine SSP based on the price at which the performance obligation is sold separately. Although uncommon, if the SSP is not observable through past transactions, we estimate the SSP taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations. Further discussion of other performance obligations in each of our major revenue streams follows:
Agency & Digital Services
Our agency services include full-service, customer engagement agencies specializing in direct and digital communications for both consumer and business-to-business markets. Our digital solutions integrate online services within those fiscal years, beginning after December 15, 2017, with early adoption permitted beginning January 1, 2017. Wethe marketing mix and include: search engine management, display, digital analytics, website development and design, digital strategy, social media, email, e-commerce, and interactive relationship management. Our contracts may include a promise to purchase media or acquire search engine marketing solutions on behalf of our clients; in such cases, we have determined we are evaluatingan agent rather than a principal, and therefore recognize the effect that this will havenet consideration as revenue.
Most agency and digital services performance obligations are satisfied over time and often offered on our consolidated financial statements and related disclosures.a project basis. We have not yet selected a transition method nor have we determinedconcluded that the effectbest approach to measure the progress toward completion of the standardproject-based performance obligations is the input method, which is based on either the costs or labor hours incurred to date depending upon whether costs or labor hours more accurately depict the transfer of value to the customer.
The variable consideration in these contracts primarily relates to time and material-based services and reimbursable out-of-pocket travel costs, both of which are estimated using the expected value method. For time and material-based contracts, we use the “as invoiced” practical expedient.
Contact Centers
We operate tele-service workstations in the United States, Asia, and Europe to provide advanced contact center solutions such as: speech, voice and video chat, integrated voice response, analytics, social cloud monitoring, and web self-service.
Performance obligations are stand-ready obligations and are satisfied over time. With regard to account management and software as a service (“SaaS”), we use a time-elapsed output method to recognize revenue. For performance obligations where we charge customers a transaction-based fee, we use the output method based on transaction quantities. In most cases, our ongoing financial reporting.
The variable consideration in our contracts results primarily from the transaction-based fee structure of Financial Instruments
Database Marketing Solutions
Our solutions are built around centralized marketing databases with services rendered to build custom databases, database hosting services, customer or target marketing lists and Disclosures,
These performance obligations, including services rendered to build a custom database, database hosting services, professional services, customer or target marketing lists and data processing services, may be satisfied over time or at a point in time. We provide SaaS solutions to host data for customers and have concluded that they are stand-ready obligations to be recognized over time on a monthly basis. Our promise to provide certain data related services meets the price that would be received to sellover-time recognition criteria because our services do not create an asset with an alternative use, and we have an enforceable right to payment. For performance obligations recognized over time, we choose either the input (i.e. labor hour) or paidoutput method (i.e. number of customer records) to measure the progress toward completion depending on the nature of the services provided. Some of our other data-related services do not meet the over-time criteria and are therefore, recognized at a point-in-time, typically upon the delivery of a specific deliverable.
We charge our customers for certain data-related services at a fixed transaction-based rate, e.g., per thousand customer records processed. Because the quantity of transactions is unknown at the onset of a contract, our transaction price is variable, and we use the expected value method to estimate the transaction price. The uncertainty associated with the variable consideration generally resolves within a short period of time since the duration of these contracts is generally less than two months.
Direct Mail, Logistics, and Fulfillment
Our services, delivered internally and with our partners, include: digital printing, print on demand, advanced mail optimization, logistics and transportation optimization, tracking, commingling, shrink wrapping, and specialized mailings. We also maintain fulfillment centers where we provide custom kitting services, print on demand, product recalls, and freight optimization, thereby allowing our customers to distribute literature and other marketing materials.
The majority of performance obligations offered within this revenue stream are satisfied over time and utilize the input or output method, depending on the nature of the service, to measure progress toward satisfying the performance obligation. For performance obligations where we charge customers a transaction-based fee, we utilize the output method based on the quantities fulfilled. Services provided through our fulfillment centers are typically priced at a per transaction basis and our contracts provide us the right to invoice for services provided and reflects the value to the customer of the services transferred to date. In most cases, we use the “as invoiced” practical expedient to recognize revenue associated with these performance obligations unless significant discounts are offered in a contract and prices for services do not represent their standalone selling prices. For our direct mail revenue stream, our contracts may include a promise to purchase postage on behalf of our clients; in such cases, we have determined we are an agent, rather than principal and therefore recognize net consideration as revenue.
The variable consideration in our contracts results primarily from the transaction-based fee structure of some performance obligations with their total transaction quantities to be provided unknown at the onset of a contract, which is estimated using the expected value method.
Upfront Non-Refundable Fees
We may receive non-refundable upfront fees from customers for implementation of our SaaS database solutions products or for providing training in connection with our contact center solutions. These activities are not deemed to transfer a liability inseparate promised service and therefore, represent advanced payments. As we do not deem these activities as transferring a separate promised service, the receipt of such fees represents advanced payments. Where customers have an orderly transaction between market participantsoption to renew a contract, the customer is not required to pay similar upfront fees upon renewal. As a result, we have determined that these renewal options provide for the purchase of future services at a reduced rate and therefore, provide a material right. These upfront non-refundable fees are recognized over the measurement date.period of benefit which is generally consistent with estimated customer life (four to five years for database solutions contracts and six months to one year for contact center contracts). The guidance also establishes a fair value hierarchy that prioritizes the inputs used in valuation methodologies into three levels:
Transaction Price Allocated to Future Performance Obligations
We have elected to apply certain optional exemptions that limit the disclosure requirements over remaining performance obligations at period end to exclude: performance obligations that have an original expected duration of each year.
Contract Balances
We continuously monitor potential triggering events, including changes inrecord a receivable when revenue is recognized prior to invoicing when we have an unconditional right to consideration (only the business climate in which we operate, attritionpassage of key personnel,time is required before payment of that consideration is due) and a contract asset when the current volatility inright to payment is conditional upon our future performance such as delivery of an additional good or service (e.g. customer contract requires customer’s final acceptance of custom database solution or delivery of final marketing strategy presentation before customer payment is required). If invoicing occurs prior to revenue recognition, the capital markets,unearned revenue is presented on our Condensed Consolidated Balance Sheet as a contract liability, referred to as deferred revenue. The following table summarizes our contract balances as of September 30, 2020 and December 31, 2019:
In thousands | September 30, 2020 | December 31, 2019 | ||||||
Contract assets | $ | 400 | $ | 805 | ||||
Deferred revenue and customer advances | 5,952 | 4,397 | ||||||
Deferred revenue, included in other long-term liabilities | 800 | 886 | ||||||
Revenue recognized during the company’s market capitalization compared to our book value, our recent operating performance, and financial projections. During the quarternine months ended September 30, 2017,2020 from amounts included in deferred revenue at December 31, 2019 was approximately $4.3 million.
Costs to Obtain and Fulfill a Contract
We recognize an asset for the direct costs incurred to obtain and fulfill contracts with customers to the extent that we didexpect to recover these costs and if the benefit is longer than one year. These costs are amortized to expense over the expected period of the benefit in a manner that is consistent with the transfer of the related goods or services to which the asset relates. We capitalized a portion of commission expense, implementation and other costs that represents the cost to obtain a contract. The remaining unamortized contract costs were $1.6 million as of September 30, 2020. For the periods presented, no impairment was recognized.
Note D - Leases
On January 1, 2019, the Company adopted Topic 842 using the modified retrospective approach with optional transition method. The Company recorded operating lease assets (right-of-use assets) of $22.8 million and operating lease liabilities of $23.9 million. There was minimal impact to retained earnings upon adoption of Topic 842.
We have operating and finance leases for corporate and business offices, service facilities, call centers and certain equipment. Leases with an initial term of 12 months or less are generally not identify any triggering eventsrecorded on the balance sheet, unless the arrangement includes an option to purchase the underlying asset, or an option to renew the arrangement, that require testing for impairment. The occurrencewe are reasonably certain to exercise (short-term leases). Our leases have remaining lease terms of one or more triggering events could requireyear to six years, some of which include options to extend the leases for up to an additional impairment testing,five years, and some of which could result in impairment chargesinclude options to terminate the leases within one year.
We sublease our Fullerton, Jacksonville and Manila facilities. Our current subleases have lease terms ranging from five to 35 months, which will each expire at various dates by fiscal year 2023.
As of September 30, 2020, assets recorded under finance and operating leases were approximately $1.0 million and $13.4 million respectively, and accumulated depreciation associated with finance leases was $0.5 million. Operating lease right of use assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The discount rate used to determine the commencement date present value of lease payment is the interest rate implicit in the future.
During the nine months ended September 30, 2020, we modified the terms of some of our existing leases which resulted in the carrying amountre-measurement of goodwillthe related ROU assets and lease liabilities. We also exercised early termination options and impaired a lease for a facility we were vacating. The resulting impairment and early termination charges are included in our restructuring expenses in the nine months ended September 30, 2020. Please refer to Note O - Restructuring Activities for more details.
The following table presents supplemental balance sheet information related to our financing and operating leases:
In thousands | As of September 30, 2020 | |||||||||||
Operating Leases | Finance Leases | Total | ||||||||||
| Right-of-use Assets | $ | 13,410 | $ | 998 | $ | 14,408 | ||||||
Liabilities | ||||||||||||
| Short-term lease liabilities | 6,580 | 223 | 6,803 | |||||||||
| Long-term lease liabilities | 10,373 | 454 | 10,827 | |||||||||
Total Lease Liabilities | $ | 16,953 | $ | 677 | $ | 17,630 | ||||||
In thousands | As of December 31, 2019 | |||||||||||
Operating Leases | Finance Leases | Total | ||||||||||
Right-of-use Assets | $ | 17,679 | $ | 1,138 | $ | 18,817 | ||||||
Liabilities | ||||||||||||
Short-term lease liabilities | 7,226 | 390 | 7,616 | |||||||||
Long-term lease liabilities | 12,514 | 564 | 13,078 | |||||||||
Total Lease Liabilities | $ | 19,740 | $ | 954 | $ | 20,694 | ||||||
For the three and nine months ended September 30, 2020 and 2019, the components of lease expense were as follows:
In thousands | Three Months Ended September 30, 2020 | Three Months Ended September 30, 2019 | ||||||
Operating lease cost | $ | 1,951 | $ | 2,347 | ||||
Finance lease cost: | ||||||||
Amortization of right-of-use assets | 59 | 75 | ||||||
Interest on lease liabilities | 10 | 16 | ||||||
Total Finance lease cost | 69 | 91 | ||||||
Variable lease cost | 604 | 614 | ||||||
| Sublease income | (228 | ) | — | |||||
Total lease cost, net | $ | 2,396 | $ | 3,052 | ||||
In thousands | Nine Months Ended September 30, 2020 | Nine Months Ended September 30, 2019 | ||||||
Operating lease cost | $ | 6,435 | $ | 6,940 | ||||
Finance lease cost: | ||||||||
Amortization of right-of-use assets | 191 | 225 | ||||||
Interest on lease liabilities | 37 | 54 | ||||||
Total Finance lease cost | 228 | 279 | ||||||
Variable lease cost | 2,246 | 1,991 | ||||||
| Sublease income | (228 | ) | — | |||||
Total lease cost, net | $ | 8,681 | $ | 9,210 | ||||
Other information related to leases was as follows:
In thousands | Nine Months Ended September 30, 2020 | Nine Months Ended September 30, 2019 | ||||||
Supplemental Cash Flows Information | ||||||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
Operating cash flows from operating leases | $ | 14,535 | $ | 13,076 | ||||
Operating cash flows from finance leases | 32 | 63 | ||||||
Financing cash flows from finance leases | 357 | 344 | ||||||
Weighted Average Remaining Lease term | ||||||||
Operating leases | 3.0 | 3.5 | ||||||
Finance leases | 3.2 | 2.9 | ||||||
Weighted Average Discount Rate | ||||||||
Operating leases | 4.67 | % | 4.71 | % | ||||
Finance leases | 5.28 | % | 6.68 | % | ||||
The maturities of the Company’s finance and operating lease liabilities as of September 30, 2020 are as follows:
In thousands | Operating Leases (1) | Finance Leases | ||||||
Year Ending December 31, | ||||||||
Remainder of 2020 | $ | 7,171 | $ | 249 | ||||
2021 | 4,842 | 220 | ||||||
2022 | 3,490 | 196 | ||||||
2023 | 2,377 | 59 | ||||||
2024 | 300 | 13 | ||||||
2025 | — | — | ||||||
Total future minimum lease payments | 18,180 | 737 | ||||||
Less: Imputed interest | 1,227 | 60 | ||||||
Total lease liabilities | $ | 16,953 | $ | 677 | ||||
| (1) Non-cancelable sublease proceeds for the remainder of the fiscal year ending December 31, 2020 and the fiscal years ending December 31, 2021, 2022, and 2023 of $254k, $647k, $540k, and $154k, respectively, are not included in the table above. | ||||||||
As of September 30, 2020, wehave one operating lease for our new fulfillment center in Kansas City that has not yet commenced.
