U.S.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2017
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
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) |
1 Executive Drive, Suite 610, San Antonio, 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 | HHS | NASDAQ |
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’s classes ofissuer’s common stock as of October 15, 2017 was 62,068,179 shares2023 was 7,216,314 shares.
TABLE OF CONTENTS
FORM 10-Q REPORT
For the Quarterly Period Ended September 30, 2017
Harte Hanks, Inc. and Subsidiaries Condensed Consolidated Balance Sheets
September 30, | December 31, | |||||||
In thousands, except shares and per share amounts | 2023 | 2022 | ||||||
| (unaudited) | (audited) | |||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 13,288 | $ | 10,364 | ||||
Accounts receivable (less allowance for doubtful accounts of $170 and $163, respectively) | 33,303 | 39,700 | ||||||
Unbilled accounts receivable | 10,350 | 7,893 | ||||||
Contract assets | 433 | 309 | ||||||
Prepaid expenses | 2,722 | 2,176 | ||||||
Prepaid income taxes and income tax receivable | 1,221 | 4,262 | ||||||
Other current assets | 878 | 1,607 | ||||||
Total current assets | 62,195 | 66,311 | ||||||
Property, plant and equipment (less accumulated depreciation of $37,847 and $44,013, respectively) | 9,279 | 10,523 | ||||||
Right-of-use assets | 16,773 | 19,169 | ||||||
Other assets | ||||||||
Intangible assets, net | 3,000 | 3,540 | ||||||
Goodwill | 2,426 | 2,398 | ||||||
Deferred tax assets, net | 15,816 | 16,306 | ||||||
Other long-term assets | 1,323 | 1,737 | ||||||
Total other assets | 22,565 | 23,981 | ||||||
Total assets | $ | 110,812 | $ | 119,984 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities | ||||||||
Accounts payable and accrued expenses | $ | 18,547 | $ | 22,465 | ||||
Accrued payroll and related expenses | 4,944 | 6,679 | ||||||
Deferred revenue and customer advances | 5,681 | 4,590 | ||||||
Customer postage and program deposits | 1,445 | 1,223 | ||||||
Other current liabilities | 2,652 | 2,862 | ||||||
Current portion of lease liabilities | 5,446 | 5,747 | ||||||
Total current liabilities | 38,715 | 43,566 | ||||||
Pension liabilities - Qualified plans | 17,388 | 18,674 | ||||||
Pension liabilities - Nonqualified plan | 18,510 | 19,098 | ||||||
Long-term lease liabilities, net of current portion | 13,553 | 16,575 | ||||||
Other long-term liabilities | 2,142 | 3,263 | ||||||
Total liabilities | 90,308 | 101,176 | ||||||
Stockholders’ equity | ||||||||
Common stock, $1 par value, 25,000,000 shares authorized;12,221,484 shares issued, 7,216,314 and 7,402,614 shares outstanding at September 30, 2023 and December 31, 2022, respectively | 12,221 | 12,221 | ||||||
Additional paid-in capital | 160,213 | 218,411 | ||||||
Retained earnings | 846,897 | 846,490 | ||||||
Less treasury stock, 5,005,170 shares at cost at September 30, 2023 and 4,818,870 shares at cost at December 31, 2022 | (953,591 | ) | (1,010,012 | ) | ||||
Accumulated other comprehensive loss | (45,236 | ) | (48,302 | ) | ||||
Total stockholders’ equity | 20,504 | 18,808 | ||||||
Total liabilities and stockholders’ equity | $ | 110,812 | $ | 119,984 | ||||
| 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 (Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
In thousands, except per share amounts | 2023 | 2022 | 2023 | 2022 | ||||||||
Revenue | $ | 47,119 | $ | 53,886 | $ | 142,001 | $ | 151,500 | ||||
Operating expenses | ||||||||||||
Labor | 22,953 | 27,389 | 74,084 | 78,415 | ||||||||
Production and distribution | 15,378 | 16,175 | 43,158 | 42,400 | ||||||||
Advertising, selling, general and administrative | 4,922 | 5,970 | 16,071 | 17,243 | ||||||||
Depreciation and amortization expense | 952 | 579 | 3,051 | 1,764 | ||||||||
Total operating expenses | 44,205 | 50,113 | 136,364 | 139,822 | ||||||||
Operating income | 2,914 | 3,773 | 5,637 | 11,678 | ||||||||
Other expense (income), net | ||||||||||||
Interest expense, net | 1 | 84 | (150 | ) | 313 | |||||||
Other expense (income), net | 383 | (4,696 | ) | 3,760 | (5,951 | ) | ||||||
Total other expense (income), net | 384 | (4,612 | ) | 3,610 | (5,638 | ) | ||||||
Income before income taxes | 2,530 | 8,385 | 2,027 | 17,316 | ||||||||
Income tax expense | 1,912 | 1,219 | 1,620 | 2,344 | ||||||||
Net income | 618 | 7,166 | 407 | 14,972 | ||||||||
Less: Preferred Stock dividends | — | 125 | — | 371 | ||||||||
Less: Earnings attributable to participating securities | — | 868 | — | 1,817 | ||||||||
Net income attributable to common stockholders | $ | 618 | $ | 6,173 | $ | 407 | $ | 12,784 | ||||
Earnings per common share | ||||||||||||
Basic | $ | 0.09 | $ | 0.87 | $ | 0.06 | $ | 1.81 | ||||
Diluted | $ | 0.08 | $ | 0.83 | $ | 0.05 | $ | 1.73 | ||||
Weighted average shares used to compute income per share attributable to common shares | ||||||||||||
Basic | 7,239 | 7,125 | 7,340 | 7,045 | ||||||||
Diluted | 7,314 | 7,524 | 7,509 | 7,418 | ||||||||
Comprehensive income, net of tax: | ||||||||||||
Net income | $ | 618 | $ | 7,166 | $ | 407 | $ | 14,972 | ||||
Adjustment to pension liability, net | 503 | 719 | 1,421 | 2,307 | ||||||||
Foreign currency translation adjustment | (559 | ) | (3,007 | ) | 1,645 | (6,118 | ) | |||||
Total other comprehensive (loss) income, net of tax | $ | (56 | ) | $ | (2,288 | ) | $ | 3,066 | $ | (3,811 | ) | |
Comprehensive income | $ | 562 | $ | 4,878 | $ | 3,473 | $ | 11,161 | ||||
| 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 | ) | ||
| 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 | ) | ||
| 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 Stockholders' Equity(Unaudited)
Three Months ended September 30, 2023 | ||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||||||
Preferred | Common | Paid-in | Retained | Treasury | Comprehensive | Stockholders’ | ||||||||||||||||||||||
In thousands | Stock | Stock | Capital | Earnings | Stock | Loss | Equity | |||||||||||||||||||||
Balance at June 30, 2023 | $ | - | $ | 12,221 | $ | 187,386 | $ | 846,279 | $ | (980,156 | ) | $ | (45,180 | ) | $ | 20,550 | ||||||||||||
Stock-based compensation | — | — | 160 | — | — | — | 160 | |||||||||||||||||||||
Vesting of RSUs | — | — | (27,333 | ) | — | 27,055 | — | (278 | ) | |||||||||||||||||||
Repurchase of common stock | — | — | — | — | (490 | ) | — | (490 | ) | |||||||||||||||||||
Net Income | — | — | — | 618 | — | — | 618 | |||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | (56 | ) | (56 | ) | |||||||||||||||||||
Balance at September 30, 2023 | $ | - | $ | 12,221 | $ | 160,213 | $ | 846,897 | $ | (953,591 | ) | $ | (45,236 | ) | $ | 20,504 | ||||||||||||
Nine Months ended September 30, 2023 | ||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||||||
Preferred | Common | Paid-in | Retained | Treasury | Comprehensive | Stockholders’ | ||||||||||||||||||||||
In thousands | Stock | Stock | Capital | Earnings | Stock | Loss | Equity | |||||||||||||||||||||
Balance at December 31, 2022 | $ | - | $ | 12,221 | $ | 218,411 | $ | 846,490 | $ | (1,010,012 | ) | $ | (48,302 | ) | $ | 18,808 | ||||||||||||
Stock-based compensation | — | — | 1,203 | — | — | — | 1,203 | |||||||||||||||||||||
Vesting of RSUs | — | — | (59,401 | ) | — | 58,791 | — | (610 | ) | |||||||||||||||||||
Repurchase of common stock | — | — | — | — | (2,370 | ) | — | (2,370 | ) | |||||||||||||||||||
Net income | — | — | — | 407 | — | — | 407 | |||||||||||||||||||||
Other comprehensive income | — | — | — | — | — | 3,066 | 3,066 | |||||||||||||||||||||
Balance at September 30, 2023 | $ | - | $ | 12,221 | $ | 160,213 | $ | 846,897 | $ | (953,591 | ) | $ | (45,236 | ) | $ | 20,504 | ||||||||||||
Three Months ended September 30, 2022 | ||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||||||
Preferred | Common | Paid-in | Retained | Treasury | Comprehensive | Stockholders’ | ||||||||||||||||||||||
In thousands | Stock | Stock | Capital | Earnings | Stock | Loss | Deficit | |||||||||||||||||||||
Balance at June 30, 2022 | $ | 9,723 | $ | 12,121 | $ | 272,727 | $ | 818,900 | $ | (1,066,608 | ) | $ | (54,851 | ) | $ | (17,711 | ) | |||||||||||
Stock-based compensation | — | — | 927 | — | — | — | 927 | |||||||||||||||||||||
Vesting of RSUs | — | — | (53,343 | ) | — | 52,460 | — | (883 | ) | |||||||||||||||||||
Net income | — | — | — | 7,166 | — | — | 7,166 | |||||||||||||||||||||
Other comprehensive income | — | — | — | — | — | (2,288 | ) | (2,288 | ) | |||||||||||||||||||
Balance at September 30, 2022 | $ | 9,723 | $ | 12,121 | $ | 220,311 | $ | 826,066 | $ | (1,014,148 | ) | $ | (57,139 | ) | $ | (12,789 | ) | |||||||||||
Nine Months ended September 30, 2022 | ||||||||||||||||||||||||||||
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, 2021 | $ | 9,723 | $ | 12,121 | $ | 290,711 | $ | 811,094 | $ | (1,085,313 | ) | $ | (53,328 | ) | $ | (24,715 | ) | |||||||||||
Stock-based compensation | — | — | 1,915 | — | — | — | 1,915 | |||||||||||||||||||||
Vesting of RSUs | — | — | (72,315 | ) | — | 71,165 | — | (1,150 | ) | |||||||||||||||||||
Net income | — | — | — | 14,972 | — | — | 14,972 | |||||||||||||||||||||
Other comprehensive income | — | — | — | — | — | (3,811 | ) | (3,811 | ) | |||||||||||||||||||
Balance at September 30, 2022 | $ | 9,723 | $ | 12,121 | $ | 220,311 | $ | 826,066 | $ | (1,014,148 | ) | $ | (57,139 | ) | $ | (12,789 | ) | |||||||||||
| 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 | 2023 | 2022 | |||||||
Cash Flows from Operating Activities | |||||||||
Net Income | $ | 407 | $ | 14,972 | |||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||
Depreciation and amortization expense | 3,051 | 1,764 | |||||||
Stock-based compensation | 1,203 | 1,776 | |||||||
Net pension cost (payment) | 16 | (775 | ) | ||||||
Deferred income taxes | (453 | ) | — | ||||||
Changes in assets and liabilities: | |||||||||
Accounts receivable and contract assets | 3,816 | (2,916 | ) | ||||||
Prepaid expenses, income tax receivable and other current assets | 4,106 | 2,496 | |||||||
Accounts payable and accrued expenses | (3,785 | ) | 4,778 | ||||||
Deferred revenue and customer advances | 1,091 | 3,101 | |||||||
Customer postage and program deposits | 222 | (1,912 | ) | ||||||
Other accrued expenses and liabilities | (3,564 | ) | (1,032 | ) | |||||
Net cash provided by operating activities | 6,110 | 22,252 | |||||||
Cash Flows from Investing Activities | |||||||||
