

¨☐			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: 001-32407

_______________________________________

ARC DOCUMENT SOLUTIONS, INC.

(Exact name of Registrant as specified in its Charter)

_______________________________________



Delaware			20-1700361
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)



12657 Alcosta Blvd, Suite 200	San Ramon ~~California 94583~~	California	94583
(Address of principal executive offices)			(Zip Code)

(925) 949-5100

(Registrant's telephone number, including area code)

_______________________________________

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 ý☒ No ¨☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 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 ý☒ No ¨☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer		☐			Accelerated filer		☒

~~Large accelerated filer~~		¨	~~Accelerated filer~~	ý

Non-accelerated filer	¨☐		Smaller reporting company			ý☒

					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 whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨☐ No ý

☒

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading ~~Symbol~~Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.001 per share	ARC	The New York Stock Exchange

The number of outstanding shares of the registrant's common stock, par value $0.001 per share, was ~~45,887,122~~43,863,017 as of ~~November 5, 2019.~~

October 29, 2020.

ARC DOCUMENT SOLUTIONS, INC.

Form 10-Q

For the Quarter Ended September 30, ~~2019~~2020

Table of Contents



PART I—FINANCIAL INFORMATION			5
Item 1. Condensed Consolidated Financial Statements			5
Condensed Consolidated Balance Sheets as of September 30, ~~2019~~2020 and December 31, ~~2018~~2019 (Unaudited)			5
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019 ~~and 2018~~ (Unaudited)			6
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2020 and 2019 ~~and 2018~~ (Unaudited)			7
Condensed Consolidated Statements of Equity for the three and nine months ended September 30, 2020 and 2019 ~~and 2018~~ (Unaudited)			8
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019 ~~and 2018~~ (Unaudited)			9
Notes to Condensed Consolidated Financial Statements (Unaudited)			10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			2118
Item 3. Quantitative and Qualitative Disclosures About Market Risk			3332
Item 4. Controls and Procedures			3332
PART II—OTHER INFORMATION			3433
Item 1. Legal Proceedings			3433
Item 1A. Risk Factors			3433
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			3435
Item 6. Exhibits			35
Signatures			36
Exhibit Index			37
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains statements that are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These "forward-looking statements," include but are not limited to expectations regarding the impact of the COVID-19 pandemic on our financial results and the effectiveness of the Company's responses to the pandemic; future cash flows, and capital requirements, the impact of foreign exchange rate movements on sales and net income, and the Company's anticipated effective tax rate. When used in this Form 10-Q, the words “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “project,” “target,” “likely,” “will,” “would,” “could,” and variations of such words and similar expressions as they relate to our management or to ARC Document Solutions, Inc. (the “Company”) are intended to identify forward-looking statements. These forward-looking statements involve risks and uncertainties that ~~could~~we have identified as having the potential to cause actual results to differ materially from those contemplated ~~herein.~~herein, especially factors relating to the COVID-19 pandemic. We have described in Part II, Item 1A-“Risk Factors” a number of factors that could cause our actual results to differ from our projections or estimates. These factors and other risk factors described in this Form 10-Q are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could harm our results. Many of these risks and uncertainties are currently amplified by and will continue to be amplified by, or in the future may be amplified by, the COVID-19 outbreak. It is not possible to predict or identify all such risks. Consequently, there can be no assurance that the actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, us. There may be additional risks that we consider immaterial or which are unknown. Given these uncertainties, you are cautioned not to place undue reliance on the substance or comprehensive nature of such forward-looking statements.

Except where otherwise indicated, the statements made in this Form 10-Q are made as of the date we filed this report with the U.S. Securities and Exchange Commission and should not be relied upon as of any subsequent date. All future written and verbal forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We undertake no obligation, and specifically disclaim any obligation, to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You should, however, consult further disclosures we make in future filings of our Forms 10-K, Forms 10-Q, and Forms 8-K, and any amendments thereto, as well as our proxy statements.