| In thousands | Total | |||
| Balance at December 31, 2016 | $ | 34,510 | ||
| Additions to goodwill | — | |||
| Impairment | — | |||
| Balance at September 30, 2017 | $ | 34,510 | ||
| In thousands | Total | |||
| Balance at December 31, 2016 | $ | 3,302 | ||
| Amortization | (544 | ) | ||
| Balance at September 30, 2017 | $ | 2,758 | ||
Note E — Long-Term Debt
Our Amended and Restated Certificate of Incorporation authorizes us to issue 1.0 million shares of preferred stock. On March 10, 2016,January 30, 2018, we entered into a secured credit facility with Wells Fargo Bank, N.A. as Administrative Agent, consisting of a maximum $65.0 million revolving credit facility and a $45.0 million term loan facility (together the "2016 Secured Credit Facility"). The 2016 Secured Credit Facility was secured by substantially allissued 9,926 shares of our assets and material domestic subsidiaries. The 2016 Secured Credit Facility was usedSeries A Preferred Stock to Wipro at an issue price of $1,000 per share, for general corporate purposes, and to replace and repay outstanding borrowings.
Series A Preferred Stock has the following rights and privileges:
Liquidation Rights
In the event of a liquidation, dissolution or winding down of the Company or a Fundamental Transaction (defined in the Certificate of Designation for the Series A Preferred Stock), whether voluntary or involuntary, the holders of the Series A Preferred Stock are entitled to receive, prior to and in preference to the holders of common stock, from the assets of the Company available for distribution, an amount equal to the greater of (i) the original issue price, plus any dividends accrued but unpaid thereon, and (ii) such amount as would have been payable to Wipro had all shares of Series A Preferred Stock been converted into common stock immediately before such liquidation.
Upon liquidation, after the payment of all preferential amounts required to be paid to the holders of Series A Preferred Stock, the remaining assets of the Company available for distribution to its stockholders shall be distributed among the holders of common stock.
Dividends
Upon liquidation, dissolution or winding down of the Company, or a Fundamental Transaction (collectively, a “Liquidation”), shares of Series A Preferred Stock which have not been otherwise converted to common stock, shall be entitled to receive dividends that accrue at a rate of (i) 5.0% each year, or (ii) the rate that cash dividends are paid in respect of shares of common stock (with Series A Preferred Stock being paid on an as-converted basis in such case) for such year if such rate is greater than 5.0%. Dividends on the Series A Preferred Stock are cumulative and accrue to the holders thereof whether or not declared by the Board of Directors (the “Board”). Dividends are payable solely upon a Liquidation, and only if prior to such Liquidation such shares of Series A Preferred Stock have not been converted to common stock. As of September 30, 2020, cumulative dividends payable to the holders of Series A Preferred Stock upon a Liquidation totaled $1.3 million or $133.46 per share of Series A Preferred Stock.
Conversion
At the option of the holders of Series A Preferred Stock, shares of Series A Preferred Stock may be converted into common stock at a rate of 100.91 shares of common stock for one share of Series A Preferred Stock, subject to certain future adjustments.
Voting and Other Rights
The Series A Preferred Stock does not have voting rights, except as otherwise required by law. Other rights afforded the holders of Series A Preferred Stock, under defined circumstances, include the election and removal of one member of the Board as a resultseparate voting class, the ability to approve certain actions of repaying the 2016 Secured Company prior to execution, and preemptive rights to participate in any future issuance of new securities. In addition, under certain circumstances, the holder of the Series A Preferred Stock is entitled to appoint an observer to our Board. The holder of the Series A Preferred Stock has elected to exercise its observer appointment rights but has not exercised its right to appoint the board member.
We determined that the Series A Preferred Stock has contingent redemption provisions allowing redemption by the holder upon certain defined events. As the event that may trigger the redemption of the Series A Preferred Stock is not solely within our control, the Series A Preferred Stock is classified as mezzanine equity (temporary equity) in the Condensed Consolidated Balance Sheet as of September 30, 2020.
Note F — Long-Term Debt
In thousands | September 30, 2020 | December 31, 2019 | ||||||
Revolving credit facility | $ | 17,100 | $ | 18,700 | ||||
Paycheck Protection Program Term Note | 10,000 | — | ||||||
Total debt | 27,100 | 18,700 | ||||||
Less: current portion of long-term debt | (6,681 | ) | — | |||||
Long-term debt | $ | 20,419 | $ | 18,700 | ||||
Credit Facility. The creditFacility
As of September 30, 2020 and guarantee agreements related toDecember 31, 2019, we had $17.1 million and $18.7 million borrowings outstanding under the 2016 SecuredTexas Capital Credit Facility were likewise terminated.
On April 17, 2017, we entered into a secured credit facility with Texas Capital Bank, N.A.N.A (“Texas Capital Bank”), that providesprovided a
Under the Texas Capital Credit Facility, is due and payable in full on April 17, 2019. Wewe can elect to accrue interest on outstanding principal balances at either LIBOR plus
The Texas Capital Credit Facility is subject to customary covenants requiring insurance, legal compliance, payment of taxes, prohibition of second liens, and secondary indebtedness, as well as the filing of quarterly and annual financial statements.
The Texas Capital Credit Facility's covenant requiring us to file our financial reports for the quarter ending June 30, 2017 with the Securities and Exchange Commission within forty-five daysFacility originally had an expiration date of the quarter end.April 17, 2019, at which point all outstanding amounts would have been due. On August 14, 2017,January 9, 2018, we entered into a waiver with Texas Capital Bank that waived our noncompliance through October 20,
| In thousands | September 30, 2017 | December 31, 2016 | ||||||
| Texas Capital Credit Facility ($20.0 million capacity), various interest rates based on (a) LIBOR plus 1.95% or (b) prime minus 0.75% (effective rate of 3.18% at September 30, 2017), due April 17, 2019 | $ | 12,000 | $ | — | ||||
| Total debt | 12,000 | — | ||||||
| Less current maturities | — | — | ||||||
| Total long-term debt | $ | 12,000 | $ | — | ||||
| September 30, 2017 | December 31, 2016 | |||||||||||||||
| In thousands | Carrying Value | Fair Value | Carrying Value | Fair Value | ||||||||||||
| Total debt | $ | 12,000 | $ | 12,000 | $ | — | $ | — | ||||||||
At September 30, 2017,2020, we had letters of credit outstanding in the amount of $3.8$1.8 million. $3.3 million of ourNo amounts were drawn against these letters of credit were backed by cash collateral with the other $0.5 million offset against our availability on the Texas Capital Credit Facility.at September 30, 2020. These letters of credit exist to support insurance programs relating to workers’ compensation, automobile liability, and general liability. No amounts were drawn against these letters
On April 14, 2020, the Company entered into a promissory note with Texas Capital Bank, for an unsecured loan with a principal amount of credit$10.0 million made to the Company pursuant to the Paycheck Protection Program (“PPP Term Note”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The PPP Term Note is guaranteed by the United States Small Business Administration.
The PPP Term Note bears interest at a fixed annual rate of 1.00%, with interest deferred for the first six months. Beginning in November 2020, the Company will be required to make 18 equal monthly payments of principal and interest with the final payment due in April 2022, unless the loan is forgiven as described below. The PPP Term Note may be accelerated upon the occurrence of an event of default.
The proceeds may be used to maintain payroll or make certain covered interest payments, lease payments and utility payments. Under the terms of the CARES Act, the Company can be granted forgiveness for all or a portion of the loan granted under the Paycheck Protection Program, with such forgiveness to be determined, subject to limitations, based on the use of the loan proceeds for permitted expenses.
At this time, the Company anticipates forgiveness of the entire amount of the PPP Term Note; however, we are not in a position to estimate the timing of the completion of the forgiveness process. We expect to apply for forgiveness of the PPP Term Note in the fourth quarter of 2020. We have elected to classify the principal balance of the PPP Term Note within both Short-term and Long-term debt, net, on the condensed consolidated balance sheet as of September 30, 2017. 2020. Under the existing terms of the PPP Term Note, if no forgiveness is granted, approximately $6.7 million of the principal amount of the PPP Term Note would be due within twelve months from September 30, 2020.
Note FG — Stock-Based Compensation
We maintain stock incentive plans for the benefit of certain officers, directors, and employees, including the 2013 OmnibusEquity Incentive Plan (the "2013“2013 Plan”). We recently established our 2020 Equity Incentive Plan (the "2020 Plan"). which has taken the place of the 2013 Plan going forward. Any shares of common stock that remain eligible for issuance under the 2013 Plan are now eligible for issuance under the 2020 Plan. Our stock incentive plans provide for the ability to issue stock options, cash stock appreciation rights, performance stock units, phantom stock units and cash performance stock units. Our cash stock appreciation rights, phantom stock units and cash performance stock units settle solely in cash and are treated as a liability, which are adjusted each reporting period based on changes in our stock price.