Purchases of property, plant and equipment | (1,480 | ) | (5,743 | ) | |||||
Proceeds from sale of property, plant and equipment | 3 | 57 | |||||||
Net cash used in investing activities | (1,477 | ) | (5,686 | ) | |||||
Cash Flows from Financing Activities | |||||||||
Repayment of borrowings | — | (5,000 | ) | ||||||
Debt financing costs | (6 | ) | (123 | ) | |||||
Payment of finance leases | (144 | ) | (148 | ) | |||||
Repurchase of common stock | (2,370 | ) | — | ||||||
Treasury stock activities | (610 | ) | (1,150 | ) | |||||
Net cash used in financing activities | (3,130 | ) | (6,421 | ) | |||||
Effect of exchange rate changes on cash, cash equivalents and restricted cash | 1,421 | (6,118 | ) | ||||||
Net increase in cash and cash equivalents and restricted cash | 2,924 | 4,027 | |||||||
Cash and cash equivalents and restricted cash at beginning of period | 11,364 | 15,133 | |||||||
Cash and cash equivalents and restricted cash at end of period | $ | 14,288 | (1) | $ | 19,160 | ||||
Supplemental disclosures | |||||||||
Cash paid for interest | $ | 198 | $ | 137 | |||||
Cash (received) paid for income taxes, net | $ | (3,369 | ) | $ | 828 | ||||
Non-cash investing and financing activities | |||||||||
Purchases of property, plant and equipment included in accounts payable | $ | 1,935 | $ | 2,385 | |||||
(1) This amount is comprised of the below balances: | |||||||||
Cash and cash equivalents | $ | 13,288 | $ | 6,907 | |||||
Restricted cash | — | 2,327 | |||||||
Cash held in Escrow account included in other assets (see Note L) | 1,000 | 9,926 | |||||||
Cash and cash equivalents and restricted cash at end of period | $ | 14,288 | $ | 19,160 | |||||
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 leading global customer experience company. With offices in North America, Asia-Pacific and Europe, Harte Hanks works with some of Presentation
Segment Reporting
The Company operates three business segments: Marketing Services; Customer Care; and Fulfillment & Logistics Services. Our Chief Executive Officer (“CEO”) is considered to be our chief operating decision maker. Our CEO reviews our operating results on an aggregate basis for purposes of allocating resources and evaluating financial performance by using the three financial measures: revenue, operating income and operating income plus depreciation and amortization (EBITDA).
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 our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the “202210-K”).
Consolidation
The accompanying unaudited Condensed Consolidated Financial Statementsinterim condensed consolidated financial statements include the accounts of Harte Hanks, Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. As used in this report, the terms “Harte Hanks,” “the company,Company,” “we,” “us,” or “our” may refer to Harte Hanks, Inc., one or more of its consolidated subsidiaries, or all of them taken as a whole.
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-Q10-Q and Rule 10-018-01 of Regulation S-X.S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAPU.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 threeThe prior period amounts in Labor, Production 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 DiscussionDistribution, Advertising, Selling, General 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
Preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported amounts of assets, liabilities, revenue, and expenses.disclosed in the financial statements and the accompanying notes. Actual results and outcomes could differ materially from those estimates and assumptions.due to uncertainties. 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; revenue recognition; income taxes; stock-based compensation;compensation and contingencies. On an ongoing basis, management reviews its estimates and assumptions 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 Income
The “Labor” line in the Condensed Consolidated Statements of Comprehensive Loss
Revenue Recognition
We recognize revenue upon the FASB issued ASU 2017-09,
• | 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 U.S. GAAP when it becomes effective. The standard permits the use of either the retrospective or cumulative effect transition method. On July 9, 2015, the FASB delayed the effective dateadvance of the new revenue standard by one year. The new effective date is for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted beginning January 1, 2017. We are evaluating the effect that this will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effectperformance of services or delivery of the standardproduct 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 when the work is performed. Fees for these services are determined by the terms set forth in each contract. These fees are typically 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 until client acceptance occurs and direct build costs are capitalized. Pricing for these types of arrangements is typically based on our ongoing financial reporting.
Fair Value of Financial Instruments
Financial Accounting Standards Board ("FASB") Accounting Standard Codification ("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.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 payables, and trade payables.long-term debt. The fair value of the assets in our outstanding debtfunded pension plan is discloseddiscussed in
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 liabilities 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 calculation oflease terms may include options to extend or terminate the acquisition related contingent consideration accounted for at fair value on a recurring basis is disclosedlease, which are included in
| In thousands | Total | |||
| Balance at December 31, 2016 | $ | 34,510 | ||
| Additions to goodwill | — | |||
| Impairment | — | |||
| Balance at September 30, 2017 | $ | 34,510 | ||
Note B - Recent Accounting Pronouncements
Recently adopted accounting pronouncements
In October 2021, the Financial Accounting Standards Board (FASB) issued ASU 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Liabilities from Contracts with Customers.” This ASU requires an acquiring entity to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. The ASU is effective for fiscal years and interim periods beginning after December 15, 2022.
The Company adopted this standard on January 1, 2023 on a prospective basis. The adoption of this new standard did not have a material impact on the Company's financial statements.
Note C - Revenue from Contracts with Customers
Under Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers ("ASC 606"), an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that are within the scope of the new standard, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. This standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. This standard also includes criteria for the capitalization and amortization of certain contract acquisition and fulfillment costs.
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 those goods or services. Our contracts with customers state the terms of sale, including the description, quantity, and price of the product sold or service provided. Payment terms can vary by contract, but the period between invoicing and when payment is due is not significant. The Company's contracts with its customers generally do not include rights of return or a significant financing component.
Consistent with GAAP, we present sales taxes assessed on revenue-producing transactions on a net basis.
Disaggregation of Revenue
We disaggregate revenue by three key revenue streams which are aligned with our business segments. The nature of the services offered by each key revenue stream is different. The following table summarizes revenue from contracts with customers for the three and nine months ended September 30, 2023 and 2022 by our three business segments and the pattern of revenue recognition:
Three Months Ended September 30, 2023 | ||||||||||||
In thousands | Revenue for performance obligations recognized over time | Revenue for performance obligations recognized at a point in time | Total | |||||||||
Marketing Services | $ | 9,272 | $ | 1,319 | $ | 10,591 | ||||||
Customer Care | 13,998 | — | 13,998 | |||||||||
Fulfillment and Logistics Services | 18,625 | 3,905 | 22,530 | |||||||||
Total Revenues | $ | 41,895 | $ | 5,224 | $ | 47,119 | ||||||
Three Months Ended September 30, 2022 | ||||||||||||
In thousands | Revenue for performance obligations recognized over time | Revenue for performance obligations recognized at a point in time | Total | |||||||||
Marketing Services | $ | 10,984 | $ | 2,032 | $ | 13,016 | ||||||
Customer Care | 17,375 | — | 17,375 | |||||||||
Fulfillment and Logistics Services | 21,398 | 2,097 | 23,495 | |||||||||
Total Revenues | $ | 49,757 | $ | 4,129 | $ | 53,886 | ||||||
Nine Months Ended September 30, 2023 | ||||||||||||
In thousands | Revenue for performance obligations recognized over time | Revenue for performance obligations recognized at a point in time | Total | |||||||||
Marketing Services | $ | 29,321 | $ | 3,430 | $ | 32,751 | ||||||
Customer Care | 45,625 | — | 45,625 | |||||||||
Fulfillment and Logistics Services | 52,044 | 11,581 | 63,625 | |||||||||
Total Revenues | $ | 126,990 | $ | 15,011 | $ | 142,001 | ||||||
Nine Months Ended September 30, 2022 | ||||||||||||
In thousands | Revenue for performance obligations recognized over time | Revenue for performance obligations recognized at a point in time | Total | |||||||||
Marketing Services | $ | 32,474 | $ | 6,915 | $ | 39,389 | ||||||
Customer Care | 50,499 | — | 50,499 | |||||||||
Fulfillment and Logistics Services | 53,489 | 8,123 | 61,612 | |||||||||
Total Revenues | $ | 136,462 | $ | 15,038 | $ | 151,500 | ||||||
MarketingServices
Our Marketing Services segment delivers strategic planning, data strategy, performance analytics, creative development and execution, technology enablement, marketing automation, and database management. We create relevancy by leveraging data, insight, and our extensive experience in leading clients as they engage their respective estimated useful lives, typicallycustomers through digital, traditional, and emerging channels. We are known for helping clients build deep customer relationships, create connected customer experiences, and optimize each and every customer touch point in order to deliver desired business outcomes.