PART I—FINANCIAL INFORMATION

Item 1.Condensed Consolidated Financial Statements

ARC DOCUMENT SOLUTIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

September 30, December 31,
(In thousands, except per share data) 2019 2018
Assets
Current assets:
Cash and cash equivalents $ 20,803
$ 29,433
Accounts receivable, net of allowances for accounts receivable of $2,084 and $2,016
57,662
58,035
Inventories, net 15,384
16,768
Prepaid expenses 5,586
4,937
Other current assets 7,435
6,202
Total current assets 106,870
115,375
Property and equipment, net of accumulated depreciation of $208,515 and $199,480
70,226
70,668
Right-of-use assets from operating leases 40,753
—
Goodwill 121,051
121,051
Other intangible assets, net 2,636
5,126
Deferred income taxes 20,164
24,946
Other assets 2,479
2,550
Total assets $ 364,179
$ 339,716
Liabilities and Equity
Current liabilities:
Accounts payable $ 23,197
$ 24,218
Accrued payroll and payroll-related expenses 12,130
17,029
Accrued expenses 19,690
17,571
Current operating lease liability 10,899
—
Current portion of long-term debt and finance leases 22,976
22,132
Total current liabilities 88,892
80,950
Long-term operating lease liabilities 37,008
—
Long-term debt and finance leases 88,437
105,060
Other long-term liabilities 497
6,404
Total liabilities 214,834
192,414
Commitments and contingencies (Note 8)

Stockholders’ equity:
ARC Document Solutions, Inc. stockholders’ equity:
Preferred stock, $0.001 par value, 25,000 shares authorized; 0 shares issued and outstanding
—
—
Common stock, $0.001 par value, 150,000 shares authorized; 49,169 and 48,492 shares issued and 45,887 and 45,818 shares outstanding
49
48
Additional paid-in capital 125,488
123,525
Retained earnings 31,588
29,397
Accumulated other comprehensive loss (3,740 ) (3,351 )
153,385
149,619
Less cost of common stock in treasury, 3,282 and 2,674 shares 10,536
9,350
Total ARC Document Solutions, Inc. stockholders’ equity 142,849
140,269
Noncontrolling interest 6,496
7,033
Total equity 149,345
147,302
Total liabilities and equity $ 364,179
$ 339,716

~~The accompanying notes are an integral part of these condensed consolidated financial statements.~~

~~ARC DOCUMENT SOLUTIONS, INC.~~

~~CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS~~

~~(Unaudited)~~

Three Months Ended
September 30, Nine Months Ended
September 30,
(In thousands, except per share data) 2019 2018 2019 2018
Net sales $ 94,104
$ 100,473
290,099
302,371
Cost of sales 63,702
67,801
195,174
203,679
Gross profit 30,402
32,672
94,925
98,692
Selling, general and administrative expenses 26,025
26,973
80,881
81,780
Amortization of intangible assets 718
949
2,480
2,942
Restructuring expense 311
—
311
—
Income from operations 3,348
4,750
11,253
13,970
Other (income) expense, net (17 ) 38
(53 ) (63 )
Interest expense, net 1,264
1,478
4,066
4,436
Income before income tax provision 2,101
3,234
7,240
9,597
Income tax provision 1,042
647
5,222
2,526
Net income 1,059
2,587
2,018
7,071
Loss (income) attributable to the noncontrolling interest 16
(28 ) 173
190
Net income attributable to ARC Document Solutions, Inc. shareholders $ 1,075
$ 2,559
$ 2,191
$ 7,261
Earnings per share attributable to ARC Document Solutions, Inc. shareholders:
Basic $ 0.02
$ 0.06
$ 0.05
$ 0.16
Diluted $ 0.02
$ 0.06
$ 0.05
$ 0.16
Weighted average common shares outstanding:
Basic 44,978
44,983
45,107
44,888
Diluted 44,992
45,188
45,213
44,993