Compensation expense for stock-based awards is based on the fair values of the awards on the date of grant and is recognized on a straight-line basis over the vesting period of the entire award in the “Labor” line of the Condensed Consolidated Statements of Comprehensive Loss.Income (Loss). We recognized $1.8$0.3 million and $2.4 $0.3 million of stock-based compensation expense during the three months ended September 30, 2020 and 2019, respectively. We recognized $0.6 million and $0.7 million of stock-based compensation expense during the nine months ended September 30, 20172020 and 2016,2019, respectively.
| Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | |||||||
| Balance as of December 31, 2016 | 3,705,893 | $ | 7.72 | 4.74 | |||||
| Granted | — | — | |||||||
| Exercised | — | — | |||||||
| Forfeited | (89,630 | ) | 7.13 | ||||||
| Vested options expired | (847,898 | ) | 11.07 | ||||||
| Balance as of September 30, 2017 | 2,768,365 | 6.72 | 5.10 | ||||||
| Vested and expected to vest as of September 30, 2017 | 2,768,365 | $ | 6.72 | 5.10 | |||||
| Exercisable as of September 30, 2017 | 2,003,764 | $ | 7.59 | 3.73 | |||||
| Number of Shares | Weighted Average Grant-Date Fair Value | ||||||
| Balance as of December 31, 2016 | — | $ | — | ||||
| Granted | 866,196 | 0.97 | |||||
| Vested | — | — | |||||
| Forfeited | — | — | |||||
| Cash stock appreciation rights outstanding at September 30, 2017 | 866,196 | $ | 0.97 | ||||
| Number of Shares | Weighted Average Grant- Date Fair Value | ||||||
| Balance as of December 31, 2016 | 945,252 | $ | 3.76 | ||||
| Granted | 1,336,060 | 0.98 | |||||
| Vested | (405,241 | ) | 4.13 | ||||
| Forfeited | (132,468 | ) | 2.76 | ||||
| Unvested shares outstanding at September 30, 2017 | 1,743,603 | $ | 1.61 | ||||
| Number of Shares | Weighted Average Grant- Date Fair Value | ||||||
| Balance as of December 31, 2016 | 531,820 | $ | 2.69 | ||||
| Granted | 560,000 | 0.97 | |||||
| Settled | (125,046 | ) | 2.69 | ||||
| Forfeited | (112,360 | ) | 2.51 | ||||
| Phantom stock units outstanding at September 30, 2017 | 854,414 | $ | 1.59 | ||||
| Number of Shares | Weighted Average Grant- Date Fair Value | ||||||
| Balance as of December 31, 2016 | 844,315 | $ | 2.56 | ||||
| Granted | 711,268 | 0.99 | |||||
| Settled | — | — | |||||
| Forfeited | (104,946 | ) | 4.79 | ||||
| Performance stock units outstanding at September 30, 2017 | 1,450,637 | $ | 1.63 | ||||
| Number of Shares | Weighted Average Grant- Date Fair Value | ||||||
| Balance as of December 31, 2016 | 444,005 | $ | 2.69 | ||||
| Granted | 1,098,871 | 1.01 | |||||
| Settled | — | — | |||||
| Forfeited | (37,784 | ) | 2.69 | ||||
| Cash performance stock units outstanding at September 30, 2017 | 1,505,092 | $ | 1.46 | ||||
Note GH — Components of Net Periodic Benefit Cost
Prior to January 1, 1999, we maintainedprovided a defined benefit pension plan for which most of our employees were eligible to participate (the "Qualified“Qualified Pension Plan"Plan”). WeIn conjunction with significant enhancements to our 401(k) plan, we elected to freeze benefits under the Qualified Pension Plan as of December 31, 1998.
In 1994, we adopted a non-qualified, unfunded, supplemental pension plan (the "Restoration“Restoration Pension Plan"Plan”) covering certain employees, which provides for incremental pension payments so that total pension payments equal those amounts that would have been payable from our Qualified Pension Planthe principal pension plan were it not for limitations imposed by income tax regulation. The benefits under the Restoration Pension Plan waswere intended to provide benefits equivalent to our Qualified Pension Plan as if such plan had not been frozen. We elected to freeze benefits under the Restoration Pension Plan as of April 1, 2014.
Net pension cost for both plans included the following components:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
In thousands | 2020 | 2019 | 2020 | 2019 | ||||||||||||
Interest cost | $ | 1,473 | $ | 1,813 | $ | 4,419 | $ | 5,439 | ||||||||
Expected return on plan assets | (1,384 | ) | (1,111 | ) | (4,152 | ) | (3,333 | ) | ||||||||
Recognized actuarial loss | 812 | 732 | 2,436 | 2,197 | ||||||||||||
Net periodic benefit cost | $ | 901 | $ | 1,434 | $ | 2,703 | $ | 4,303 | ||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| In thousands | 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Interest cost | $ | 1,837 | $ | 1,950 | $ | 5,511 | $ | 5,851 | ||||||||
| Expected return on plan assets | (1,832 | ) | (2,061 | ) | (5,496 | ) | (6,183 | ) | ||||||||
| Recognized actuarial loss | 688 | 596 | 2,065 | 1,789 | ||||||||||||
| Net periodic benefit cost | $ | 693 | $ | 485 | $ | 2,080 | $ | 1,457 | ||||||||
We are not required to make and do not intend to make, any contributionsa $6.0 million minimum contribution to our Qualified Pension Plan in 2017. Based on current estimates we will not be required to make any contributions to our Qualified Pension Plan until the 2018 plan year.
We are not required to make, and do not intend to make, any contributions to our Restoration Pension Plan other than to the extent needed to cover benefit payments. We made benefit payments under our Restoration Pension Planthis supplemental plan of $0.4 million and$1.3$1.3 million in each of the nine months ended September 30, 2020 and September 30, 2019.
Note I - Income Taxes
Coronavirus Aid, Relief and Economic Security Act
In response to the COVID-19 pandemic, the CARES Act was signed into law in March 2020. The CARES Act lifts certain deduction limitations originally imposed by the Tax Cuts and Jobs Act of 2017 (“2017 Tax Act”). Under the CARES Act, corporate taxpayers may carryback net operating losses (“ NOLs”) realized during 2018 through 2020 for up to five years, which was not previously allowed under the 2017 Tax Act. The CARES Act also eliminates the 80% of taxable income limitations by allowing corporate entities to fully utilize NOL carryforwards to offset taxable income in 2018, 2019 or 2020. Taxpayers may generally deduct interest up to the sum of 50% of adjusted taxable income plus business interest income (30% limit under the 2017 Tax Act) for tax years beginning January 1, 2019 and 2020. The CARES Act allows taxpayers with alternative minimum tax credits to claim a refund in 2020 for the entire amount of the credits instead of recovering the credits through refunds over a period of years, as originally enacted by the 2017 Tax Act. In addition, the CARES Act raises the corporate charitable deduction limit to 25% of taxable income and makes qualified improvement property generally eligible for 15-year cost-recovery and 100% bonus depreciation.
Our income tax benefit of $0.1 million for the three months ended September 30, 2020 resulted in an effective income tax rate of 3.2%. Our income tax benefit of $12.9 million for the nine months ended September 30, 2020 resulted in an effective income tax rate of 82.4%. The effective income tax rate for the three and nine months ended September 30, 2017, respectively.
Our income tax expense of $0.1 million for the three months ended September 30, 2017, an income tax expense of $0.4 million2019 resulted in a negative effective income tax rate of 18.2%1.7%. ForOur income tax expense of $0.8 million for the nine months ended September 30, 2017, an income tax benefit of $3.3 million2019 resulted in ana negative effective income tax rate of 20.8%3.7%. We have calculated the provision forThe effective income taxestax rate for the three and nine months ended September 30, 20172019 differs from the federal statutory rate of 21.0%, primarily due to valuation allowances recorded on our deferred tax assets for current period federal net operating losses incurred, as we have concluded that it is more likely than not that these deferred tax assets will not be realized.
We have in general historically calculated the provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate for the full calendar year to ordinary income or loss for the reporting period. The effective income tax rate calculated for the three and nine months ended September 30, 2017 differs from the federal statutory rate of 35.0%, primarily due to the nondeductible interest associated with the 3Q Digital contingent consideration and foreign tax credit limitations on dividends paid from foreign subsidiaries.
Effective January 1, 2019 we adopted ASU 2018-02 which allows a reclassification from accumulated other comprehensive income to retained earnings of stranded tax effects resulting from the historical method would not provide a reliable estimate forreduction of the three and nine months ended September 30, 2016. The effectiveU.S. federal statutory income tax rate calculated for the three and nine months ended September 30, 2016 differs from the federal statutory rate of 35.0%, primarily35% to 21% due to the nondeductible interest associated withenactment of the 3Q Digital contingent consideration and foreignTax Reform Act. As a result of the adoption, we reclassified $11.4 million of stranded tax credit limitations on dividends paideffects from foreign subsidiaries.
Harte Hanks, or one of our subsidiaries, files income tax returns in the U.S. federal, U.S. state, and foreign jurisdictions. For U.S. state returns, we are no longer subject to tax examinations for tax years prior to 2012.2014. For U.S. federal and foreign returns, we are no longer subject to tax examinations for tax years prior to 2014.
We have elected to classify any interest expense and penalties related to income taxes within income tax expense in our Condensed Consolidated Statements of Comprehensive Loss.Income (Loss). We did not have a significant amount of interest or penalties accrued at September 30, 20172020 or December 31, 2016.2019.
Note I —J - Earnings Per Share
In periods in which the companyCompany has net income, from continuing operations, the companyCompany is required to calculate earnings per share (“EPS”) using the two-class method. The two-class method is required because the company's unvested shares granted before 2017 areCompany’s Series A Preferred Stock is considered a participating securities. Participating securitiessecurity with objectively determinable and non-discretionary dividend participation rights. Series A Preferred stockholders have the right to receiveparticipate in dividends above their five percent dividend rate should the companyCompany declare dividends on its common stock.stock at a dividend rate higher than the five percent (on an as-converted basis). Under the two-class method, undistributed and distributed earnings are allocated on a pro-rata basis to the common and restrictedthe preferred stockholders. The weighted-average number of common and restricted sharespreferred stock outstanding during the period is then used to calculate earnings per share ("EPS")EPS for each class of shares.
In periods in which the companyCompany has a net loss, from continuing operations, basic loss per share is calculated using the treasury stock method. The treasury stock method is calculated by dividing the net loss by the weighted-average number of common shares outstanding during the period. The two-class method is not used, because the calculation would be anti-dilutive.
Reconciliations of basic and diluted EPS arewere as follows:
Three Months Ended September 30, | ||||||||
In thousands, except per share amounts | 2020 | 2019 | ||||||
| Numerator: | ||||||||
Net loss | $ | (1,621 | ) | $ | (5,988 | ) | ||
Less: Preferred stock dividends | 125 | 125 | ||||||
Numerator for basic EPS: loss attributable to common stockholders | (1,746 | ) | $ | (6,113 | ) | |||
Denominator: | ||||||||
Basic EPS denominator: weighted-average common shares outstanding | 6,523 | 6,291 | ||||||
| Diluted EPS denominator | 6,523 | 6,291 | ||||||
Basic loss per Common Share | $ | (0.27 | ) | $ | (0.97 | ) | ||
Diluted loss per Common Share | $ | (0.27 | ) | $ | (0.97 | ) | ||
| Three Months Ended September 30, | ||||||||
| In thousands, except per share amounts | 2017 | 2016 | ||||||
| Net Loss | ||||||||
| Loss from continuing operations | $ | (2,480 | ) | $ | (4,285 | ) | ||
| Income from discontinued operations | — | 1,244 | ||||||
| Net loss | $ | (2,480 | ) | $ | (3,041 | ) | ||
| Basic Earnings (Loss) per Common Share | ||||||||
| Weighted-average common shares outstanding | 62,012 | 61,543 | ||||||
| Basic earnings (loss) per common share | ||||||||
| Continuing operations | $ | (0.04 | ) | $ | (0.07 | ) | ||
| Discontinued operations | — | 0.02 | ||||||
| Basic earnings (loss) per common share | $ | (0.04 | ) | $ | (0.05 | ) | ||
| Diluted Earnings (Loss) per Common Share | ||||||||
| Weighted-average common and common equivalent shares outstanding | 62,012 | 61,543 | ||||||
| Diluted earnings (loss) per common share | ||||||||
| Continuing operations | $ | (0.04 | ) | $ | (0.07 | ) | ||
| Discontinued operations | — | 0.02 | ||||||
| Diluted earnings (loss) per common share | $ | (0.04 | ) | $ | (0.05 | ) | ||
| Computation of Shares Used in Earnings (Loss) Per Common Share | ||||||||
| Weighted-average common shares outstanding | 62,012 | 61,543 | ||||||
| Weighted-average common equivalent shares-dilutive effect of stock options and awards | — | — | ||||||
| Shares used in diluted earnings (loss) per common share computations | 62,012 | 61,543 | ||||||
For the three months ended September 30, 2020 and 4.1 million of anti-dilutive market price options2019, respectively, the following shares have been excluded from the calculation of shares used in the diluted EPS calculation for the three months ended September 30, 2017 and 2016, respectively. 1.7calculation: 0.1 million and 1.30.1 million anti-dilutive unvested shares were excluded from the calculation of shares used in the diluted EPS calculation for the three months ended September 30, 2017 and 2016, respectively.