Most marketing services performance obligations are satisfied over time and often offered on a 2 to 10-year period. Other intangible assets are reviewed for impairment when events or changes in circumstance indicateper project basis. We have concluded that the carrying amountbest approach to measure the progress toward completion of the project-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.
Our database solutions are built around centralized marketing databases with services rendered to build custom database, database hosting services, customer or target marketing lists and data processing services.
These performance obligations, including services rendered to build a custom database, database hosting services, customer or target marketing lists and data processing services, may be satisfied over time or at a point in time. We provide software as a service (“SaaS”) solutions to host data for customers and have concluded that these solutions are stand-ready obligations to be recognized over time on a monthly basis. Our promise to provide certain data related services meets the over-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 output 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.
Our contracts may include outsourced print production work for our clients. These 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.
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 typically resolves within a short period of time since the duration of these contracts is generally less than two months.
Customer Care
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 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 contracts provide us the right to invoice for services provided, therefore, we generally 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 SSPs.
The variable consideration in our contracts results primarily from the transaction-based fee structure of some performance obligations as the total transaction quantities to be provided are unknown at the onset of a contract, and are estimated using the expected value method.
Fulfillment&Logistics Services
Our services, delivered internally and with our partners, include printing, lettershop, advanced mail optimization (including commingling services), logistics and transportation optimization, monitoring and tracking, to support traditional and specialized mailings. Our print and fulfillment centers in Massachusetts and Kansas provide custom kitting services, print on demand, product recall support, trade marketing fulfillment, ecommerce product fulfillment, sampling programs, and freight optimization, thereby allowing our customers to efficiently and effectively distribute literature and other marketing materials.
Most 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 on a per transaction basis and our contracts allow us to invoice for services provided and reflect the value to the customer of the services provided 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. Prior to the closure of our direct mail production facilities, our direct mail business contracts may have included 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 as the total transaction quantities to be provided are unknown at the onset of a contract, and are 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 separate promised service and therefore, represent advanced payments. Where customers have an option 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 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 balance of upfront non-refundable fees collected from customers was immaterial as of September 30, 2023 and December 31, 2022.
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 the performance obligations that have an original expected duration of one year or less, transactions using the “as invoiced” practical expedient, or when a performance obligation is a series and we have allocated the variable consideration directly to the services performed. As of September 30, 2023, we had no transaction prices allocated to unsatisfied or partially satisfied performance obligations.
Contract Balances
We record a receivable when revenue is recognized prior to invoicing when we have an unconditional right to consideration (only the passage of time is required before payment of that consideration is due) and a contract asset when the right 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 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, 2023 and December 31, 2022:
In thousands | September 30, 2023 | December 31, 2022 | ||||||
Contract assets | 433 | 309 | ||||||
Deferred revenue and customer advances | 5,681 | 4,590 | ||||||
Deferred revenue, included in other long-term liabilities | 321 | 432 | ||||||
Revenue recognized during the nine months ended September 30, 2023 from amounts included in deferred revenue at the beginning of the period was approximately $3.9 million. Revenue recognized during the nine months ended September 30,2022 from amounts included in deferred revenue at the beginning of the period was approximately $2.9 million.
Costs to Obtain and Fulfill a Contract
We recognize an asset for the direct costs incurred to obtain and fulfill our contracts with customers to the extent that we expect to recover these costs and if the benefit is longer than one year. These costs are amortized to operating 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 impair the asset when recoverability is not anticipated. 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 $0.6 million and $1.0 million as of September 30, 2023 and December 31, 2022, respectively. For the periods presented, no impairment was recognized.
Note D - Leases
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 recorded on the balance sheet, unless the arrangement includes an option to purchase the underlying asset, or an option to renew the arrangement, that we are reasonably certain to exercise (short-term lease). Our leases have remaining lease terms of one to eight years, some of which may not be recoverable.
We subleased our Fullerton (CA), Jacksonville (FL) and Uxbridge (UK) facilities. The changeslease and sublease for Fullerton (CA) facility expired in April 2023, the lease and sublease for Uxbridge (UK) facility will expire in October 2023 and the lease and sublease for Jacksonville (FL) facility will expire at the end of July 2024.
As of September 30, 2023, assets recorded under finance and operating leases were approximately $0.5 million and $16.3 million, respectively, and accumulated amortization associated with finance leases was $1.0 million. As of December 31,2022, assets recorded under finance and operating leases were approximately $0.6 million and $18.6 million, respectively, and accumulated amortization associated with finance leases was $1.0 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 carryinglease, or when that is not readily determinable, we utilize our incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term at an amount equal to the lease payments in a similar economic environment. Since noneof other intangible assets with definite livesour leases has a readily determinable implicit interest rate, we use our incremental borrowing rate under our Texas Capital Bank Revolver Facility as the discount rate. Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received.
There was no impairment of leases during the three and nine months ended September 30, 2023 and 2022.
The following table presents supplemental balance sheet information related to our financing and operating leases:
In thousands | As of September 30, 2023 | |||||||||||
Operating Leases | Finance Leases | Total | ||||||||||
Right-of-use Assets | $ | 16,289 | $ | 484 | $ | 16,773 | ||||||
Liabilities | ||||||||||||
Current portion of lease liabilities | 5,388 | 58 | 5,446 | |||||||||
Long-term lease liabilities | 13,538 | 15 | 13,553 | |||||||||
Total Lease Liabilities | $ | 18,926 | $ | 73 | $ | 18,999 | ||||||
In thousands | As of December 31, 2022 | |||||||||||
Operating Leases | Finance Leases | Total | ||||||||||
Right-of-use Assets | $ | 18,574 | $ | 595 | $ | 19,169 | ||||||
Liabilities | ||||||||||||
Short-term lease liabilities | 5,587 | 160 | 5,747 | |||||||||
Long-term lease liabilities | 16,523 | 52 | 16,575 | |||||||||
Total Lease Liabilities | $ | 22,110 | $ | 212 | $ | 22,322 | ||||||
For the three and nine months ended September 30, 2023 and 2022, the components of lease expense were as follows:
In thousands | Three Months Ended September 30, 2023 | Three Months Ended September 30, 2022 | ||||||
Operating lease cost | $ | 1,338 | $ | 1,393 | ||||
Finance lease cost: | ||||||||
Amortization of right-of-use assets | 35 | 39 | ||||||
Interest on lease liabilities | 2 | 4 | ||||||
Total Finance lease cost | 37 | 43 | ||||||
Variable lease cost | 537 | 433 | ||||||
Sublease income | (177 | ) | (128 | ) | ||||
Total lease cost, net | $ | 1,735 | $ | 1,741 | ||||
In thousands | Nine Months Ended September 30, 2023 | Nine Months Ended September 30, 2022 | ||||||
Operating lease cost | $ | 4,160 | $ | 4,393 | ||||
Finance lease cost: | ||||||||
Amortization of right-of-use assets | 115 | 126 | ||||||
Interest on lease liabilities | 6 | 13 | ||||||
Total Finance lease cost | 121 | 139 | ||||||
Variable lease cost | 1,525 | 1,419 | ||||||
Sublease income | (676 | ) | (539 | ) | ||||
Total lease cost, net | $ | 5,130 | $ | 5,412 |
| |||
Other information related to leases was as follows:
In thousands | Nine Months Ended September 30, 2023 | Nine Months Ended September 30, 2022 | ||||||
Supplemental Cash Flows Information | ||||||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
Operating cash flows from operating leases | $ | 9,525 | $ | 10,995 | ||||
Operating cash flows from finance leases | 6 | 12 | ||||||
Financing cash flows from finance leases | 144 | 148 | ||||||
Weighted Average Remaining Lease term | ||||||||
Operating leases | 5.6 | 6.3 | ||||||
Finance leases | 1.3 | 1.6 | ||||||
Weighted Average Discount Rate | ||||||||
Operating leases | 3.56 | % | 3.39 | % | ||||
Finance leases | 7.04 | % | 5.60 | % | ||||
The maturities of the Company’s finance and operating lease liabilities as of September 30, 2023 are as follows:
In thousands | Operating Leases (1) | Finance Leases | ||||||
Year Ending December 31, | ||||||||
Remainder of 2023 | $ | 1,600 | $ | 18 | ||||
2024 | 5,286 | 50 | ||||||
2025 | 2,873 | 8 | ||||||
2026 | 2,373 | — | ||||||
2027 | 2,291 | — | ||||||
2027 and beyond | 6,217 | — | ||||||
Total future minimum lease payments | 20,640 | 76 | ||||||
Less: imputed interest | 1,714 | 3 | ||||||
Total lease liabilities | $ | 18,926 | $ | 73 | ||||
(1) Non-cancelable sublease proceeds for the remainder of the fiscal year ending December 31, 2023 and the fiscal year ending December 31, 2024 of $0.2 million and $0.4 million, respectively, are not included in the table above.
| In thousands | Total | |||
| Balance at December 31, 2016 | $ | 3,302 | ||
| Amortization | (544 | ) | ||
| Balance at September 30, 2017 | $ | 2,758 | ||
Note E — Long-Term Debt
Convertible Preferred Stock
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 issued 9,926 shares of our Series A Preferred Stock to Wipro, LLC d/b/a Wipro US Branch IT Services (“Wipro”) at an issue price of $1,000 per share, for gross proceeds of $9.9 million pursuant to a Certificate of Designation filed with the State of Delaware on January 29, 2018. We incurred $0.2 million of transaction fees in connection with the issuance of the Series A Preferred Stock which were netted against the gross proceeds of $9.9 million on our Condensed Consolidated Financial Statements.