	September 30,		December 31,
(In thousands, except per share data)	2020		2019
Assets
Current assets:
Cash and cash equivalents	$	50,342	$	29,425
Accounts receivable, net of allowances for accounts receivable of $2,305 and $2,099	41,322		51,432
Inventory	10,502		13,936

Prepaid expenses	4,663		4,783
Other current assets	4,051		6,807
Total current assets	110,880		106,383
Property and equipment, net of accumulated depreciation of $223,197 and $210,849	62,971		70,334
Right-of-use assets from operating leases	37,743		41,238
Goodwill	121,051		121,051
Other intangible assets, net	641		1,996
Deferred income taxes	17,287		19,755
Other assets	2,127		2,400
Total assets	$	352,700	$	363,157
Liabilities and Equity
Current liabilities:
Accounts payable	$	19,317	$	23,231
Accrued payroll and payroll-related expenses	10,798		14,569
Accrued expenses	17,167		20,440
Current operating lease liability	11,779		11,060
Current portion of finance leases	18,748		17,075
Total current liabilities	77,809		86,375
Long-term operating lease liabilities	34,082		37,260
Long-term debt and finance leases	87,374		89,082

Other long-term liabilities	500		400
Total liabilities	199,765		213,117
Commitments and contingencies (Note 6)
Shareholders’ equity:
ARC Document Solutions, Inc. shareholders’ equity:
Preferred stock, $0.001 par value, 25,000 shares authorized; 0 shares issued and outstanding	0		0
Common stock, $0.001 par value, 150,000 shares authorized; 49,911 and 49,189 shares issued and 43,863 and 45,228 shares outstanding	50		49
Additional paid-in capital	127,505		126,117
Retained earnings	36,477		31,969
Accumulated other comprehensive loss	(3,611)		(3,357)
	160,421		154,778
Less cost of common stock in treasury, 6,048 and 3,960 shares	13,842		11,410
Total ARC Document Solutions, Inc. shareholders’ equity	146,579		143,368
Noncontrolling interest	6,356		6,672
Total equity	152,935		150,040
Total liabilities and equity	$	352,700	$	363,157

The accompanying notes are an integral part of these condensed consolidated financial statements.

ARC DOCUMENT SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF ~~COMPREHENSIVE INCOME~~OPERATIONS

(Unaudited)

Three Months Ended
September 30, Nine Months Ended
September 30,
(In thousands) 2019 2018 2019 2018
Net income $ 1,059
$ 2,587
$ 2,018
$ 7,071
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments, net of tax 201
(320 ) (753 ) (1,633 )
Other comprehensive income (loss), net of tax 201
(320 ) (753 ) (1,633 )
Comprehensive income 1,260
2,267
1,265
5,438
Comprehensive income (loss) attributable to noncontrolling interest 102
(202 ) (537 ) (364 )
Comprehensive income attributable to ARC Document Solutions, Inc. shareholders $ 1,158
$ 2,469
$ 1,802
$ 5,802


	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands, except per share data)	2020		2019		2020		2019


Net sales	$	72,379	$	94,104	$	225,123	$	290,099
Cost of sales	48,186		63,702		152,888		195,174
Gross profit	24,193		30,402		72,235		94,925
Selling, general and administrative expenses	19,186		26,025		60,816		80,881
Amortization of intangible assets	285		718		1,353		2,480

Restructuring expense	0		311		0		311
Income from operations	4,722		3,348		10,066		11,253
Other income, net	(11)		(17)		(44)		(53)

Interest expense, net	871		1,264		3,111		4,066
Income before income tax provision	3,862		2,101		6,999		7,240
Income tax provision	1,234		1,042		2,489		5,222
Net income	2,628		1,059		4,510		2,018
Loss attributable to the noncontrolling interest	163		16		425		173
Net income attributable to ARC Document Solutions, Inc. shareholders	$	2,791	$	1,075	$	4,935	$	2,191
Earnings per share attributable to ARC Document Solutions, Inc. shareholders:
Basic	$	0.07	$	0.02	$	0.11	$	0.05
Diluted	$	0.07	$	0.02	$	0.11	$	0.05
Weighted average common shares outstanding:
Basic	42,747		44,978		43,017		45,107
Diluted	42,918		44,992		43,160		45,213

The accompanying notes are an integral part of these condensed consolidated financial statements.