| Nine Months Ended September 30, | ||||||||
| In thousands, except per share amounts | 2017 | 2016 | ||||||
| Net Loss | ||||||||
| Loss from continuing operations | $ | (12,519 | ) | $ | (16,886 | ) | ||
| Income from discontinued operations | — | 3,980 | ||||||
| Net loss | $ | (12,519 | ) | $ | (12,906 | ) | ||
| Basic Earnings (Loss) per Common Share | ||||||||
| Weighted-average common shares outstanding | 61,866 | 61,445 | ||||||
| Basic earnings (loss) per common share | ||||||||
| Continuing operations | $ | (0.20 | ) | $ | (0.27 | ) | ||
| Discontinued operations | — | 0.06 | ||||||
| Basic earnings (loss) per common share | $ | (0.20 | ) | $ | (0.21 | ) | ||
| Diluted Earnings (Loss) per Common Share | ||||||||
| Weighted-average common and common equivalent shares outstanding | 61,866 | 61,445 | ||||||
| Diluted earnings (loss) per common share | ||||||||
| Continuing operations | $ | (0.20 | ) | $ | (0.27 | ) | ||
| Discontinued operations | — | 0.06 | ||||||
| Diluted earnings (loss) per common share | $ | (0.20 | ) | $ | (0.21 | ) | ||
| Computation of Shares Used in Earnings (Loss) Per Common Share | ||||||||
| Weighted-average common shares outstanding | 61,866 | 61,445 | ||||||
| Weighted-average common equivalent shares-dilutive effect of stock options and awards | — | — | ||||||
| Shares used in diluted earnings (loss) per common share computations | 61,866 | 61,445 | ||||||
| Nine Months Ended September 30, | ||||||||
In thousands, except per share amounts | 2020 | 2019 | ||||||
Numerator: | ||||||||
Net loss | $ | (2,738 | ) | $ | (23,318 | ) | ||
Less: Preferred stock dividend | 372 | 371 | ||||||
Numerator for basic EPS: loss attributable to common stockholders | (3,110 | ) | (23,689 | ) | ||||
Denominator: | ||||||||
Basic EPS denominator: weighted-average common shares outstanding | 6,432 | 6,277 | ||||||
Diluted EPS denominator | 6,432 | 6,277 | ||||||
Basic loss per Common Share | $ | (0.48 | ) | $ | (3.77 | ) | ||
Diluted loss per Common Share | $ | (0.48 | ) | $ | (3.77 | ) | ||
For the nine months ended September 30, 2020 and 2019, respectively, the following shares have been excluded from the calculation of shares used in the diluted EPS calculation for the nine months ended September 30, 2017calculation: 32 thousand and 2016, respectively. 1.10.1 million shares of anti-dilutive market price options; 0.4 million and 1.10.2 million of anti-dilutive unvested shares; and 1.0 million and 1.0 shares were excluded from the calculation of shares used in the diluted EPS calculation for the nine months ended September 30, 2017 and 2016, respectively.anti-dilutive Series A Preferred Stock (as if converted).
Note JK — Comprehensive Loss
Comprehensive lossincome (loss) for a period encompasses net lossincome (loss) and all other changes in equity other than from transactions with our stockholders. Our comprehensive lossincome (loss) was as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
In thousands | 2020 | 2019 | 2020 | 2019 | ||||||||||||
Net loss | $ | (1,621 | ) | $ | (5,988 | ) | $ | (2,738 | ) | $ | (23,318 | ) | ||||
Other comprehensive income (loss): | ||||||||||||||||
Adjustment to pension liability | 812 | 732 | 2,436 | 2,197 | ||||||||||||
Tax expense | (203 | ) | (183 | ) | (609 | ) | (549 | ) | ||||||||
| 609 | 549 | 1,827 | 1,648 | |||||||||||||
Foreign currency translation adjustment, net of tax | 1,129 | (660 | ) | 1,067 | (311 | ) | ||||||||||
| Adoption of ASU 2018-2 | — | — | — | (11,355 | ) | |||||||||||
Total other comprehensive income (loss), net of tax | 1,738 | (111 | ) | 2,894 | (10,018 | ) | ||||||||||
Total comprehensive income (loss) | $ | 117 | $ | (6,099 | ) | $ | 156 | $ | (33,336 | ) | ||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| In thousands | 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Net loss | $ | (2,480 | ) | $ | (3,041 | ) | $ | (12,519 | ) | $ | (12,906 | ) | ||||
| Other comprehensive income (loss): | ||||||||||||||||
| Adjustment to pension liability | 688 | 596 | 1,940 | 2,063 | ||||||||||||
| Tax expense | (275 | ) | (238 | ) | (776 | ) | (825 | ) | ||||||||
| Adjustment to pension liability, net of tax | 413 | 358 | 1,164 | 1,238 | ||||||||||||
| Foreign currency translation adjustment | 33 | (437 | ) | 677 | (1,856 | ) | ||||||||||
| Total other comprehensive income (loss) | 446 | (79 | ) | 1,841 | (618 | ) | ||||||||||
| Total comprehensive loss | $ | (2,034 | ) | $ | (3,120 | ) | $ | (10,678 | ) | $ | (13,524 | ) | ||||
Changes in accumulated other comprehensive loss by component arewere as follows:
Defined Benefit | Foreign Currency | |||||||||||
In thousands | Pension Items | Items | Total | |||||||||
Balance at December 31, 2019 | $ | (63,887 | ) | $ | 753 | $ | (63,134 | ) | ||||
| Other comprehensive loss, net of tax, before reclassifications | — | 1,067 | 1,067 | |||||||||
| Amounts reclassified from accumulated other comprehensive income (loss), net of tax, to other, net, on the condensed consolidated statements of comprehensive loss | 1,827 | — | 1,827 | |||||||||
Net current period other comprehensive loss, net of tax | 1,827 | 1,067 | 2,894 | |||||||||
Balance at September 30, 2020 | $ | (62,060 | ) | $ | 1,820 | $ | (60,240 | ) | ||||
| In thousands | Defined Benefit Pension Items | Foreign Currency Items | Total | |||||||||
| Balance at December 31, 2016 | $ | (46,977 | ) | $ | 799 | $ | (46,178 | ) | ||||
| Other comprehensive income, net of tax, before reclassifications | — | 677 | 677 | |||||||||
| Amounts reclassified from accumulated other comprehensive loss, net of tax | 1,164 | — | 1,164 | |||||||||
| Net current period other comprehensive income, net of tax | 1,164 | 677 | 1,841 | |||||||||
| Balance at September 30, 2017 | $ | (45,813 | ) | $ | 1,476 | $ | (44,337 | ) | ||||
Defined Benefit | Foreign Currency | |||||||||||
In thousands | Pension Items | Items | Total | |||||||||
Balance at December 31, 2018 | $ | (46,584 | ) | $ | 101 | $ | (46,483 | ) | ||||
Other comprehensive loss, net of tax, before reclassifications | — | (311 | ) | (311 | ) | |||||||
Amounts reclassified from accumulated other comprehensive income (loss), net of tax, to other, net, on the condensed consolidated statements of comprehensive loss | 1,648 | — | 1,648 | |||||||||
| Adoption of ASU 2018-02 | (11,355 | ) | — | (11,355 | ) | |||||||
Net current period other comprehensive loss, net of tax | (9,707 | ) | (311 | ) | (10,018 | ) | ||||||
Balance at September 30, 2019 | $ | (56,291 | ) | $ | (210 | ) | $ | (56,501 | ) | |||
| In thousands | Defined Benefit Pension Items | Foreign Currency Items | Total | |||||||||
| Balance at December 31, 2015 | $ | (43,915 | ) | $ | 355 | $ | (43,560 | ) | ||||
| Other comprehensive loss, net of tax, before reclassifications | — | (1,856 | ) | (1,856 | ) | |||||||
| Amounts reclassified from accumulated other comprehensive loss, net of tax | 1,238 | — | 1,238 | |||||||||
| Net current period other comprehensive income (loss), net of tax | 1,238 | (1,856 | ) | (618 | ) | |||||||
| Balance at September 30, 2016 | $ | (42,677 | ) | $ | (1,501 | ) | $ | (44,178 | ) | |||
Reclassification amounts related to the defined pension plans are included in the computation of net periodic pension benefit cost (see
NoteNote KL — Litigation and Contingencies
In the normal course of our business, we are obligated under some agreements to indemnify our clients as a result of claims that we infringe on the proprietary rights of third parties. The terms and duration of these commitments vary and, in some cases, may be indefinite, and certain of these commitments do not limit the maximum amount of future payments we could become obligated to make thereunder; accordingly, our actual aggregate maximum exposure related to these types of commitments is not reasonably estimable. Historically, we have not been obligated to make significant payments for obligations of this nature, and no liabilities have been recorded for these obligations in our condensed consolidated financial statements.
We are also subject to various claims and legal proceedings in the ordinary course of conducting our businesses and, from time to time, we may become involved in additional claims and lawsuits incidental to our businesses. We routinely assess the likelihood of adverse judgments or outcomes to these matters, as well as ranges of probable losses; to the extent losses are reasonably estimable. Accruals are recorded for these matters to the extent that management concludes a loss is probable and the financial impact, should an adverse outcome occur, is reasonable estimable.
In the opinion of management, appropriate and adequate accruals for legal matters have been made, and management believes that the probability of a material loss beyond the amounts accrued is remote. Nevertheless, we cannot predict the impact of future developments affecting our pending or future claims and lawsuits. We expense legal costs as incurred, and all recorded legal liabilities are adjusted as required as better information becomes available to us. The factors we consider when recording an accrual for contingencies include, among others: (i) the opinions and views of our legal counsel; (ii) our previous experience; and (iii) the decision of our management as to how we intend to respond to the complaints.
Note M — Certain Relationships and Related Party Transactions
From 2016 until October 2020, we conducted business with Wipro, whereby Wipro provided us with a variety of technology-related services. We have since terminated all service agreements.
Effective January 30, 2018, Wipro became a related party when it purchased 9,926 shares of our Series A Preferred Stock (which are convertible at Wipro’s option into 1,001,614 shares, or 16% of our common stock), for aggregate consideration of $9.9 million. For information pertaining to the Company’s preferred stock, See Note E, Convertible Preferred Stock.
During the three and nine months ended September 30, 2020, we recorded no revenue from services we provided to Wipro. During the three and nine months ended September 30, 2019, we recorded an immaterial amount of revenue for services we provided to Wipro.
During the three and nine months ended September 30, 2020, we recorded immaterial amount of expenses for technology-related services Wipro provided to us. During the three and nine months ended September 30, 2019, we recorded $2.6 million and $9.5 million of expense, respectively, for technology-related services and lease expense for a facility Wipro provided to us.
As of September 30, 2020 and December 31, 2019, we had trade payables due to Wipro of $0 and $1.5 million respectively. As of September 30, 2020 and December 31, 2019, we had no trade receivables due from Wipro.
In the third quarter of 2019, we entered into a business relationship with Snap Kitchen, the founder of which is a 9% owner of Harte Hanks. We recorded $164,000 of revenue earned from Snap Kitchen in the nine months ended September 30, 2020.