On June 30, 2022, the Company entered into a secured credit facilityshare repurchase agreement (the “Repurchase Agreement”) with Wells Fargo Bank, N.A. as Administrative Agent, consistingWipro, pursuant to which the Company agreed to repurchase all 9,926 shares of the Company’s Series A Preferred Stock then outstanding in exchange for (i) a maximum $65.0cash payment equal to their liquidation value, or total cash payment of $9,926,000 and (ii) 100,000 shares of the Company’s common stock, par value $1.00 per share (the “Common Stock”). The cash portion of the repurchase price was paid into escrow at the signing of the Repurchase Agreement on June 30, 2022 and held in escrow until the closing of the repurchase on December 2, 2022.
On March 20, 2023, the Company cancelled all shares of Series A Preferred Stock pursuant to the Certificate of Elimination filed with the Secretary of State of Delaware.
Share Repurchase Program
On May 2, 2023, the Board of Directors of Harte Hanks approved a share repurchase program to maximize shareholder value with authorization to repurchase $6.5 million revolving credit facilityof the Company’s Common Stock. In the three and a $45.0nine months ended September 30, 2023, we repurchased 0.1 and 0.4 million term loan facility (togethershares of common stock for $0.5 million and $2.4 million, respectively.
Note F — Long-Term Debt
Credit Facility
As of September 30, 2023 and December 31, 2022, we had no outstanding borrowings under the "2016 Secured Credit Facility"). The 2016 Secured Credit Facility was secured by substantially all of our assets and material domestic subsidiaries. The 2016 Secured Credit Facility was used for general corporate purposes, and to replace and repay outstanding borrowings.
As of August 9, 2017, we were not in compliance with 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 days of the quarter end. On August 14, 2017, 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 | $ | — | $ | — | ||||||||
As of credit at September 30, 2017.2023, we had the ability to borrow $24.2 million under the New Credit Facility.
On December 21, 2021, the Company entered into a three-year, $25.0 million asset-based revolving credit facility (the "Credit Facility") with Texas Capital Bank. The Company’s obligations under the Credit Facility are guaranteed on a joint and several basis by the Company’s material subsidiaries (the “Guarantors”). The Credit Facility is secured by substantially all of the assets of the Company and the Guarantors pursuant to a Pledge and Security Agreement, dated as of December 21, 2021, among the Company, Texas Capital Bank and the other grantors party thereto (the "Security Agreement").
The Credit Facility is subject to certain covenants restricting the Company's and its subsidiaries' ability to create, incur, assume or become liable for indebtedness; make certain investments; pay dividends or repurchase the Company's stock; create, incur or assume liens; consummate mergers or acquisitions; liquidate, dissolve, suspend or cease operations; or modify accounting or tax reporting methods (other than as required by U.S. GAAP). The Company was in compliance with all of the requirements as of September 30, 2023.
The loans under the Credit Facility accrue interest at a variable rate equal to the Bloomberg Short-Term Bank Yield Index Rate plus a margin of 2.25% per annum. The interest rate was 7.62% as of September 30, 2023. The outstanding amounts advanced under the Credit Facility are due and payable in full on December 21, 2024. Unused commitment balances accrue fees at a rate of 0.25%.
Cash payments for interest were $34 thousand and $52 thousand for the three months ended September 30, 2023 and 2022, respectively. Cash payments for interest were $198 thousand and $137 thousand for the nine months ended September 30, 2023 and 2022, respectively.
Note FG — Stock-Based Compensation
We maintain stock incentive plans for the benefit of certain officers, directors, and employees, includingemployees. Our stock incentive plans provide for the 2013 Omnibus Incentive Plan (the "2013 Plan"). 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 the current 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. We recognized $1.8$0.2 million and $2.4$0.9 million of stock-based compensation expense during the ninethree months ended September 30, 2017 2023 and 2016,2022, 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 H — Employee Benefit Plans
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.
At the end of 2020, the Board of Directors of the Company approved the division of the Qualified Pension Plan into two distinct plans, “Qualified Pension Plan I” and “Qualified Pension Plan II.” The assets and liabilities of the Qualified Pension Plan that were attributable to certain participants in Qualified Pension Plan II were spun off and transferred into Qualified Pension Plan II effective as of the end of December 31, 2020, in accordance with Internal Revenue Code section 414 (I) and ERISA Section 4044.
In January 2023, the Board of Directors of the Company approved the termination of the Qualified Pension Plan I. The termination process will take approximately 18 months to complete and will result in the transfer of our obligations pursuant to this pension plan to a third-party provider.
The overfunded or underfunded status of our defined benefit post-retirement plans is recorded as an asset or liability on our balance sheets. The funded status is measured as the difference between the fair value of plan assets and the projected benefit obligation. Periodic changes in the funded status are recognized through other comprehensive income in the Consolidated Statements of Comprehensive Income. We currently measure the funded status of our defined benefit plans as of December 31, the date of our year-end Consolidated Balance Sheets.
Net pension cost for both plans included the following components:
| 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 | ||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
In thousands | 2023 | 2022 | 2023 | 2022 | ||||||||||||
Interest cost | $ | 1,772 | $ | 1,260 | $ | 5,316 | $ | 3,780 | ||||||||
Expected return on plan assets | (1,554 | ) | (1,468 | ) | (4,662 | ) | (4,404 | ) | ||||||||
Recognized actuarial loss | 630 | 719 | 1,890 | 2,157 | ||||||||||||
Net periodic benefit cost | $ | 848 | $ | 511 | $ | 2,544 | $ | 1,533 | ||||||||
Based on current estimates, we will not be required to make any contributionsa $1.6 million contribution to our Qualifiedthe combined qualified Pension Plan untilin 2023. We made $1.2 million of such $1.6 million aggregate contribution in the 2018 plan year.
We are not required to make, and do not intend to make, any contributions to our Restoration Pension Plan in 2023 other than to the extent needed to cover benefit payments. We made benefit payments under our Restoration Pension Planthis supplemental plan of $0.4$1.4 million and$1.3and $1.3 million in the three and nine months ended September 30, 2017,2023 and 2022, respectively.
Note H —I - Income Taxes
The income tax provision was $1.9 million and $1.2 million for the three months ended September 30, 2017, an2023 and 2022, respectively. The provision for income tax expense of $0.4 million resulted in a negative effective income tax rate of 18.2%. For the nine months ended September 30, 2017, an income tax benefit of $3.3 milliontaxes resulted in an effective income tax rate of 20.8%. We have calculated75.6% for thethree months ended September 30, 2023 and 14.5% for the three months ended September 30,2022.
The income tax provision was $1.6 million and $2.3 million for the nine months ended September 30, 2023 and 2022, respectively. The provision for income taxes for the three and nine months ended September 30, 2017 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.
Harte Hanks, or one of our subsidiaries filesfile 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. 2017.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. We did not have a significant amount of interest or penalties accrued at September 30, 20172023 or December 31, 2016.2022.
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-classtwo-class method. The two-classtwo-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-classtwo-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 December 2022, we repurchased all 9,926 shares of the Company’s Series A Preferred Stock then outstanding.
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-classtwo-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 | 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 | ||||||
Three Months Ended September 30, | ||||||||
In thousands, except per share amounts | 2023 | 2022 | ||||||
Numerator: | ||||||||
Net income | $ | 618 | $ | 7,166 | ||||
Less: Preferred stock dividends | — | 125 | ||||||
Less: Earnings attributable to participating securities | — | 868 | ||||||
Numerator for basic EPS: income attributable to common stockholders | 618 | 6,173 | ||||||
Effect of dilutive securities: | ||||||||
Add back: Allocation of earnings to participating securities | — | 868 | ||||||
Less: Re-allocation of earnings to participating securities considering potentially dilutive securities | — | (827 | ) | |||||
Numerator for diluted EPS | $ | 618 | $ | 6,214 | ||||
Denominator: | ||||||||
Basic EPS denominator: weighted-average common shares outstanding | 7,239 | 7,125 | ||||||
Diluted EPS denominator | 7,314 | 7,524 | ||||||
Basic income per Common Share | $ | 0.09 | $ | 0.87 | ||||
Diluted income per Common Share | $ | 0.08 | $ | 0.83 | ||||
For the three months ended September 30, 2023 and 4.1 million of anti-dilutive market price options2022, 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, 2017calculation: 132,193 and 2016, respectively. 1.7 million and 1.3 million anti-dilutive unvested 12,694 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 | 2023 | 2022 | |||||
Numerator: | |||||||
Net income | $ | 407 | $ | 14,972 | |||
Less: Preferred stock dividend | — | 371 | |||||
Less: Earnings attributable to common stockholders | — | 1,817 | |||||
Numerator for basic EPS: income attributable to common stockholders | 407 | 12,784 | |||||
Effect of dilutive securities: | |||||||
Add back: Allocation of earnings to participating securities | — | 1,817 | |||||
Less: Re-allocation of earnings to participating securities considering potentially dilutive securities | — | (1,737) | |||||
Numerator for diluted EPS | $ | 407 | $ | 12,864 | |||
Denominator: | |||||||
Basic EPS denominator: weighted-average common shares outstanding | 7,340 | 7,045 | |||||
Diluted EPS denominator | 7,509 | 7,418 | |||||
Basic income per Common Share | $ | 0.06 | $ | 1.81 | |||
Diluted income per Common Share | $ | 0.05 | $ | 1.73 | |||
For the nine months ended September 30, 2023 and 2022, 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: 8,098 and 2016, respectively. 1.1 million13,602 shares of anti-dilutive market price options; 40,389 and 1.1 million16,849 of anti-dilutive unvested restricted shares; and 0 and 1,001,614 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 for a period encompasses net lossincome (loss) and all other changes in equity other than from transactions with our stockholders. Our comprehensive loss was as follows:
| 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 lossincome by component arewere as follows:
| 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 | ) | ||||
| 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 | ) | |||
Defined Benefit | Foreign Currency | |||||||||||
In thousands | Pension Items | Items | Total | |||||||||
Balance at December 31, 2022 | $ | (44,120 | ) | $ | (4,182 | ) | $ | (48,302) | ||||
Other comprehensive income, net of tax, before reclassifications | — | 1,421 | 1,421 | |||||||||
Amounts reclassified from accumulated other comprehensive income, net of tax, to other, net, on the condensed consolidated statements of comprehensive income | 1,645 | — | 1,645 | |||||||||
Net current period other comprehensive income, net of tax | 1,645 | 1,421 | 3,066 | |||||||||
Balance at September 30, 2023 | $ | (42,475 | ) | $ | (2,761 | ) | $ | (45,236) | ||||
Defined Benefit | Foreign Currency | ||||||||||
In thousands | Pension Items | Items | Total | ||||||||
Balance at December 31, 2021 | $ | (54,394 | ) | $ | 1,066 | $ | (53,328) | ||||
Other comprehensive loss, net of tax, before reclassifications | — | (6,118 | ) | (6,118) | |||||||
Amounts reclassified from accumulated other comprehensive income, net of tax, to other, net, on the condensed consolidated statements of comprehensive income | 2,307 | — | 2,307 | ||||||||
Net current period other comprehensive income (loss), net of tax | 2,307 | (6,118 | ) | (3,811) | |||||||
Balance at September 30, 2022 | $ | (52,087 | ) | $ | (5,052 | ) | $ | (57,139) | |||
Reclassification amounts related to the defined pension plans are included in the computation of net periodic pension benefit cost (see
NoteNote L — Acquisition of Inside Out Solutions, LLC
On December 1, 2022 (the “Closing Date”), we purchased substantially all of the assets (the “Transaction”) of Inside Out Solutions, LLC, a Florida limited liability company (“InsideOut”),
InsideOut is a premium sales enablement agency offering technology and data driven support to technology, media telecommunications, business services, industrial, and financial technology customers in the North American and European markets with its headquarters in St. Petersburg, Florida.