ARC DOCUMENT SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF ~~EQUITY~~COMPREHENSIVE INCOME (LOSS)

(Unaudited)

ARC Document Solutions, Inc. Shareholders
Common Stock Accumulated
(In thousands, except per share data) Shares
Par
Value

Additional Paid-in
Capital
Retained Earnings
Other Comprehensive
Loss

Common Stock in
Treasury

Noncontrolling
Interest
Total
Balance at June 30, 2018 48,345
$ 48
$ 122,252
$ 25,226
$ (3,367 ) $ (9,350 ) $ 7,212
$ 142,021
Stock-based compensation 100
—
597
597
Issuance of common stock under Employee Stock Purchase Plan 19
—
29
29
Comprehensive income (loss) 2,559
(90 ) (202 ) 2,267
Balance at September 30, 2018 48,464
$ 48
$ 122,878
$ 27,785
$ (3,457 ) $ (9,350 ) $ 7,010
$ 144,914

ARC Document Solutions, Inc. Shareholders
Common Stock Accumulated
(In thousands, except per share data) Shares
Par
Value

Additional Paid-in
Capital

Retained
Earnings

Other Comprehensive
Loss

Common Stock in
Treasury

Noncontrolling
Interest
Total
Balance at June 30, 2019 49,144
$ 49
$ 124,837
$ 30,513
$ (3,823 ) $ (10,217 ) $ 6,394
$ 147,753
Stock-based compensation —
—
623

623
Issuance of common stock under Employee Stock Purchase Plan 25
—
28

28
Treasury shares

(319 )

(319 )
Comprehensive income 1,075
83
102
1,260
Balance at September 30, 2019 49,169
$ 49
$ 125,488
$ 31,588
$ (3,740 ) $ (10,536 ) $ 6,496
$ 149,345

ARC Document Solutions, Inc. Shareholders
Common Stock Accumulated
(In thousands, except per share data) Shares
Par
Value

Additional Paid-in
Capital
Retained Earnings
Other Comprehensive
Loss

Common Stock in
Treasury

Noncontrolling
Interest
Total
Balance at December 31, 2017 47,913
$ 48
$ 120,953
$ 20,524
$ (1,998 ) $ (9,290 ) $ 7,374
$ 137,611
Stock-based compensation 490
1,824
1,824
Issuance of common stock under Employee Stock Purchase Plan 61
101
101
Treasury shares (60 ) (60 )
Comprehensive income (loss) 7,261
(1,459 ) (364 ) 5,438
Balance at September 30, 2018 48,464
$ 48
$ 122,878
$ 27,785
$ (3,457 ) $ (9,350 ) $ 7,010
$ 144,914

ARC Document Solutions, Inc. Shareholders
Common Stock Accumulated
(In thousands, except per share data) Shares
Par
Value

Additional Paid-in
Capital

Retained
Earnings

Other Comprehensive
Loss

Common Stock in
Treasury

Noncontrolling
Interest
Total
Balance at December 31, 2018 48,492
$ 48
$ 123,525
$ 29,397
$ (3,351 ) $ (9,350 ) $ 7,033
$ 147,302
Stock-based compensation 607
1
1,854
1,855
Issuance of common stock under Employee Stock Purchase Plan 70
109
109
Treasury shares (1,186 ) (1,186 )
Comprehensive income (loss) 2,191
(389 ) (537 ) 1,265
Balance at September 30, 2019 49,169
$ 49
$ 125,488
$ 31,588
$ (3,740 ) $ (10,536 ) $ 6,496
$ 149,345