As described in Note F, Long-Term Debt, the Company’s Texas Capital Credit Facility is secured by HHS Guaranty, LLC, an entity formed to provide credit support for the Company by certain members of the Shelton family (descendants of one of our founders). Pursuant to the Amended and Restated Fee, Reimbursement and Indemnity Agreement, dated January 9, 2018, between HHS Guaranty, LLC and the Company, HHS Guaranty, LLC has the right to appoint one representative director to the Board and is paid a fee to provide the guarantee. Currently, David L. Copeland serves as the HHS Guaranty, LLC representative on the Board.
Note N — Sale of Direct Mail Assets and Equipment
On March 4, 2016,April 24, 2020, we completedsold the acquisitionmajority of Aleutian Consulting,the production equipment from our Jacksonville facility to Summit Direct Mail Inc. (“Summit”) for $1.5 million. Subsequent to April 2020, the Company sold or scrapped the remaining supplies and equipment in Jacksonville for additional proceeds of $0.5 million. In addition to the asset sale, the Company entered into a strategic partnership with Summit, pursuant to which has been integratedthe Company continues to manage client relationships, and may at its discretion and direction, use Summit to perform direct mail campaigns. We act as principal in these transactions, and will account for the associated revenue on a gross basis.
The Company is well positioned to provide the full suite of marketing solutions to Summit customers and will leverage the expanded print and direct mail capabilities provided by the partnership with Summit to grow our continuing operations. The resultsbusiness.
As a result of Aleutian Consulting operations have been this sale, we booked a $1.9 million impairment charge on our Jacksonville facility and recognized a $1.4 million capital loss and impairment expense from the fixed asset disposal and impairment associated with the Summit deal. These expenses were included in our financial statementsrestructuring expense for the nine months ended September 30, 2020.
Note O — Restructuring Activities
In 2019, our management team, along with members of the Board, formed a project committee focused on cost-saving initiatives and other restructuring efforts. This committee reviewed each of our business segments and other operational areas to identify both one-time and recurring cost-saving opportunities. In 2020, our management team continues to review and adjust our cost structure and operating footprint, optimize our operations, and invest in improved technology.
During 2020, in an effort to right-size our operating footprint, we terminated leases in Wilkes Barre and Grand Prairie and exited our last direct mail facility in Jacksonville. We will migrate our fulfillment business from the Grand Prairie operations into a new 300,000 square foot facility in Kansas City by the end of 2020. The new Kansas City location will be our primary facility in the Midwest. We have successfully reduced the footprint of our Customer Care business by reducing our Austin office location by 50,000 square feet in addition to exiting and subleasing one of our Manila offices since that datethe business is operating effectively in a work-from-home environment.
In the three months ended September 30, 2020 and are reported in continuing operations. 2019 we recorded restructuring charges of $1.4 million and $3.1 million respectively. The purchase price was $3.5charges for the three months ended September 30, 2020 included $0.6 million of severance charges, $0.6 million of facility related and other expenses, and $0.2 million in cash.capital losses from the asset disposal associated with the Summit deal. The fair valuecharges for the three months ended September 30, 2019 were primarily related to or comprised of $1.1 million of severance expense, $1.3 million of lease impairment and other charges, and $0.7 million contract termination fee.
In the nine months ended September 30, 2020 and 2019, we recorded restructuring charges of $8.0 million and $10.9 million respectively. The charges for the nine months ended September 30, 2020 included $3.0 million of lease impairment charges related to the exit from our direct mail facilities, $2.0 million of severance charges, $1.3 million in capital losses from the asset disposal associated with the Summit deal and $2.0 million of facility related and other expenses. The charges for the nine months ended September 30, 2019 were primarily related to or comprised of the identified tangible assets residual purchase price methodology used in the calculation to determine goodwill allocation relied on management's assumptions. These assumptions, which are significant to the calculated fair values, are considered Level 3 inputs under the fair value hierarchy established by ASC 820, as they are unobservable.
The following table summarizes the restructuring charges which are recorded in “Restructuring Expense” in the eventCondensed Consolidated Statement of Comprehensive Income (Loss).
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
In thousands | 2020 | 2019 | 2020 | 2019 | ||||||||||||
Customer database build write off | $ | — | $ | — | $ | — | $ | 4,036 | ||||||||
Contract termination fee | — | 667 | — | 2,767 | ||||||||||||
| Adjustment to Contract termination fee | — | — | (306 | ) | — | |||||||||||
Severance | 641 | 1,116 | 2,053 | 1,760 | ||||||||||||
| Facility, asset impairment and other expense | ||||||||||||||||
| Lease impairment and termination expense | — | 888 | 2,974 | 956 | ||||||||||||
| Fixed Asset disposal and impairment charges | 154 | 26 | 1,294 | 589 | ||||||||||||
| Facility and other expenses | 624 | 383 | 1,990 | 759 | ||||||||||||
Total facility, asset impairment and other expense | 778 | 1,297 | 6,258 | 2,304 | ||||||||||||
Total | $ | 1,419 | $ | 3,080 | $ | 8,005 | $ | 10,867 | ||||||||
The following table summarizes the business is sold priorchanges in liabilities related to April 1, 2019.restructuring activities:
In thousands | Three Months Ended September 30, 2020 | |||||||||||||||
Contract Termination Fee | Severance | Facility, asset impairment and other expense | Total | |||||||||||||
Beginning Balance: | $ | 695 | $ | 775 | $ | 2 | $ | 1,472 | ||||||||
| Additions | — | 611 | 576 | 1,187 | ||||||||||||
| Payments and adjustments | (695 | ) | (608 | ) | (570 | ) | (1,873 | ) | ||||||||
Ending Balance: | $ | — | $ | 778 | $ | 8 | $ | 786 | ||||||||
In thousands | Nine Months Ended September 30, 2020 | |||||||||||||||
Contract Termination Fee | Severance | Facility, asset impairment and other expense | Total | |||||||||||||
Beginning balance: | $ | 1,491 | $ | 360 | $ | 70 | $ | 1,921 | ||||||||
| Additions | — | 2,022 | 3,145 | 5,167 | ||||||||||||
| Payments and adjustments | (1,491 | ) | (1,604 | ) | (3,207 | ) | (6,302 | ) | ||||||||
Ending balance: | $ | — | $ | 778 | $ | 8 | $ | 786 | ||||||||
In thousands | Three Months Ended September 30, 2019 | |||||||||||||||
Contract Termination Fee | Severance | Facility, asset impairment and other expense | Total | |||||||||||||
Beginning Balance: | $ | 2,100 | $ | 231 | $ | 76 | $ | 2,407 | ||||||||
Additions | 667 | 1,116 | 452 | 2,235 | ||||||||||||
Payments | (700 | ) | (739 | ) | (387 | ) | (1,826 | ) | ||||||||
Ending Balance: | $ | 2,067 | $ | 608 | $ | 141 | $ | 2,816 | ||||||||
For the Nine Months Ended September 30, 2019 | ||||||||||||||||
Contract Termination Fee | Severance | Facility, asset impairment and other expense | Total | |||||||||||||
| Beginning Balance: | $ | — | $ | — | $ | — | $ | — | ||||||||
Additions | 2,767 | 1,760 | 528 | 5,055 | ||||||||||||
Payments | (700 | ) | (1,152 | ) | (387 | ) | (2,239 | ) | ||||||||
Ending Balance: | $ | 2,067 | $ | 608 | $ | 141 | $ | 2,816 | ||||||||
We expect that in connection with our cost-saving and restructuring initiatives, we will incur total restructuring charges of fair valueapproximately $21.0 million through the end of the contingent consideration requires subjective assumptions to be made regarding revenue growth, discount rates, discount periods, and probability assessments with respect to the likelihood2020. We recognized $8.0 million of reaching the established targets. The fair value measurement is based on significant inputs unobservablerestructuring expense in the marketnine months ended September 30, 2020 and thus represents a Level 3 measurement. Measurement is sensitive to changes in revenue projections usedrecognized $11.8 million of restructuring expense in the assumptions. Changes in current expectations and revenue performance could change the probability of achieving the targets within the measurement period and result in an increase or decrease in the fair value of the contingent consideration. As of September 30, 2017, weyear ended December 31, 2019. We expect that the contingent consideration will be paid at the maximum potential amount of $35.0 million.
| In thousands | Fair Value | |||
| Balance at December 31, 2016 | $ | 29,725 | ||
| Accretion of interest | 3,122 | |||
| Balance at September 30, 2017 | $ | 32,847 | ||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| In thousands | 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Revenue | $ | — | $ | 11,683 | $ | — | $ | 35,554 | ||||||||
| Labor | — | 4,413 | — | 14,916 | ||||||||||||
| Production and distribution | — | 171 | — | 583 | ||||||||||||
| Advertising, selling, general and administrative | — | 2,535 | — | 8,299 | ||||||||||||
| Depreciation and software amortization | — | 576 | — | 1,677 | ||||||||||||
| Interest expense, net | — | 1,784 | — | 3,870 | ||||||||||||
| Other, net | — | 587 | — | 765 | ||||||||||||
| Income from discontinued operations before income taxes | — | 1,617 | — | 5,444 | ||||||||||||
| Income tax expense | — | 373 | — | 1,464 | ||||||||||||
| Net income from discontinued operations | $ | — | $ | 1,244 | $ | — | $ | 3,980 | ||||||||
Cautionary Note Regarding Forward-Looking Statements
This report, including this Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)(“MD&A”), contains “forward-looking statements” within the meaning of the federal securities laws. All such statements are qualified by this cautionary note, which is provided pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the “1933 Act”) and Section 21E of the Securities Exchange1934 Act, of 1934.as amended. Forward-looking statements may also be included in our other public filings, press releases, our website, and oral and written presentations by management. Statements other than historical facts are forward-looking and may be identified by words such as “may,” “will,” “expects,” “believes,” “anticipates,” “plans,” “estimates,” “seeks,” “could,” “intends,” or “the negative thereof” or similar words of similar meaning. Examples include statements regarding (1) the impact the COVID-19 pandemic has had and the anticipated impact it will have on our business, strategies and initiatives, related thereto, (2) the impact of restructuring activities and other adjustments to our cost structure and other actions designed to respond to market conditions and improve our performance, and the anticipated effectiveness and expenses associated with these actions, (3) our financial outlook for revenues, earnings per share, operating income, expense related to equity-based compensation, capital resources and other financial items, (4) expectations for our businesses and for the industries in which we operate, including the impact of economic conditions of the markets we serve and on the marketing expenditures and activities of our clients and prospects, (5) competitive factors, (6) acquisition, disposition, and development plans, (7) expectations for and effects of acquired and disposed businesses and our ability to effect such acquisitions and dispositions, (8) our stock repurchase program, (9) expectations regarding legal proceedings and other contingent liabilities, (8) the impact of recent tax reform legislation on our results of operations, and (10)(9) other statements regarding future events, conditions, or outcomes.
These forward-looking statements are based on current information, expectations, and estimates and involve risks, uncertainties, assumptions, and other factors that are difficult to predict and that could cause actual results to vary materially from what is expressed in or indicated by the forward-looking statements. In that event, our business, financial condition, results of operations, or liquidity could be materially adversely affected and investors in our securities could lose part or all of their investments. Some of these risks, uncertainties, assumptions, and other factors can be found in our filings with the Securities and Exchange Commission,SEC, including the factors discussed under “Item 1A. Risk Factors” in ourthe Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2019 (the “2019 10-K”), Part II, Item 1a. “ Risk Factors” in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2017,2020 and in our other reports filed or furnished with the “Cautionary Note Regarding Forward-Looking Statements” in our third quarter 2017 earnings release issued on September 28, 2017.SEC. The forward-looking statements included in this report and those included in our other public filings, press releases, our website, and oral and written presentations by management are made only as of the respective dates thereof, and we undertake no obligation to update publicly any forward-looking statement in this report or in other documents, our website, or oral statements for any reason, even if new information becomes available or other events occur in the future.