The acquisition of InsideOut further expands our capabilities within our marketing services and customer care segments and strengthens our ability to drive profitable revenue growth within our current sales enablement offerings, including: (i) demand generation which creates qualified marketing leads for our clients, and (ii) inside sales offerings to further promote a client’s internal growth objectives. In addition, the owner and CEO of InsideOut entered into a two-year consulting agreement with the Company, which will ensure consistency in our delivery of these sales enablement offerings, post-closing.
Pursuant to the Asset Purchase Agreement, $5.75 million of the Purchase Price was paid in cash at closing, $1.0 million in cash was placed in escrow to satisfy indemnification obligations, if any, and separately, to satisfy earn-outs related to future revenue performance. In addition, $0.75 million of the Purchase Price was paid at closing in shares of Common Stock issued in a private placement. The share amount was based on the volume weighted closing price over the fifteen trading days ending on November 28, 2022. The $1.0 million of cash in the escrow account is included in other current assets in our balance sheet as of September 30, 2023 and December 31, 2022.
The Purchase Price was subject to a post-closing net working capital true-up 180-days after the Closing Date if net working capital is not between $1.3 million and $1.6 million. The true up was immaterial.
The acquisition was accounted for under the acquisition method of accounting with the Company treated as the acquiring entity. Accordingly, the consideration paid by the Company to complete the acquisition has been recorded to the assets acquired and liabilities assumed based upon their estimated fair values as of the date of the acquisition. The carrying values for current assets and liabilities were deemed to approximate their fair values due to the short-term nature of these assets and liabilities. The following table shows the amounts recorded as of their acquisition date.
In thousands | Amount | |||
Accounts receivable | $ | 1,445 | ||
Prepaid expenses | 148 | |||
Property, plant and equipment | 177 | |||
Total assets acquired | 1,770 | |||
Less: Current liabilities assumed | (761 | ) | ||
Net assets acquired | $ | 1,009 | ||
We recognized $3.6 million of intangible assets and $2.4 million of goodwill associated with this acquisition. The amount of goodwill recorded reflects expected earning potential and synergies with our Customer Care segment. We are amortizing the intangible assets on a straight-line basis over its useful life of five years. The amortization expense for the three and nine months ended September 30, 2023 were $180 thousand and $540 thousand, respectively. A summary of the Company’s intangible asset as ofSeptember 30, 2023 is as follows:
Weighted Average | Gross | Accumulated | Net Carrying | |||||
In thousands | Amortization Period | Carrying Amount | Amortization | Amount | ||||
Customer Relationships | 5 years | $ | 3,600 | $ | 600 | $ | 3,000 | |
Estimated future amortization expense related to intangible assets as of September 30, 2023 is as follows:
In thousands | ||||
Year Ending December 31, | Amount | |||
Remainder of 2023 | $ | 180 | ||
2024 | 720 | |||
2025 | 720 | |||
2026 | 720 | |||
2027 | 660 | |||
Total | $ | 3,000 | ||
The Company's result of operations for the three and nine months endedSeptember 30, 2023includes revenue of $2.2 million and $7.3 million, respectively, and net earnings of $0.1 million and 0.7 million, respectively, from the InsideOut operation.
Note KM — 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.thereunder. 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 N — Segment Reporting
Harte Hanks is a leading global customer experience company. We have organized our operations into three business segments based on the types of products and services we completed the acquisitionprovide: Marketing Services, Customer Care, Fulfillment & Logistics Services.
Our Marketing Services segment leverages data, insight, and experience to support clients as they engage customers through digital, traditional, and emerging channels. We partner with clients to develop strategies and tactics to identify and prioritize customer audiences in B2C and B2B transactions. Our key service offerings include strategic business, brand, marketing and communications planning, data strategy, audience identification and prioritization, predictive modeling, creative development and execution across traditional and digital channels, website and app development, platform architecture, database build and management, marketing automation, and performance measurement, reporting and optimization.
Our Customer Care segment offers intelligently responsive contact center solutions, which use real-time data to effectively interact with each customer. Customer contacts are handled through phone, e-mail, social media, text messaging, chat and digital self-service support. We provide these services utilizing our advanced technology infrastructure, human resource management skills and industry experience.
Our Fulfillment & Logistics Services segment consists of Aleutian Consulting, which has been integrated with our continuing operations. The resultsmail and product fulfillment and logistics services. We offer a variety of Aleutian Consulting operations have been included in our financial statements since that dateproduct fulfillment solutions, including printing on demand, managing product recalls, and distributing literature and promotional products to support B2B trade, drive marketing campaigns, and improve customer experience. We are reported in continuing operations. The purchase price was $3.5 million in cash. The fair valuealso a provider of the identified tangible assets residual purchase price methodology usedthird-party logistics and freight optimization in the calculationUnited States. Prior 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.
| In thousands | Fair Value | |||
| Balance at December 31, 2016 | $ | 29,725 | ||
| Accretion of interest | 3,122 | |||
| Balance at September 30, 2017 | $ | 32,847 | ||
There are three principal financial measures reported to Syncsort. Theour CEO (the chief operating decision to sell Trillium was largelymaker) for use in assessing segment performance and allocating resources. Those measures are revenue, operating income (loss) and operating income (loss) plus depreciation and amortization (“EBITDA”). Operating income for segment reporting disclosed below, is revenues less operating costs and allocated corporate expenses. Segment operating expenses include allocations of certain centrally incurred costs such as employee benefits, occupancy, information systems, accounting services, internal legal staff, and human resources administration. These costs are allocated based on actual usage or other appropriate methods. Unallocated corporate expenses are corporate overhead expenses not attributable to the prioritization of investments in support of optimizingoperating groups. Interest income and expense are not allocated to the segments. The Company does not allocate assets to our clients' customer journey across an omni-channel delivery platform, and the determination that the Trillium business is likely to be a better strategic fit and more valuablereportable segments for internal reporting purposes, nor does our CEO evaluate operating segments using discrete asset to other parties.information. The business was sold for gross proceeds of approximately $112.0 million in cash and resulted in a loss on the sale of $39.9 million, net of $4.6 million of income tax benefit.