	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2020		2019		2020		2019
Net income	$	2,628	$	1,059	$	4,510	$	2,018
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments, net of tax	444		201		(145)		(753)

Other comprehensive income (loss), net of tax	444		201		(145)		(753)
Comprehensive income	3,072		1,260		4,365		1,265
Comprehensive income (loss) attributable to noncontrolling interest	44		102		(316)		(537)
Comprehensive income attributable to ARC Document Solutions, Inc. shareholders	$	3,028	$	1,158	$	4,681	$	1,802

The accompanying notes are an integral part of these condensed consolidated financial statements.

ARC DOCUMENT SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited)


	ARC Document Solutions, Inc. Shareholders
	Common Stock							Accumulated
(In thousands, except per share data)	Shares	Par Value		Additional Paid-in Capital		Retained Earnings		Other Comprehensive Loss		Common Stock in Treasury		Noncontrolling Interest		Total
Balance at June 30, 2019	49,144	$	49	$	124,837	$	30,513	$	(3,823)	$	(10,217)	$	6,394	$	147,753
Stock-based compensation	—	—		623										623
Issuance of common stock under Employee Stock Purchase Plan	25			28										28

Treasury shares										(319)				(319)


Comprehensive income						1,075		83				102		1,260
Balance at September 30, 2019	49,169	$	49	$	125,488	$	31,588	$	(3,740)	$	(10,536)	$	6,496	$	149,345

	ARC Document Solutions, Inc. Shareholders
	Common Stock							Accumulated
(In thousands, except per share data)	Shares	Par Value		Additional Paid-in Capital		Retained Earnings		Other Comprehensive Loss		Common Stock in Treasury		Noncontrolling Interest		Total
Balance at June 30, 2020	49,891	$	50	$	127,077	$	33,686	$	(3,848)	$	(13,842)	$	6,312	$	149,435
Stock-based compensation	—	—		413										413
Issuance of common stock under Employee Stock Purchase Plan	20			15										15


Comprehensive income						2,791		237				44		3,072
Balance at September 30, 2020	49,911	$	50	$	127,505	$	36,477	$	(3,611)	$	(13,842)	$	6,356	$	152,935


	ARC Document Solutions, Inc. Shareholders
	Common Stock							Accumulated
(In thousands, except per share data)	Shares	Par Value		Additional Paid-in Capital		Retained Earnings		Other Comprehensive Loss		Common Stock in Treasury		Noncontrolling Interest		Total
Balance at December 31, 2018	48,492	$	48	$	123,525	$	29,397	$	(3,351)	$	(9,350)	$	7,033	$	147,302
Stock-based compensation	607	1		1,854										1,855
Issuance of common stock under Employee Stock Purchase Plan	70			109										109

Treasury shares										(1,186)				(1,186)


Comprehensive income (loss)						2,191		(389)				(537)		1,265
Balance at September 30, 2019	49,169	$	49	$	125,488	$	31,588	$	(3,740)	$	(10,536)	$	6,496	$	149,345

	ARC Document Solutions, Inc. Shareholders
	Common Stock							Accumulated
(In thousands, except per share data)	Shares	Par Value		Additional Paid-in Capital		Retained Earnings		Other Comprehensive Loss		Common Stock in Treasury		Noncontrolling Interest		Total
Balance at December 31, 2019	49,189	$	49	$	126,117	$	31,969	$	(3,357)	$	(11,410)	$	6,672	$	150,040
Stock-based compensation	643	1		1,333										1,334
Issuance of common stock under Employee Stock Purchase Plan	79			55										55
Treasury shares										(2,432)				(2,432)
Cash Dividends - common stock ($0.01 per share)						(427)								(427)
Comprehensive income (loss)						4,935		(254)				(316)		4,365
Balance at September 30, 2020	49,911	$	50	$	127,505	$	36,477	$	(3,611)	$	(13,842)	$	6,356	$	152,935

The accompanying notes are an integral part of these condensed consolidated financial statements.