Overview
The following MD&A section is intended to help the reader understand the results of operations and financial condition of Harte Hanks, Inc.Hanks. This section is provided as a supplement to, and should be read in conjunction with, our consolidated financial statementsCondensed Consolidated Financial Statements and the accompanying notes to the condensed consolidated financial statementsincluded herein as well as our 2016 Form2019 10-K. Our 2016 Form2019 10-K contains a discussion of other matters not included herein, such as disclosures regarding critical accounting policies and estimates, and contractual obligations.
Harte Hanks partners with clients to deliver relevant, connected, and quality customer interactions. Our approach starts with discovery and learning, which leads to customer journey mapping, creative and content development, analytics, and data management, and ends with execution and support in a variety of digital and traditional channels. We do something powerful: we produce engaging and memorable customer interactions to drive business results for our clients, which is why Harte Hanks is famousknown for developing better customer relationships and experiences and defining interaction-led marketing.
Our services provide our clients around the globe withinclude a wide variety of integrated, multichannel,multi-channel, data-driven solutions for top brands around the globe. We help our clients gain insight into their customers’ behaviors from their data and use that insight to create innovative multi-channel marketing programs to deliver a return on marketing investment. We believe our clients’ success is determined not only by how good their tools are, but how well we help them use thosethe tools to gain insight and analyze their consumers.consumers’ preferences. This results in a strong and enduring relationship between our clients and their customers.customers which is key to being leaders in customer interaction. We offer a full complementsuite of capabilities and resources to provide a broad range of marketing services, in print and electronicutilizing a variety of media from direct mail to email, including:
Agency
Digital Solutions
Database Marketing Solutions
Direct mail
Mail and digital services;Product Fulfillment
Logistics
Contact centers
We are affected by the general, national, and international economic and business conditions in the markets where we and our customers operate. Marketing budgets are largely discretionary in nature, and as a consequence are easier for our clients to reduce in the short-term than all other expenses should they face expense pressure.expenses. Our revenues are also affected by the economic fundamentals of each industry that we serve, various market factors, including the demand for services by our clients, and the financial condition of and budgets available to specificour clients, among other factors. In particular, for most of our recent history our retail client vertical was our largest, usually representing well over a quarter of our revenues. As the retail industry has struggled in the face of internet-based shopping models, many of our clients, and consequently our revenues, have suffered.
We continued to face a challenging competitive environment in 2017.2020. The sale of Trilliumour direct mail assets and equipment to Summit in 2016, the new credit facility we entered intoApril 2020, together with our restructuring activities, have and will continue to result in 2017, and our announced intention to seek strategic alternatives for 3Q Digitala decrease of recurring expenses. These are all parts of our efforts to prioritize our investments and focus on our core business of optimizing the journey of our clients' customer journeycustomers’ clients across an omni-channel delivery platform. We expect these actions will continue to enhance our liquidity and financial flexibility. For additional information, see Liquidity“Liquidity and Capital ResourcesResources” section.
COVID-19
In the first quarter of 2020, we took a number of precautionary measures designed to help minimize the risk of the spread of the virus among our employees, including suspending all non-essential employee travel worldwide, temporarily closing the majority of our domestic and foreign offices, extensively and frequently disinfecting our offices that remained open, enforcing social distancing to the extent possible and requiring the majority of our employees to work remotely. These measures will remain in effect until we can safely re-open our offices.
We continue to closely monitor the impact of the pandemic on all aspects of our business, including how the pandemic continues to impact our customers, employees, suppliers, vendors and business partners, as well as how it has impacted our liquidity and ability to comply with covenants in our credit agreement.
In connection with the pandemic, some of our customers have reduced the amount of work we provide to them while other customers have requested accommodations including extensions of payment or restructuring of agreements. In addition, some of our customers have declared bankruptcy and it is possible that additional customers will file for bankruptcy in the coming months. We have also seen a number of wins for our contact centers solutions services as well as increased volume for existing customers as a result of the environment caused by the pandemic including an increased need for contact center services. While the pandemic has not had a material effect on our business, liquidity or ability to comply with covenants to date, given the dynamic nature of the pandemic, we may experience material impacts in the future. We recommend that you review “Item 1A. Risk Factors” in this Quarterly Report on Form 10-Q for a further discussion on COVID-19.
Recent Developments
Restructuring Activities
In 2019, our management team, along with members of the Board, formed a project committee focused on our cost-saving initiatives and other restructuring efforts. This committee reviewed each of our business lines and other operational areas to identify both one-time and recurring cost-saving opportunities. In 2020, our management team continues to review and adjust our cost structure and operating footprint, optimize our operations, and invest in improved technology.
During 2020, in an effort to right-size our operating footprint, we terminated leases in Wilkes Barre and Grand Prairie and exited our last direct mail facility in Jacksonville. We will migrate our fulfillment business from the Grand Prairie operations into a new 300,000 square foot facility in Kansas City by the end of 2020. The new Kansas City location will be our primary facility in the Midwest. We have successfully reduced the footprint of our Customer Care business by reducing our Austin office location by 50,000 square feet in addition to exiting and subleasing one of our Manila offices since the business is operating effectively in a work-from-home environment.
In the three and nine months ended September 30, 2020, we recorded restructuring charges of $1.4 million and $8.0 million, respectively. These charges were mainly related to lease termination and impairment charges, fixed asset impairment and disposal charges and other facility related expenses as well as severance payments.
We expect that in connection with our cost-saving restructuring initiatives, we will incur total restructuring charges of approximately $21.0 million through the end of 2020. We recognized $8.0 million of restructuring expense in the nine months ended September 30, 2020 and $11.8 million of restructuring expense in the year ended December 31, 2019. We expect to incur another $1.2 million of restructuring charges in the fourth quarter of 2020.
Sale of assets and production equipment from Jacksonville facility and strategic partnership with Summit
On April 24, 2020, we sold the majority of the production equipment from our Jacksonville facility to Summit Direct Mail Inc.(“Summit”) for $1.5 million. Subsequent to April 2020, the Company sold or scrapped the remaining supplies and equipment in Jacksonville for additional proceeds of $0.5 million. In addition to the asset sales, the Company entered into a strategic partnership with Summit, pursuant to which the Company continues to manage client relationships, and may at its discretion and direction, use Summit to perform direct mail campaigns. The Company is well positioned to provide the full suite of marketing solutions to Summit customers and will leverage the expanded print and direct mail capabilities provided by the partnership with Summit to grow our business.
As a result of this sale, we booked a $1.9 million impairment charge on our Jacksonville facility and recognized a $1.4 million capital loss and impairment expense from the fixed asset disposal and impairment associated with the Summit deal. These expenses were included in our restructuring expense for the nine months ended September 30, 2020.
On April 14, 2020, the Company entered into a promissory note with Texas Capital Bank, for an unsecured loan with a principal amount of $10.0 million made to the Company pursuant to the Paycheck Protection Program (“PPP Term Note”) under the CARES Act. The PPP Term Note is guaranteed by the United States Small Business Administration.
The PPP Term Note bears interest at a fixed annual rate of 1.00%, with interest deferred for the first six months. Beginning in November 2020, the Company will be required to make 18 equal monthly payments of principal and interest with the final payment due in April 2022, unless the loan is forgiven as described below. The PPP Term Note M, Discontinued Operations,may be accelerated upon the occurrence of an event of default.
The proceeds may be used to maintain payroll or make certain covered interest payments, lease payments and utility payments. Under the terms of the Notes to Condensed Consolidated Financial Statements we sold our Trillium operations on December 23, 2016 for gross proceeds of $112.0 million. Because Trillium represented a distinct business unit with operations and cash flows thatCARES Act, the Company can be clearly distinguished from the rest of Harte Hanks, both operationally andgranted forgiveness for financial purposes, the resultsall or a portion of the Trillium operationsloan granted under the Paycheck Protection Program, with such forgiveness to be determined, subject to limitations, based on the use of the loan proceeds for permitted expenses.
At this time, the Company anticipates forgiveness of the entire amount of the PPP Term Note; however, we are reportednot in a position to estimate the timing of the completion of the forgiveness process. We expect to apply for forgiveness of the PPP Term Note in the fourth quarter of 2020. We have elected to classify the principal balance of the PPP Term Note within both Short-term and Long-term debt, net, on the condensed consolidated balance sheet as discontinued operations for all periods presentedof September 30, 2020. Under the existing terms of the PPP Term Note, if no forgiveness is granted, approximately $6.7 million of the principal amount of the PPP Term Note would be due within twelve months.
Texas Capital Credit Facility
On May 11, 2020, we entered into an amendment to the Texas Capital Credit Facility which further extended the maturity of the facility by one year to April 17, 2022 and are excluded from Management’s Discussion and Analysis of Financial Condition and decreased availability under the facility to $19 million.
Results of Operations below. Results of the remaining Harte Hanks business are reported as continuing operations.
Operating results from continuing operations were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
In thousands, except percentages | 2020 | 2019 | % Change | 2020 | 2019 | % Change | ||||||||||||||||||
Revenues | $ | 47,702 | $ | 51,414 | (7.2 | )% | $ | 129,825 | $ | 165,250 | (21.4 | )% | ||||||||||||
Operating expenses | 46,917 | 55,889 | (16.1 | )% | 140,033 | 187,278 | (25.2 | )% | ||||||||||||||||
Operating income (loss) | $ | 785 | $ | (4,475 | ) | 117.5 | % | $ | (10,208 | ) | $ | (22,028 | ) | (53.7 | )% | |||||||||
Operating margin | 1.6 | % | (8.7 | )% | (7.9 | )% | (13.3 | )% | ||||||||||||||||
Loss before income taxes | $ | (1,674 | ) | $ | (5,886 | ) | (71.6 | )% | $ | (15,601 | ) | $ | (22,478 | ) | (30.6 | )% | ||||||||
Diluted loss per common share from operations | $ | (0.27 | ) | $ | (0.97 | ) | (72.4 | )% | $ | (0.48 | ) | $ | (3.77 | ) | (87.2 | )% | ||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||
| In thousands | 2017 | 2016 | % Change | 2017 | 2016 | % Change | ||||||||||||||||
| Revenues | $ | 94,424 | $ | 97,425 | (3.1 | )% | $ | 284,040 | $ | 294,305 | (3.5 | )% | ||||||||||
| Operating expenses | 93,474 | 101,511 | (7.9 | )% | 291,222 | 313,626 | (7.1 | )% | ||||||||||||||
| Operating income (loss) from continuing operations | $ | 950 | $ | (4,086 | ) | (123.3 | )% | $ | (7,182 | ) | $ | (19,321 | ) | (62.8 | )% | |||||||
| Operating margin | 1.0 | % | (4.2 | )% | (2.5 | )% | (6.6 | )% | ||||||||||||||
| Loss from continuing operations before taxes | $ | (2,098 | ) | $ | (5,386 | ) | (61.0 | )% | $ | (15,812 | ) | $ | (22,664 | ) | (30.2 | )% | ||||||
| Loss per common share from continuing operations | (0.04 | ) | (0.07 | ) | (42.9 | )% | (0.20 | ) | (0.27 | ) | (25.9 | )% | ||||||||||
Revenues
Three months ended September 30, 2020 vs. Third Quarter of 2016
Revenues from continuing operations decreased $3.0declined $3.7 million, or 3.1%7.2%, in the third quarter of 2017three months ended September 30, 2020, compared to the third quarter of 2016.three months ended September 30, 2019. These results reflect the impact of declines in most of our industry verticals. Revenues declined in our financial services, retail, B2B,transportation, and consumerhealthcare verticals decreasing $1.7by $5.1 million, or 6.4%43.9%, $2.2$3.4 million, or 10.1%38.9%, $2.7 million, or 83.7%, and $0.2$1.2 million, or 0.8%21.8%, respectively. This isThese declines were primarily due to lost clients and clients reducing their marketing spend with us.lower volumes of sales to existing clients. These decreasesdeclines were partially offset slightly by anthe increase in our financial services verticalB2B and consumer brands verticals of $1.2$5.8 million, or 8.4%. This increase was generated by expansion of work from existing clients. Our transportation51.0%, and healthcare verticals were flat to the prior year.