The following table presents financial information by segment:
Three Months ended September 30, 2023 | Marketing Services | Customer Care | Fulfillment and Logistics Services | Unallocated Corporate | Total | |||||||||||||||
| (In thousands) | ||||||||||||||||||||
Revenues | $ | 10,591 | $ | 13,998 | $ | 22,530 | $ | — | $ | 47,119 | ||||||||||
Segment Operating Expense | $ | 8,370 | $ | 11,339 | $ | 18,995 | $ | 4,549 | $ | 43,253 | ||||||||||
Contribution margin (loss) | $ | 2,221 | $ | 2,659 | $ | 3,535 | $ | (4,549 | ) | $ | 3,866 | |||||||||
Shared Services | $ | 706 | $ | 668 | $ | 680 | $ | (2,054 | ) | $ | — | |||||||||
EBITDA | $ | 1,515 | $ | 1,991 | $ | 2,855 | $ | (2,495 | ) | $ | 3,866 | |||||||||
Depreciation and amortization | $ | 71 | $ | 253 | $ | 249 | $ | 379 | $ | 952 | ||||||||||
Operating income (loss) | $ | 1,444 | $ | 1,738 | $ | 2,606 | $ | (2,874 | ) | $ | 2,914 | |||||||||
Three Months ended September 30, 2022 | Marketing Services | Customer Care | Fulfillment and Logistics Services | Unallocated Corporate | Total | |||||||||||||||
| (In thousands) | ||||||||||||||||||||
Revenues | $ | 13,016 | $ | 17,375 | $ | 23,495 | $ | — | $ | 53,886 | ||||||||||
Segment Operating Expense | $ | 9,970 | $ | 13,661 | $ | 19,865 | $ | 6,038 | $ | 49,534 | ||||||||||
Contribution margin (loss) | $ | 3,046 | $ | 3,714 | $ | 3,630 | $ | (6,038 | ) | $ | 4,352 | |||||||||
Shared Services | $ | 1,125 | $ | 743 | $ | 853 | $ | (2,721 | ) | $ | — | |||||||||
EBITDA | $ | 1,921 | $ | 2,971 | $ | 2,777 | $ | (3,317 | ) | $ | 4,352 | |||||||||
Depreciation and amortization | $ | 98 | $ | 206 | $ | 176 | $ | 99 | $ | 579 | ||||||||||
Operating income (loss) | $ | 1,823 | $ | 2,765 | $ | 2,601 | $ | (3,416 | ) | $ | 3,773 | |||||||||
Nine Months ended September 30, 2023 | Marketing Services | Customer Care | Fulfillment and Logistics Services | Unallocated Corporate | Total | |||||||||||||||
(In thousands) | ||||||||||||||||||||
Revenues | $ | 32,751 | $ | 45,625 | $ | 63,625 | $ | — | $ | 142,001 | ||||||||||
Segment Operating Expense | $ | 26,464 | $ | 36,534 | $ | 54,435 | $ | 15,880 | $ | 133,313 | ||||||||||
Contribution margin | $ | 6,287 | $ | 9,091 | $ | 9,190 | $ | (15,880 | ) | $ | 8,688 | |||||||||
Shared Services | $ | 2,261 | $ | 2,102 | $ | 2,203 | $ | (6,566 | ) | $ | — | |||||||||
EBITDA | $ | 4,026 | $ | 6,989 | $ | 6,987 | $ | (9,314 | ) | $ | 8,688 | |||||||||
Depreciation and amortization | $ | 167 | $ | 1,024 | $ | 736 | $ | 1,124 | $ | 3,051 | ||||||||||
Operating income (loss) | $ | 3,859 | $ | 5,965 | $ | 6,251 | $ | (10,438 | ) | $ | 5,637 | |||||||||
Nine Months ended September 30, 2022 | Marketing Services | Customer Care | Fulfillment and Logistics Services (1) | Unallocated Corporate | Total | |||||||||||||||
(In thousands) | ||||||||||||||||||||
Revenues | $ | 39,389 | $ | 50,499 | $ | 61,612 | $ | — | $ | 151,500 | ||||||||||
Segment Operating Expense | $ | 30,903 | $ | 39,434 | $ | 50,795 | $ | 16,926 | $ | 138,058 | ||||||||||
Contribution margin | $ | 8,486 | $ | 11,065 | $ | 10,817 | $ | (16,926 | ) | $ | 13,442 | |||||||||
Shared Services | $ | 3,290 | $ | 2,139 | $ | 2,483 | $ | (7,912 | ) | $ | — | |||||||||
EBITDA | $ | 5,196 | $ | 8,926 | $ | 8,334 | $ | (9,014 | ) | $ | 13,442 | |||||||||
Depreciation and amortization | $ | 288 | $ | 609 | $ | 581 | $ | 286 | $ | 1,764 | ||||||||||
Operating income (loss) | $ | 4,908 | $ | 8,317 | $ | 7,753 | $ | (9,300 | ) | $ | 11,678 | |||||||||
| 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 thisthe 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 and Section 21E of the Securities Exchange Act of 1934.Act. Forward-looking statements maywill also be included from time to time 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 words of similar meaning. Examples include statements regarding (1) our strategies and initiatives, related thereto, (2) adjustments to our cost structure and otherincluding actions designed to respond to market conditions and improve our performance, and the anticipated effectiveness and expenses associated with these actions, (3)(2) our financial outlook for revenues, earnings (loss) per share, operating income (loss), expense related to equity-based compensation, capital resources and other financial items, (4)if any, (3) expectations for our businesses and for the industries in which we operate, including the impact of economic conditions of the markets we serve on the marketing expenditures and activities of our clients and prospects, (5)(4) competitive factors, (6)(5) acquisition 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)(6) expectations regarding legal proceedings and other contingent liabilities, and (10)(7) 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. SomeA discussion of 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 our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, Form 10-Q for the quarter ended September 30, 2017,2022 (the “2022 10-K”), “Part II - Item 1A. Risk Factors” in this Quarterly Report, 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 helpenable the reader to understand the results of operations and financial condition of Harte Hanks, Inc.including any material changes in the Company’s financial condition and results of operations since December 31, 2022, and as compared with the three and nine months ended September 30, 2022. 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 Form2022 10-K. Our 2016 Form2022 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, partnersInc. is a leading global customer experience company operating in three business segments: Marketing Services, Customer Care, and Fulfillment & Logistics Services. Our mission is to partner with clients to deliver relevant, connected, and quality customer interactions. Our approach startsprovide them with discovery and learning, which leads to customer journey mapping, creative and content development,a robust customer-experience, or CX, strategy, data-driven analytics and data management,actionable insights combined with seamless program execution to better understand, attract, 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 famous for developing better customer relationships and experiences and defining interaction-led marketing.
We are affected by the general, national, and international economic, geopolitical 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 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 ourDue to the recent history our retail client vertical was our largest, usually representing well over a quarter of our revenues. Asincreases in inflation and interest rates throughout the retail industry has struggledglobe, and other geopolitical uncertainties, including but not limited to the ongoing war between Russia and Ukraine and conflict in the face of internet-based shopping models, many of our clients,Middle East, there is continued uncertainty and consequently our revenues, have suffered.
Management is closely monitoring inflation and wage pressure in the parts ofmarket, and the potential impact to our business. While inflation has not had a material impact to our business, that are not growingit is possible a material increase in inflation could have an impact on our clients, and in turn, in our business.
Recent Developments
Executive Transition
Effective as fast. We believe these actions, suchof June 19, 2023, our Board of Directors appointed media-industry veteran Kirk Davis to serve as our Chief Executive Officer (“CEO”)and nominated Mr. Davis to the Board of Directors, to serve until our 2024 annual meeting of stockholders and until his successor is elected or qualified, or until his earlier death, resignation or removal. Mr. Davis has decades of media and marketing expertise, most recently served as CEO of legacy publishing company Metro Corp. and previously served as CEO of GateHouse Media, which was the second-largest regional publishing company in the United States before merging with Gannett in 2019.
Effective as of October 23, 2023, our Board of Directors appointed David Garrison to serve as our interim Chief Financial Officer (“CFO”). Mr. Garrison brings 20 years of public company CFO experience, with particular expertise in cost containment, streamlining operations, and enterprise resource implementation. Mr. Garrison most recently served as the adoptionCFO of Digital Lumens Incorporated, a new database platformsmart lighting fixture and the developmentfactory automation technology company, and previously served as CFO of our DataView™ marketing data facility, willSensera, Inc., an Australian listed medical and smart technology company.
Changes in Segment Reporting
To improve our profitabilitystrategic posture in future periods.
Share Repurchase Program
On May 2, 2023, the Board 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 that can be clearly distinguished from the restDirectors of Harte Hanks both operationally and for financial purposes, the resultsapproved a share repurchase program to maximize shareholder value with authorization to repurchase $6.5 million of the Trillium operations are reportedCompany’s Common Stock. In the three months and nine months ended September 30, 2023, we repurchased 0.1 million and 0.4 million shares of common stock for $0.5 million and $2.4 million, respectively. After giving effect to these repurchases, we have remaining authority of $4.1 million to repurchase shares remaining under the program.
Acquisition of Inside Out Solutions, LLC
On December 1, 2022, we purchased substantially all of the assets (the “Transaction”) of Inside Out Solutions, LLC, a Florida limited liability company (“InsideOut”), for an aggregate purchase price of approximately $7.5 million (the “Purchase Price”) pursuant to an asset purchase agreement, dated as discontinued operationsof December 1, 2022 by and between Harte Hanks and InsideOut (the “Asset Purchase Agreement”).
InsideOut is a premium sales enablement agency offering technology and data driven support to technology, media telecommunications, business services, industrial, and financial technology customers in the North American and European markets with its headquarters in St. Petersburg, Florida.
The acquisition of InsideOut further expands our customer experience capabilities within our Marketing Services and Customer Care segments and strengthens our ability to drive profitable revenue growth within our current sales enablement offerings, including: (i) demand generation which creates qualified marketing leads for all periods presentedour clients, and are excluded from Management’s Discussion(ii) inside sales offerings to further promote a client’s internal growth objectives. In addition, the owner and AnalysisCEO of Financial Condition and InsideOut entered into a two-year consulting agreement with us, which will ensure consistency in our delivery of these sales enablement offerings, post-closing.
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 | 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 | )% | ||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
In thousands, except percentages | 2023 | 2022 | % Change | 2023 | 2022 | % Change | ||||||||||||||||||
Revenues | $ | 47,119 | $ | 53,886 | (12.6 | )% | $ | 142,001 | $ | 151,500 | (6.3 | )% | ||||||||||||
Operating expenses | 44,205 | 50,113 | (11.8 | )% | 136,364 | 139,822 | (2.5 | )% | ||||||||||||||||
Operating income | $ | 2,914 | $ | 3,773 | (22.8 | )% | $ | 5,637 | $ | 11,678 | (51.7 | )% | ||||||||||||
Operating margin | 6.2 | % | 7.0 | % | 4.0 | % | 7.7 | % | ||||||||||||||||
Income before income taxes | $ | 2,530 | $ | 8,385 | (69.8 | )% | $ | 2,027 | $ | 17,316 | (88.3 | )% | ||||||||||||
Diluted earnings per common share from operations | $ | 0.08 | $ | 0.83 | (90.4 | )% | $ | 0.05 | $ | 1.73 | (97.1 | )% | ||||||||||||
Consolidated Results
Revenues
Three months ended September 30, 2023 vs. Third Quarter of 2016
Revenues from continuing operations decreased $3.0$6.8 million, or 3.1%12.6%, in the third quarter of 2017three months ended September 30, 2023, compared to the third quarter of 2016. These results reflect the impact ofthree months ended September 30, 2022. Revenue in our retail, B2B, and consumer verticals decreasing $1.7Customer Care segment decreased $3.4 million, or 6.4%19.4%, $2.2to $14.0 million, and revenue in our Marketing Services segment decreased $2.4 million, or 10.1%18.6%, and $0.2to $10.6 million. Revenue in our Fulfillment & Logistics Services segment decreased $1.0 million, or 0.8%4.1%, respectively. This is due to lost clients and clients reducing their marketing spend with us. These decreases were offset slightly by an increase in our financial services vertical of $1.2$22.5 million.