ARC DOCUMENT SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine Months Ended September 30,							Nine Months Ended September 30,
(In thousands)	2019			2018			(In thousands)		2020		2019
Cash flows from operating activities							Cash flows from operating activities
Net income	$	2,018		$	7,071		Net income		$	4,510	$	2,018
Adjustments to reconcile net income to net cash provided by operating activities:							Adjustments to reconcile net income to net cash provided by operating activities:
Allowance for accounts receivable	430			637			Allowance for accounts receivable		706		430
Depreciation	21,600			21,708			Depreciation		21,402		21,600
Amortization of intangible assets	2,480			2,942			Amortization of intangible assets		1,353		2,480
Amortization of deferred financing costs	162			175			Amortization of deferred financing costs		48		162

Stock-based compensation	1,854			1,824			Stock-based compensation		1,333		1,854
Deferred income taxes	4,684			2,175			Deferred income taxes		2,419		4,684
Deferred tax valuation allowance	115			71			Deferred tax valuation allowance		22		115
Restructuring expense, non-cash portion	46			—			Restructuring expense, non-cash portion		0		46

Other non-cash items, net	(209		)	(201		)	Other non-cash items, net		226		(209)
Changes in operating assets and liabilities:							Changes in operating assets and liabilities:
Accounts receivable	(258		)	(6,594		)
Accounts receivable, net							Accounts receivable, net		9,310		(258)
Inventory	1,242			1,291			Inventory		3,469		1,242
Prepaid expenses and other assets	7,094			(2,326		)	Prepaid expenses and other assets		10,765		7,094
Accounts payable and accrued expenses	(11,464		)	1,289			Accounts payable and accrued expenses		(16,548)		(11,464)
Net cash provided by operating activities	29,794			30,062			Net cash provided by operating activities		39,015		29,794
Cash flows from investing activities							Cash flows from investing activities
Capital expenditures	(8,406		)	(10,463		)	Capital expenditures		(5,053)		(8,406)

Other	342			556			Other		250		342
Net cash used in investing activities	(8,064		)	(9,907		)	Net cash used in investing activities		(4,803)		(8,064)
Cash flows from financing activities							Cash flows from financing activities

Proceeds from issuance of common stock under Employee Stock Purchase Plan	109			100			Proceeds from issuance of common stock under Employee Stock Purchase Plan		55		109
Share repurchases	(1,186		)	(60		)	Share repurchases		(2,432)		(1,186)
Contingent consideration on prior acquisitions	(3		)	(176		)	Contingent consideration on prior acquisitions		0		(3)
Payments on long-term debt agreements and finance leases	(17,551		)	(17,200		)

Payments on finance leases and long-term debt agreements							Payments on finance leases and long-term debt agreements		(10,236)		(17,551)
Borrowings under revolving credit facilities	19,750			9,250			Borrowings under revolving credit facilities		45,000		19,750
Payments under revolving credit facilities	(31,000		)	(20,875		)	Payments under revolving credit facilities		(45,000)		(31,000)

Dividends paid							Dividends paid		(870)		0
Net cash used in financing activities	(29,881		)	(28,961		)	Net cash used in financing activities		(13,483)		(29,881)
Effect of foreign currency translation on cash balances	(479		)	(849		)	Effect of foreign currency translation on cash balances		188		(479)
Net change in cash and cash equivalents	(8,630		)	(9,655		)	Net change in cash and cash equivalents		20,917		(8,630)
Cash and cash equivalents at beginning of period	29,433			28,059			Cash and cash equivalents at beginning of period		29,425		29,433
Cash and cash equivalents at end of period	$	20,803		$	18,404		Cash and cash equivalents at end of period		$	50,342	$	20,803
Supplemental disclosure of cash flow information							Supplemental disclosure of cash flow information
Noncash investing and financing activities							Noncash investing and financing activities
Finance lease obligations incurred	$	13,010		$	16,560		Finance lease obligations incurred		$	9,624	$	13,010
Operating lease obligations incurred	$	3,257		$	—		Operating lease obligations incurred		$	4,582	$	3,257

The accompanying notes are an integral part of these condensed consolidated financial statements.