Nine months ended September 30, 2020 vs. Nine months ended September 30, 2019
Revenues declined $35.4 million, or 21.4%, in the first nine months of 2017ended September 30, 2020, compared to the first nine months of 2016.ended September 30, 2019. These results reflect the impact of declines in most of our industry verticals. Revenues declined in our retail, financial services, transportation and healthcare and B2B verticals decreasing $6.8by $17.7 million, or 8.8%55.9%, $5.4$15.3 million, or 24.9%41.6%, and $2.0$9.5 million, or 3.2%83.9%,and $2.7 million, or 17.8%, respectively. This isThese declines were primarily due to lost clients and clients reducing their marketing spend on programs with us.lower volumes of sales to existing clients. These decreasesdeclines were partially offset slightly by increasesthe increase in ourthe B2B and consumer and financial services verticalsbrands vertical of $1.2$7.3 million, or 1.8%20.8%, and $3.0$2.5 million, or 7.2%7.1%, respectively. These increases were generatedrespectively, driven by expansion of work from existing clients. Our transportation vertical was flat to the prior year.
Operating Expenses
Three months ended September 30, 2020 vs. Third Quarter of 2016
Operating expenses from continuing operations were $93.5$46.9 million in the third quarter of 2017,three months ended September 30, 2020, compared to $101.5$55.9 million in the third quarter of 2016. Labor costs decreased $4.4three months ended September 30, 2019. Production and distribution expenses declined $4.1 million, or 7.5%23.9%, compared to the third quarter of 2016three months ended September 30, 2019 primarily due to lower managed payroll expenserevenue, consolidation of locations and closure of mail facilities as a result of our expensewell as cost reduction efforts. General and administrative expense decreased $2.4initiatives. Labor costs declined $1.5 million, or 21.1%5.4%, compared to the prior year primarily due a reduction in employee related expenses. Production and distribution decreased $0.5 million, or 2.0%three months ended September 30, 2019, compared to the same quarter of the prior year primarily due to a decreaselower payroll expense from lower revenue across most revenue streams and our expense reduction efforts, which was partially offset by higher temporary labor expenses in outsourced servicesContact Center driven by an increased volume of work. Advertising, Selling, General and mail supply chain expenses. Depreciation and intangible asset and software amortizationAdministrative expense decreased $0.6$1.1 million, or 19.3%, compared to the third quarter of 2016.
The largest components of 2016.
Postage costs offor mailings are borne by our clients and are not directly reflected in our revenues or expenses.
Nine months ended September 30, 2020 vs. Nine months ended September 30, 2019
Operating expenses were $140.0 million in the nine months ended September 30, 2020, compared to $187.3 million in the nine months ended September 30, 2019. Production and distribution expenses declined $21.2 million, or 36.5%, compared to the three months ended September 30, 2019 primarily due to lower revenue and cost reduction initiatives. Labor costs declined $17.4 million, or 18.5%, compared to the nine months ended September 30, 2019, primarily due to lower payroll expense from lower revenue across most revenue streams and our expense reduction efforts, which was partially offset by higher temporary labor expenses in Contact Center driven by an increased volume of work. Advertising, Selling, General and Administrative expense decreased $4.6 million, or 23.0%, compared to the nine months ended September 30, 2019, primarily due to $1.8 million of lower business services expense resulting from the reduction in IT services expenses including data processing fees, software license fees and data network services, $0.8 million of lower employee expenses as a result of less travel and related expenses, $0.6 million of lower accrued consulting expense and $0.5 million lower bad debt expenses. Depreciation expense declined $1.1 million, or 27.8%, compared to the prior year quarter, primarily due to lower capital expenditures and disposals of mail equipment.
The largest components of our operating expenses are labor, mail transportation expenses and outsourced costs. Each of these costs is, at least in part, variable and tends to fluctuate in line with revenues and the demand for our services. Mail transportation rates have increased over the last few years due to demand and supply fluctuations within the transportation industry. Future changes in mail transportation expenses will continue to impact our total production costs and total operating expenses and may have an impact on future demand for our supply chain management services.
Postage costs for mailings are borne by our clients and are not directly reflected in our revenues or expenses.
Operating Income (loss)
Three months ended September 30, 2020vs. Three months ended September 30, 2019
Operating income was $0.8 million in the three months ended September 30, 2020, compared to a $4.5 million operating loss in the three months ended September 30, 2019. The $5.3 million improvement was primarily driven by the impact of restructuring activities with a $8.4 million reduction in operating expenses which exceeded the revenue decline of $3.7 million.
Nine months ended September 30, 2020vs. Nine months ended September 30, 2019
Operating loss was $10.2 million in the nine months ended September 30, 2020, compared to $22.0 million in the nine months ended September 30, 2019. The $11.8 million improvement was primarily driven by the impact of restructuring activities with a $46.7 million reduction in operating expenses which exceeded the revenue decline of $35.4 million.
Interest Expense,
Three months ended September 30, 2020 vs. Third Quarter of 2016
Interest expense, net, in the third quarter of 2017 increased $0.6three months ended September 30, 2020 decreased $0.1 million compared to the third quarterthree months ended September 30, 2019 due to lower interest rate compared to prior year period.
Nine months ended September 30, 2020 vs. Nine months ended September 30, 2019
Interest expense, net, in the nine months ended September 30, 2020 decreased $0.1 million compared to the three months ended September 30, 2019 due to lower interest rate compared to prior year period.
Gain on sale
The gain on sale for three and nine months ended September 30, 2019 was the result of 2016. This increase is$5.0 million earn out we received related to the qualified sale of 3Q Digital. There was no gain on sale recognized in the three or nine months ended September 30, 2020.
Other Expense
Three months ended September 30, 2020 vs. Three months ended September 30, 2019
Other expense, net, increased $1.1 million in the three months ended September 30, 2020, compared to the three months ended September 30, 2019 mainly due to an increase in interest accretion related to the 3Q Digital contingent consideration and interestcurrency revaluation expense incurred on the Texas Capital Credit Facility. Interestof $1.5 million which was partially offset by $0.5 million of lower pension expense.
Nine months ended September 30, 2020 vs. Nine months ended September 30, 2019
Other expense, incurred in 2016 related to the 2016 Secured Credit Facility was reclassified to discontinued operations in accordance with ASC 205-20-45-6 and is not reflectednet, were flat in the change in interest expense.
Three months ended September 30, 2020vs. Three months ended September 30, 2019
The income tax benefit of 2017 vs. Third Quarter of 2016
We have in general historically calculated the provision for income taxes for 2017during interim reporting periods by applying an estimate of the annual effective tax rate for the full calendar year to ordinary income or loss for the reporting period. However, we used a discrete effective tax rate method to calculate income taxes in 2016for the three months ended September 30, 2020 and September 30, 2019 because we determined that our ordinary income or loss cannot be reliably estimated and small changes in estimated ordinary income would result in significant changes in the estimated annual effective tax rates.
Nine months ended September 30, 2020vs. Nine months ended September 30, 2019
The income tax benefit of $12.9 million in the nine months ended September 30, 2020 represents an increase in benefit of $13.7 million when compared to the nine months ended September 30, 2019. Our effective tax rate suchwas 82.4% for the nine months ended September 30, 2020, increasing from a negative effective tax rate of 3.7% for the nine months ended September 30, 2019. The effective income tax rate calculated for the nine months ended September 30, 2020 differs from the federal statutory rate of 21.0%, primarily due to the change in valuation allowances recorded on our deferred tax assets for federal net operating losses incurred, as a result of the enactment of the CARES Act during the nine months ended September 30, 2020. These losses will be carried back to tax years when the federal statutory rate was 35%, resulting in an additional tax benefit.
We have in general historically calculated the provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate for the full calendar year to ordinary income or loss for the reporting period. However, we used a discrete effective tax rate method to calculate income taxes for the nine months ended September 30, 2020 and September 30, 2019 because we determined that our ordinary income or loss cannot be reliably estimated and small changes in estimated ordinary income would result in significant changes in the historical method would not provide a reliable estimate for 2016.estimated annual effective tax rates.
Liquidity and Capital Resources
Sources and Uses of Cash
Our cash and cash equivalent and restricted cash balances were $11.4$31.8 million and $46.0$34.1 million at September 30, 20172020 and December 31, 2016,2019, respectively. On April 20, 2020, the Company received PPP Loan proceeds in the amount of $10 million. On August 5, 2020, we received $3.3 million in federal tax refunds related to our 2018 NOL carryback. We also expect to receive additional tax refunds of $6.6 million and $2.9 million in 2020 and 2021, respectively, as a result of the change to the tax NOL carryback provisions included in the CARES Act.
Our principal sources of liquidity are cash on hand, cash provided by operating activities, borrowings, and proceeds from asset sales.borrowings. Our cash is primarily used for general corporate purposes, working capital requirements, and capital expenditures.
At this time, we believe that we will be able to continue to meet our liquidity requirements and fund our fixed obligations (such as debt services, operating leases and unfunded pension plan benefit payments) and other cash needs for our operations for at least the next twelve months through a combination of cash on hand, cash flow from operations, and borrowings under the Texas Capital Credit Facility. Although the Company believes that it will be able to meet its cash needs for the foreseeable future, if unforeseen circumstances arise the Company may need to seek alternative sources of liquidity. To date, the COVID-19 pandemic has not had a material impact on the Company’s liquidity or on the Company’s ability to meet its obligations under the Texas Capital Credit Facility, including its ability to comply with all covenants. We will continue to closely monitor the impact the COVID-19 pandemic has on the Company’s liquidity and assess whether any additional cost saving measures, including capital expenditure deferral or human capital decisions, are needed.
Operating Activities
Net cash used in operating activities for the nine months ended September 30, 20172020 was $42.0$11.4 million, compared to net cash provided by operating activities of $26.5$9.4 million for the nine months ended September 30, 2019. The $20.8 million year-over-year decrease in cash provided by operating activities was primarily due to the $15.9 million tax refund and $5.0 million earn out related to the Qualified Sale of 3Q Digital each of which we received in the second quarter of 2019.
Investing Activities
Net cash provided by investing activities was $0.5 million for the nine months ended September 30, 2020, compared to net cash used in investing activities of $1.6 million for the nine months ended September 30, 2019 The change was mainly due to the $1.7 million of proceeds from the sale of direct mail assets and equipment to Summit and other vendors in 2020 and less capital expenditure activities for the nine months ended September 30, 2020 as compared to the same period in 2019.