Nine months ended September 30, 2023 vs. Nine months ended September 30, 2022
Revenues decreased $9.5 million, or 8.4%. This increase was generated by expansion of work from existing clients. Our transportation and healthcare verticals were flat to the prior year.
Operating Expenses
Three months ended September 30, 2023 vs. Third Quarter of 2016
Operating expenses from continuing operations were $93.5$44.2 million in the third quarterthree months ended September 30, 2023, a decrease of 2017,$5.9 million, or 11.8%, compared to $101.5$50.1 million in the third quarterthree months ended September 30, 2022.
Labor costsexpense decreased $4.4 million, or 7.5%16.2%, in the three months ended September 30, 2023, compared to the three months ended September 30, 2022 primarily due to the reduction in workforce in our Customer Care and Marketing Services segment as well as lower stock compensation expense. Advertising, Selling, General and Administrative expenses decreased $1.0 million, or 17.6%, in the three months ended September 30, 2023, compared to three months ended September 30, 2022 primarily due to reduced software licensing fees and lower professional fees. Production and Distribution expenses decreased $0.8 million, or 4.9%, in the three months ended September 30, 2023, compared to the third quarter of 2016three months ended September 30, 2022, primarily due to lower managed payroll expensetransportation services cost associated with the lower Fulfillment & Logistics segment revenue as a result of our expense reduction efforts. General and administrative expense decreased $2.4 million, or 21.1%, compared to the prior year primarily due a reduction in employee related expenses. Production and distribution decreased $0.5 million, or 2.0%, compared to the same quarter of the prior year primarily due to a decrease in outsourced services and mail supply chain expenses. Depreciation and intangible asset and software amortization expense decreased $0.6 million, or 19.3%, compared to the third quarter of 2016.
The largest components of our expense reduction efforts. General and administrative expense decreased $4.7 million, or 13.5%, compared to the prior year primarily due a reduction in employee-related expenses. Production and distribution decreased $4.5 million, or 5.3%, compared to the prior year primarily due to a decrease in outsourced services and mail supply chain expenses. Depreciation and intangible asset and software amortization expense decreased $1.2 million, or 13.2%, compared to the first nine months 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, 2023 vs. Nine months ended September 30, 2022
Operating expenses were $136.4 million in the nine months ended September 30, 2023, a decrease of $3.4 million, or 2.5%, compared to $139.8 million in the nine months ended September 30, 2022.
Labor expense decreased $4.3 million, or 5.5%, in the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022 primarily due to the reduction in workforce in our Customer Care and Marketing Services segment from lower revenue which was partially offset by higher severance expense. Advertising, Selling, General and Administrative expenses decreased $1.2 million, or 6.8%, in the nine months ended September 30, 2023, compared to nine months ended September 30, 2022 primarily due to reduced software licensing fees. Production and Distribution expenses increased $0.8 million, or 1.8%, in the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, due to the change in revenue mix resulting in higher transportation costs in our Fulfillment & Logistics Services segment.
.
The largest components of our operating expenses are labor, 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. Transportation rates have increased over the last few years due to demand and supply fluctuations within the transportation industry. Future changes in transportation expenses will continue to impact our total production costs and total operating expenses, and in turn our margins, 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.
Interest Expense
Three months ended September 30, 2023 vs. Third Quarter of 2016
Interest expense, net, in the third quarter of 2017 increased $0.6 millionthree months ended September 30, 2023 was $1k as compared to $84k for the three months ended September 30, 2022. The $83k decrease was primarily due to the lower debt level.
Nine months ended September 30, 2023 vs. Nine months ended September 30, 2022
Interest income, net, in the nine months ended September 30, 2023 was $150k as compared to the thirdinterest expense, net of $313k for the nine months ended September 30, 2022. The $463k improvement was primarily driven by the interest income we received from the IRS related to our tax refund claims during the first quarter of 2016. This increase is due2023.
Other expense (income), net
Three months ended September 30, 2023 vs. Three months ended September 30, 2022
Other expense (income), net, for the three months ended September 30, 2023 was $0.4 million of expense compared to an increase in interest accretion related to the 3Q Digital contingent consideration and interest expense incurred on the Texas Capital Credit Facility. Interest 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 reflected in the change in interest expense.
Nine months ended September 30, 2023 vs. Third Quarter of 2016
Other expense, net, increased $1.2for the nine months ended September 30, 2023 was $3.8 million of expense compared to $6.0 million of other income, net, in the prior year quarter . The $9.7 million increase in other expense, net was mainly associated with changes in foreign currency gain and loss account.
Income Taxes
Three months ended September 30, 2023vs. Three months ended September 30, 2022
The income tax provision of $1.9 million in the third quarter of 2017 compared to third quarter of 2016. The increase is primarily the result of an increase in pension expense and losses on fixed asset disposals.
Nine Months of 2017months ended September 30, 2023 vs. First Nine Months of 2016
The income tax benefitprovision of $3.3$1.6 million in the first nine months of 2017ended September 30, 2023 represents a decrease in benefitincome tax provision of $2.5$0.7 million when compared to the first nine months of 2016.ended September 30, 2022. Our effective tax rate was 20.8%79.9% for the first nine months ended September 30, 2023, an increase of 2017, decreasing66.4% from athe effective tax rate of 25.5%13.5% for the first nine months of 2016.ended September 30, 2022. The effective income tax rate differs from the federal statutory rate of 35.0%21.0%, primarily due to the nondeductible interestchange in valuation allowance, U.S. state income taxes and income earned in foreign jurisdictions.
Segment Results
The following is a discussion and analysis of the results of our reporting segments for the three months ended September 30, 2023 and 2022. There are three principal financial measures reported to our CEO (the chief operating decision maker) for use in assessing segment performance and allocating resources. Those measures are revenue, operating income and operating income plus depreciation and amortization (“EBITDA”). For additional information, see Note N, Segment Reporting, in the Notes to Condensed Consolidated Financial Statements.
Marketing Services:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
In thousands | 2023 | 2022 | % Change | 2023 | 2022 | % Change | ||||||||||||||||||
Revenues | $ | 10,591 | $ | 13,016 | (18.6 | )% | $ | 32,751 | $ | 39,389 | (16.9 | )% | ||||||||||||
EBITDA | 1,515 | 1,921 | (21.1 | )% | 4,026 | 5,196 | (22.5 | )% | ||||||||||||||||
Operating Income | 1,444 | 1,823 | (20.8 | )% | 3,859 | 4,908 | (21.4 | )% | ||||||||||||||||
Operating Income % of Revenue | 13.6 | % | 14.0 | % | 11.8 | % | 12.5 | % | ||||||||||||||||
Three months ended September 30, 2023vs. Three months ended September 30, 2022
Marketing Services segment revenue decreased $2.4 million, or 18.6%, due to a decrease of service volume from existing customers. Operating income for the three months ended September 30, 2023 decreased $0.4 million from the prior year quarter due to the reduced revenue.
Nine months ended September 30, 2023 vs. Nine months ended September 30, 2022
Marketing Services segment revenue decreased $6.6 million, or 16.9%, due to a decrease in direct mail service volume from existing customers. Operating income for the nine months ended September 30, 2023 decreased $1.0 million from the prior year quarter due to the lower revenue.
Customer Care:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
In thousands | 2023 | 2022 | % Change | 2023 | 2022 | % Change | ||||||||||||||||||
Revenues | $ | 13,998 | $ | 17,375 | (19.4 | )% | $ | 45,625 | $ | 50,499 | (9.7 | )% | ||||||||||||
EBITDA | 1,991 | 2,971 | (33.0 | )% | 6,989 | 8,926 | (21.7 | )% | ||||||||||||||||
Operating Income | 1,738 | 2,765 | (37.1 | )% | 5,965 | 8,317 | (28.3 | )% | ||||||||||||||||
Operating Income % of Revenue | 12.4 | % | 15.9 | % | 13.1 | % | 16.5 | % | ||||||||||||||||
Three months ended September 30, 2023vs. Three months ended September 30, 2022
Customer Care segment revenue decreased $3.4 million, or 19.4%, primarily due to decreased project work which was partially offset by $2.2M revenue associated with the 3Q Digital contingent consideration and foreign tax credit limitations on dividends paid from foreign subsidiaries.
Nine months ended September 30, 2023 vs. Nine months ended September 30, 2022
Customer Care segment revenue decreased $4.9 million, or 9.7%, primarily due to the decrease in both non-recurring pandemic-related projects and a discrete effective tax rate methodlarge non-recurring recall project in 2022 which was partially offset by $7.3 million revenue from InsideOut. Operating Income was $6.0 million for the nine months ended September 30, 2023, compared to calculateoperating income taxes in 2016 because we determined that small changes in estimated ordinary income would result in significant changes inof $8.3 million for the estimated annual effective tax rate, such that the historical method would not provide a reliable estimate for 2016.