ARC DOCUMENT SOLUTIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data or where otherwise noted)

(Unaudited)

1. Description of Business and Basis of Presentation

ARC Document Solutions, Inc. (“ARC Document Solutions,” “ARC” or the “Company”) is a leading document solutions provider to architectural, engineering, construction, and facilities management professionals, while also providing document solutions to businesses of all types. ARC offers a variety of services including: Construction Document Information Management ("CDIM"), Managed Print Services ("MPS"), and Archive and Information Management ("AIM"). In addition, ARC also sells Equipment and Supplies. The Company conducts its operations through its wholly-owned operating subsidiary, ARC Document Solutions, LLC, a Texas limited liability company, and its affiliates.

Basis of Presentation

The accompanying interim Condensed Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in conformity with the requirements of the U.S. Securities and Exchange Commission ("SEC"). As permitted under those rules, certain footnotes or other financial information required by GAAP for complete financial statements have been condensed or omitted. In management’s opinion, the accompanying interim Condensed Consolidated Financial Statements reflect all adjustments of a normal and recurring nature that are necessary to fairly present the interim Condensed Consolidated Financial Statements. All intercompany accounts and transactions have been eliminated in consolidation. The operating results for the three and nine months ended September 30, ~~2019~~2020 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2019~~.2020.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the interim Condensed Consolidated Financial Statements and accompanying notes. The Company evaluates its estimates and assumptions on an ongoing basis and relies on historical experience and various other factors that it believes to be reasonable under the circumstances to determine such estimates. Actual results could differ from those estimates and such differences may be material to the interim Condensed Consolidated Financial Statements.

These interim Condensed Consolidated Financial Statements and accompanying notes should be read in conjunction with the consolidated financial statements and notes included in the Company’s ~~2018~~2019 Form 10-K.

Revenue Recognition

Revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Net sales of the Company’s principal services and products were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
CDIM	$	47,107	$	50,502	$	137,337	$	155,701
MPS(1)	17,648		30,607		61,189		93,092
AIM	2,910		3,516		9,163		10,380
Equipment and supplies sales	4,714		9,479		17,434		30,926
Net sales	$	72,379	$	94,104	$	225,123	$	290,099

Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 2019 2018
CDIM $ 50,502
$ 52,418
$ 155,701
$ 160,270
MPS⁽¹⁾
30,607
32,384
93,092
97,181
AIM 3,516
3,617
10,380
9,709
Equipment and supplies sales 9,479
12,054
30,926
35,211
Net sales $ 94,104
$ 100,473
$ 290,099
$ 302,371

⁽¹⁾ MPS includes $16.1 million of rental income and $1.6 million of service income for the three months ended September 30, 2020 and $56.2 million of rental income and $5.0 million of service income for the nine months ended September 30, 2020. MPS includes $28.5 million of rental income and $2.1 million of service income for the three months ended September 30, 2019 and $86.5 million of rental income and $6.6 million of service income for the nine months ended September 30, 2019.

CDIM consists of professional services and software services to (i) reproduce and distribute large-format and small-format documents in either black and white or color (“Ordered Prints”) and (ii) specialized graphic color printing. Substantially all of the Company’s revenue from CDIM comes from professional services to reproduce Ordered Prints. Sales of Ordered Prints are initiated through a customer order or quote and are governed by established terms and conditions agreed upon at the onset of the customer relationship. Revenue is recognized when the performance obligation under the terms of a contract with a customer are ~~satisfied;~~satisfied, which generally ~~this~~ occurs with the transfer of control of the ~~reproduced~~ Ordered Prints. Transfer of control occurs at a specific point in time, when the Ordered Prints are delivered to the customer’s site or handed to the customer for ~~walk in~~walk-in orders. Revenue is

measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Taxes collected concurrent with revenue-producing activities are excluded from revenue.