Financing Activities
Net cash provided by financing activities was $7.5 million for the nine months ended September 30, 2020, compared to $3.4 million net cash provided by financing activities for the nine months ended September 30, 2019. The $4.1 million year-over-year increase was primarily due to the $10 million PPP loan we received in the second quarter of 2020, which was partially offset by the repayment of $1.6 million of the borrowings outstanding under our Texas Capital Credit Facility in the nine months ended September 30, 2016. The $68.5 million year-over-year decrease is primarily the result of a $69.4 million difference in cash provided by changes in operating assets and liabilities. This difference is driven by a $28.4 million decrease in other accrued expenses and liabilities, which reflects the tax payment made in 2017 related to the taxable gain on the sale of our Trillium business in 2016. The other principal driver is the $27.9 million decrease in cash provided by accounts receivable due to our year over year revenue decline.
Foreign Holdings of Cash
Consolidated foreign holdings of cash as of September 30, 20172020 and 20162019 were $3.4 million and $3.2 million, and $4.0 million, respectively. The company is subject to, and has accrued additional U.S. income taxes and foreign withholding taxes for repatriated cash.
Credit Facilities
On March 10, 2016, we entered the 2016 Secured Credit Facility with Wells Fargo Bank, N.A. as Administrative Agent. This facility consisted of a maximum $65.0 million revolving credit facility and a $45.0 million term loan. The lenders provided waivers of our noncompliance of the minimum fixed charge coverage ratio and leverage ratios under the 2016 Secured Credit Facility as of April 30, 2016, June 30, 2016, September 30, 2016, and October 31, 2016. Additional covenants in the 2016 Secured Credit Facility included, among other things, restrictions on the company and its subsidiaries from liquidating, dissolving, suspending, or ceasing subsidiaries or a substantial portion of the business. As such, repayment was required following the completion of the sale of Trillium. Outstanding loans were repaid in full on December 23, 2016 using the proceeds of the sale and the 2016 Secured Credit Facility was likewise terminated.
At September 30, 2020, we had letters of credit in the amount of $1.8 million outstanding. No amounts were drawn against these letters of credit at September 30, 2020 These letters of credit exist to support insurance programs relating to workers’ compensation, automobile, and general liability. We had no other off-balance sheet financing activities at September 30, 2020.
As of September 30, 2020 and December 31, 2019, we had $17.1 million and $18.7 million of borrowings outstanding under the Texas Capital Facility, respectively. As of September 30, 2020, we had the ability to borrow an additional $0.1 million under the facility.
On April 20, 2020, the Company received loan proceeds in the amount of $10 million under the Small Business Administration PPP. The credit facility adds additional financial flexibilityPPP, established as part of the CARES Act, provides for loans to qualifying businesses for amounts up to 2.5 times of the companyaverage monthly payroll expenses of the qualifying business. The loans and accrued interest are forgivable so long as, over the eight-week period following the receipt by the Company of the PPP Loan, the Company uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries during the eight-week period.
The unforgiven portion of the PPP Term Notes is payable over two years at a fixed annual rate of 1.00%, with interest deferred for the first six months . The Company used the proceeds for working capital and general corporate purposes. See
Outlook
We consider such factors as total cash and cash equivalents, current assets, current liabilities, total debt, revenues, operating income, cash flows from operations, investing activities, and financing activities when assessing our liquidity. Our principal sources of liquidity are cash on hand, cash provided by operating activities, and borrowings. Our management of cash is designed to optimize returns on cash balances and to ensure that it is readily available to meet our operating, investing, and financing requirements.
Critical Accounting Policies
Critical accounting policies are defined as those that, in our judgment, are most important to the portrayal of our company’sCompany’s financial condition and results of operations and which require complex or subjective judgments or estimates. We considerRefer to the following to be2019 10-K for a discussion of our critical accounting policies.
Our Significant Accounting policies asare described in detailNote A, Overview and Significant Accounting Policies, in our 2016 Form 10-K:
See Recent Accounting Pronouncements
Market risk includes the risk of loss arising from adverse changes in market rates and prices. We face market risks related to interest rate variations and to foreign exchange rate variations. WeFrom time to time, we may utilize derivative financial instruments to manage our exposure to such risks.
The interest rate on the Texas Capital Credit Facility is variable based upon the prime rate or LIBOR and, therefore, is affected by changes in market interest rates. We do not believeestimate that a one percentage100-basis point changeincrease in averagemarket interest rates on the actual borrowings in 2019 would have a materialan immaterial impact on our interest expense. As such,At September 30, 2020, the company had $17.1 million of debt outstanding under the Texas Capital Credit Facility. The nature and amount of our borrowings can be expected to fluctuate as a result of business requirements, market conditions, and other factors. Due to our overall debt level and cash balance at September 30, 2020, anticipated cash flows from operations, and the various financial alternatives available to us, we do not believe that we currently have significant exposure to market risks associated with changingan adverse change in interest rates. At this time, we have not entered into any interest rate swap or other derivative instruments to hedge the effects of adverse fluctuations in interest rates.
Our earnings are also affected by fluctuations in foreign currency exchange rates as a result of our operations in foreign countries. Our primary exchange rate exposure is to the Euro, British Pound, and Philippine Peso. We monitor these risks throughout the normal course of business. The majority of the transactions of our U.S. and foreign operations are denominated in the respective local currencies. Changes in exchange rates related to these types of transactions are reflected in the applicable line items making up operating income (loss) in our Condensed Consolidated Statements of Comprehensive Loss.Income (Loss). Due to the current level of operations conducted in foreign currencies, we do not believe that the impact of fluctuations in foreign currency exchange rates on these types of transactions is significant to our overall annual earnings. A smaller portion of our transactions are denominated in currencies other than the respective local currencies. For example, intercompany transactions that are expected to be settled in the near-term are denominated in U.S. Dollars. Since the accounting records of our foreign operations are kept in the respective local currency, any transactions denominated in other currencies are accounted for in the respective local currency at the time of the transaction. Any foreign currency gain or loss from these transactions, whether realized or unrealized, results in an adjustment to income, which is recorded in “Other, net” in our Condensed Consolidated Statements of Comprehensive Loss.Income (Loss). Transactions such as these amounted to $0.7$1.0 million in pre-tax currency transaction losses in the first nine months of 2017.ended September 30, 2020. At this time, we are not entered intoparty to any foreign currency forward exchange contracts or other derivative instruments to hedge the effects of adverse fluctuations in foreign currency exchange rates.
We do not enter into derivative instruments for any purpose other than cash flow hedging.purpose. We do not speculate using derivative instruments.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures are controlsas defined in Rule 13a-15(e) and procedures15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controlsforms, and procedures include controls and procedures designed to ensure that information required to be disclosed in such reportsinformation is accumulated and communicated to management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer and Corporate Controller(“CFO”), as appropriate to allow timely decisions regarding required disclosure.
Our management, including our Chief Executive Officer, Chief Financial Officer,CEO and Corporate Controller, carried out an evaluation ofCFO, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rulepursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of September 30, 2017.2020, the end of the period covered by this Quarterly Report on Form 10-Q. Based on thatupon such evaluation, our Chief Executive Officer, Chief Financial Officer,CEO and Corporate ControllerCFO concluded that the company'sdesign and operation of these disclosure controls and procedures were not effective, as of September 30, 2017 dueat the “reasonable assurance” level, to the material weaknesses in internal control over financial reporting as described in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2016.
Changes in Internal Control over Financial Reporting
There were no changes in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2016, weinternal controls over financial reporting during our most recent fiscal quarter that have undertaken actionsmaterially affected, or are reasonably likely to redesign processes and controls to address all of the material weaknesses. We have engaged specialists to assist us with reviewing, documenting, and (as needed) supplementing our controls, with a goal of providing controls that not only better address both the accuracy and precision of management’s review, but also enhance our ability to manage our business as it has evolved. We continue to evaluate our financial team and organizational structure, and have begun to make changes to roles and responsibilities to enhance controls and compliance, including the recently announced hiring of a new Chief Financial Officer. We expect to make further changes as our specialists deliver recommendations from their reviews. As we implement these plans, management may determine that additional steps may be necessary to remediate the material weaknesses.
Information regarding legal proceedings is set forth in
NoteIn addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our 2016 Form2019 10-K, which could materially affect our business, financial condition, or future results. The risks described in our 2016 Form2019 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and operating results. In our judgment, there wereThere have been no material changes induring the three months ended September 30, 2020 to the risk factors as previously disclosed in Part I, “Item 1A. Risk Factors”the 2019 10-K.
The COVID-19 pandemic may have a materially adverse effect on the Company’s business and operations.
The COVID-19 pandemic is severe, widespread, and continues to evolve and may adversely affect the Company’s business, financial position, results of operations, and cash flows. Recent rises in infection rates across the globe have caused the re-institution of quarantines and lock-down procedures that were relaxed during the summer months in Northern Hemisphere. The COVID-19 pandemic has caused, and may continue to cause significant volatility in the global economic markets and our operating results may be subject to fluctuations based on general economic conditions and the extent to which COVID-19 ultimately impacts our business. While the pandemic and the resulting impact on the global economy have not material adversely affected our business to date, the deterioration of economic conditions could materially reduce our sales and profitability. Any financial distress of our 2016 Form 10-Kcustomers due to declines in the global economy could result in reduced sales and decreased collectability of accounts receivable which would negatively impact our results of operations. Furthermore, the Company faces risks due to the evolving effect of COVID-19 on our employees, customers, suppliers, and third-party providers, including the impact of actions taken by the U.S. and foreign governments to curtail the spread of the virus, including social distancing measures and restrictions on travel and building capacity limits. In addition, if there was an outbreak of COVID-19 at one of our facilities, we may be required to temporarily close such facility.
As a result of the COVID-19 pandemic, the majority of our employees are working remotely, and it is possible that this could have a negative impact on the execution of our business plans and operations. If a natural disaster, power outage, connectivity issue, or other than as described below. Referevent occurred that impacted our employees’ ability to Part I, Item 2 of this Quarterly Report on Form 10-Q,work remotely, it may be difficult or, in certain cases, impossible, for us to continue our business for a discussionsubstantial period of time. Further, the increase in remote working may also result in consumer privacy, IT security, and fraud concerns.
Although we have developed and continue to develop plans to mitigate the negative impact of the economic climateCOVID-19 pandemic on our business and safeguard all of our IT functions to ensure security and data protection, such efforts may not prevent our business from being materially adversely affected. Should the adverse impacts described above (or others that are currently unknown) occur, whether individually or collectively, we could experience declines in revenue and profitability. Such impacts could be material to our consolidated financial statements in the fourth quarter and subsequent reporting periods.
As the full extent of COVID-19’s impact on our operations, key metrics, and financial statements.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
None.
| Period | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of a Publicly Announced Plan (2) | Maximum Dollar Amount that May Yet Be Spent Under the Plan | ||||||||||
| July 1-31, 2017 | — | $ | — | — | $ | 11,437,538 | ||||||||
| August 1-31, 2017 | 2,290 | $ | 0.80 | — | $ | 11,437,538 | ||||||||
| September 1-30, 2017 | 19,364 | $ | 0.87 | — | $ | 11,437,538 | ||||||||
| Total | 21,654 | $ | 0.86 | — | ||||||||||
Exhibit No. | |||
Description of Exhibit | |||
*31.1 | |||
*101 | XBRL Instance Document. | ||
*Filed or furnished herewith, as applicable.
**Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
HARTE HANKS, INC. | ||
November | /s/ | |
Date | Andrew B. Benett | |
Executive Chairman and Chief Executive Officer | ||
November 13, 2020 | /s/ Laurilee Kearnes | |
Date | Laurilee Kearnes | |
Vice President, and Chief Financial Officer | ||