Fulfillment & Logistics Services:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
In thousands | 2023 | 2022 | % Change | 2023 | 2022 | % Change | ||||||||||||||||||
Revenues | $ | 22,530 | $ | 23,495 | (4.1 | )% | $ | 63,625 | $ | 61,612 | 3.3 | % | ||||||||||||
EBITDA | 2,855 | 2,777 | 2.8 | % | 6,987 | 8,334 | (16.2 | )% | ||||||||||||||||
Operating Income | 2,606 | 2,601 | 0.2 | % | 6,251 | 7,753 | (19.4 | )% | ||||||||||||||||
Operating Income % of Revenue | 11.6 | % | 11.1 | % | 9.8 | % | 12.6 | % | ||||||||||||||||
Three months ended September 30, 2023vs. Three months ended September 30, 2022
Fulfillment & Logistics Services segment revenue decreased by $1.0 million due to declined volume from the existing customers. Operating income stayed flat at $2.6 million for the three months ended September 30, 2023 and 2022.
Nine months ended September 30, 2023 vs. Nine months ended September 30, 2022
Fulfillment & Logistics Services segment revenue increased $2.0 million, or 3.3%, primarily driven by the increase in work from continuing operations of $16.9existing customers. Operating income was $6.3 million and loss per share from continuing operations of $0.27 per share infor the first nine months of 2016.
Liquidity and Capital Resources
Sources and Uses of Cash
Our cash and cash equivalent balances were $11.4$13.3 million and $46.0$10.4 million at September 30, 20172023 and December 31, 2016,2022, respectively. Our As of September 30, 2023, we had the ability to borrow an additional $24.2 million under our Credit Facility. The cash deposited in an escrow account to satisfy our contingent payment obligations in connection with the acquisition of InsideOut is not included in our cash and cash equivalent or restricted cash balances as of September 30, 2023.
We received $2.5 million in tax refunds in 2022 and received an additional tax refund of $5.3 million in March 2023, 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, and borrowings and proceeds from asset sales.available under our Credit Facility. 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, finance and operating leases and unfunded pension plan benefit payments) and other cash needs for our operations in the short term and beyond through a combination of cash on hand, cash flow from operations, and borrowings under the Credit Facility. Although the Company believes that it will be able to meet its cash needs for the short term and beyond, if unforeseen circumstances arise the company may need to seek alternative sources of liquidity.
Operating Activities
Net cash used inprovided by the operating activities for the nine months ended September 30, 20172023 was $42.0$6.1 million, compared to net cash provided by operating activities of $26.5$22.3 million for the nine months ended September 30, 2016.2022. The $68.5$16.1 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 operating activities was primarily driven by lower net income of $14.6 million and the $11.1 million decrease in accounts payable, accrued expenses and other liabilities, which was partially offset by a $6.7 million decrease in accounts receivable dueand contract assets, and a $1.6 million decrease in prepaid and other current assets in the nine months ended September 30, 2023 as compared to our year over year revenue decline.
Investing Activities
Net cash used in investing activities was $4.1$1.5 million for the nine months ended September 30, 2017,2023, compared to $12.5$5.7 million for the nine months ended September 30, 2016. Current year2022. The $4.2 million year-over-year decrease in cash used in investing activities consisted of capital expenditures of $4.1 million. This compareswas primarily due to prior year investing activities consisting of the acquisition of Aleutian Consulting in March of 2016 for $3.5$4.3 million capital expenditures of $6.9 million, andless cash used to purchase property, plant and equipment (mainly for discontinued operations of $2.4 million.
Financing Activities
Net cash flows fromused in financing activities was $10.8$3.1 million for the nine months ended September 30, 2017,2023, as compared to $6.4 million of net cash used of $21.8 millionin financing activities for the nine months ended September 30, 2016.2022. The $32.6$3.3 million increase isdecrease was primarily duerelated to the net cash borrowed from credit facilities of $11.8$2.4 million in 2017 as opposedused to net cash paid of $14.3 million in 2016, as well as the lone dividend payment of $5.3 million maderepurchase our common stock in the first quarternine months ended September 30, 2023 as compared to the paydown of 2016.
Foreign Holdings of Cash
Consolidated foreign holdings of cash as of September 30, 20172023 and 20162022 were $3.2$4.0 million and $4.0$1.8 million, respectively. The company is subject to, and has accrued additional U.S. income taxes and foreign withholding taxes for repatriated cash.
Long Term Debt
On March 10, 2016, weDecember 21, 2021, the Company entered the 2016 Secured Credit Facility with Wells Fargo Bank, N.A. as Administrative Agent. This facility consisted ofinto a maximum $65.0three-year, $25.0 million asset-based 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.
The Credit Facility provides for loans up to the lesser of (a) $25.0 million, and (b) the amount available under a "borrowing base" calculated primarily by reference to the Company's cash and cash equivalents and accounts receivables. The Credit Facility allows the Company to use up to $3.0 million of its borrowing capacity to issue letters of credit.
The loans under the Credit Facility accrue interest at a variable rate equal to the Bloomberg Short-Term Bank Yield Index Rate plus a margin of 2.25% per annum. The outstanding amounts advanced under the Credit Facility are due and payable in full on December 21, 2024.
The Company may voluntarily prepay all or any portion of the company's founders.loans advanced under the Credit Facility at any time, without premium or penalty. The Credit Facility is subject to mandatory prepayments (i) from the net proceeds of asset dispositions not otherwise permitted under the Credit Facility; (ii) if the unpaid principal balance under the Credit Facility plus the aggregate face amount of all outstanding letters of credit facility adds additional financial flexibilityexceeds the borrowing base; (iii) in an amount equal to 50% of the net proceeds of issuances of capital stock (subject to customary exceptions); or (iv) in an amount equal to the companynet proceeds from any issuance of debt not otherwise permitted under the Credit Facility.
The Credit Facility contains certain covenants restricting the Company's and will be usedits subsidiaries' ability to create, incur, assume or become liable for working capitalindebtedness; make certain investments; pay dividends or repurchase the Company's stock; create, incur or assume liens; consummate mergers or acquisitions; liquidate, dissolve, suspend or cease operations; or modify accounting or tax reporting methods (other than as required by U.S. GAAP).
As of September 30, 2023 and December 31, 2022, we had no borrowings outstanding under the Credit Facility. At each of September 30, 2023 and December 31, 2022, we had letters of credit in the amount of $0.8 million outstanding. No amounts were drawn against these letters of credit at September 30, 2023 and December 31, 2022. These letters of credit exist to support insurance programs relating to workers’ compensation, automobile, and general corporate purposes. See
As of September 30, 2023, we had the ability to borrow an additional $24.2 million under the Credit Facility.
Dividends
We did not pay any dividends in the Notes to Condensed Consolidated Financial Statements for further discussion.
Share Repurchase
On May 2, 2023, the Board of Directors of Harte Hanks approved a share repurchase program to maximize shareholder value with authorization to repurchase $6.5 million of the Company’s Common Stock. In the three and nine months ended September 30, 2023, we have not repurchased anyrepurchased 0.1 million and 0.4 million shares of our common stock under our current stock repurchase program that was publicly announced in August 2014. Under our current program, we are authorized to spend up to $20.0for $0.5 million to repurchase shares of our outstanding common stock. At September 30, 2017, we had $11.4and $2.4 million, of remaining authorization under this program. From 1997 through September 30, 2017, we have repurchased 67.9 million shares for an aggregate of $1.2 billion.
Outlook
We consider such factors as total cash and cash equivalents and restricted cash, 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 and Recent Accounting Policies
Critical accounting policiesestimates 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 considerActual results could differ materially from those estimates under different assumptions and conditions. Refer to the following to be2022 10-K for a discussion of our critical accounting estimates.
Our Significant Accounting policies asare described in detailNote A, Overview and Significant Accounting Policies, in our 2016 Form 10-K:
See Recent Accounting Pronouncements
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, 2017.2023, 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 forinternal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the year ended December 31, 2016, weExchange Act) 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 Form2022 10-K, which could materially affect our business, financial condition, or future results. The risks described in our 2016 Form2022 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, 2023 to the risk factors as previously disclosed in Part I, “Item 1A. Risk Factors” of our 2016 Form 10-K other than as described below. Refer to Part I, Item 2 of this Quarterly Report on Form 10-Q, for a discussion of the economic climate and impact on our financial statements.
We did not sell any unregistered equity securities during the third quarter of 2017:
| 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 | — | ||||||||||
The following table provides information with respect to offset withholding taxes uponpurchases by the vestingCompany of unvested shares.
Period | Total Number of Shares (or units) Purchased | Average Price per Share (or unit) | Total number of Shares Purchased as Part of a Publicly Announced Plan or Program | Approximate dollar value of shares that may yet be purchased under the program (1) | ||||||||||||
| (in thousands) | ||||||||||||||||
July 1, 2023 to July 31, 2023 | - | $ | — | - | $ | 4,621 | ||||||||||
August 1, 2023 to August 31, 2023 | 25,726 | $ | 6.40 | 25,726 | 4,457 | |||||||||||
September 1, 2023 to September 30, 2023 | 51,501 | $ | 6.32 | 51,501 | 4,131 | |||||||||||
| 77,227 | 77,227 | $ | 4,131 | |||||||||||||
(1) In May 2023, the open market, our Board of Directors has authorized usof Harte Hanks approved a share repurchase program to spend upmaximize shareholder value with authorization to $20.0repurchase $6.5 million of the Company’s Common Stock. After giving effect to these repurchases, we have remaining authority of $4.1 million to repurchase shares of our outstanding common stock. As of September 30, 2017, we have repurchased 1.5 million shares and spent $11.4 millionremaining under the 2014 stock repurchase program. Through September 30, 2017, we had repurchased a total
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
None.
Exhibit No. | Description of Exhibit | ||
| *101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data Files because its XBRL tags are embedded within the Inline XBRL Document. | ||
| *101.SCH | Inline XBRL Taxonomy Extension Schema Document | ||
| *101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | ||
| *101.LAB | Inline XBRL Taxonomy Extension Labels Linkbase Document | ||
| *101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | ||
| *101.DEF | Inline XBRL Definition Linkbase Document | ||
| * | Cover Page Interactive Data File (embedded within the Inline XBRL | ||
| and contained in Exhibit 101) | |
*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 | Kirk Davis | |
Chief Executive Officer | ||
| November | /s/ | |
Date | David Garrison | |
Interim Chief Financial Officer | ||