MPS consists of placement, management, and optimization of print and imaging equipment in ~~the~~ customers' offices, job sites, and other facilities. MPS relieves the Company’s customers of the burden of purchasing print equipment and related supplies and maintaining print devices and print networks, and it shifts their costs to a “per-use” basis. MPS is supported by our hosted proprietary technology, Abacus^®, which allows our customers to capture, control, manage, print, and account for their documents. Under its MPS contracts, the Company is paid a fixed rate per unit for each print produced (per-use), often referred to as a “click charge”. MPS sales are driven by the ongoing print needs of the Company’s customers at their facilities. Upon the issuance of Accounting Standards Codification ("ASC") 842, Leases, the Company concluded that certain of its MPS arrangements, which had previously been accounted for as service revenue under ASC 606, Revenue from Contracts with Customers, are accounted for as operating leases under ASC 842. ~~See Note 7,~~ ~~Leasing,~~ ~~for additional information.~~

AIM combines software and professional services to facilitate the capture, management, access and retrieval of documents and information that have been produced in the past. AIM includes our hosted SKYSITE^® software to organize, search and retrieve documents, as well as the provision of services that include the capture and conversion of hardcopy and electronic documents into digital files (“Scanned Documents”), and their cloud-based storage and maintenance. Sales of AIM professional services, which represents the majority of AIM revenue, are initiated through a customer order or proposal and are governed by established terms and conditions agreed upon at the onset of the customer relationship. Revenue is recognized when the performance obligation under the terms of a contract with a customer are ~~satisfied;~~satisfied, which generally ~~this~~ occurs with the transfer of control of the digital files. Transfer of control occurs at a specific point in time, when the Scanned Documents are delivered to the customer either through SKYSITE or on electronic media. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Taxes collected concurrent with revenue-producing activities are excluded from revenue.

Equipment and Supplies sales consist of reselling printing, imaging, and related equipment (“Goods”) to customers primarily in architectural, engineering and construction firms. Sales of equipment and supplies are initiated through a customer order and are governed by established terms and conditions agreed upon at the onset of the customer relationship. Revenue is recognized when the performance obligations under the terms of a contract with a customer are ~~satisfied; generally, this~~satisfied, which occurs with the transfer of control of the Goods. Transfer of control occurs at a specific point in time, when the Goods are delivered to the customer’s site. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Taxes collected concurrent with revenue-producing activities are excluded from revenue. The Company has experienced minimal customer returns or refunds and does not offer a warranty on equipment that it is reselling.

Recently Adopted Accounting Pronouncements

In ~~February 2016,~~December 2019, the FASB issued ~~ASC 842,~~ ~~Leases.~~ ~~The new guidance replaced~~Accounting Standards Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance ~~in ASC 840,~~ ~~Leases. ASC 842 requires a dual approach~~to improve consistent application. ASU 2019-12 will be effective for ~~lessee accounting under which a lessee accounts for leases as finance leases or operating leases. Both finance leases~~interim and operating leases result in the lessee recognizing a right-of-use ("ROU") asset and a corresponding lease liability. For finance leases, the lessee recognizes interest expense and amortization of the ROU asset and for operating leases the lessee will recognize a straight-line total lease expense.annual periods beginning after December 15, 2020. Early adoption is permitted. The Company ~~adopted ASC 842~~elected to early adopt ASU 2019-12 on January 1, ~~2019. In July 2018, the FASB issued~~2020. The adoption of ASU ~~2018-11,~~ ~~Leases(Topic 842): Targeted Improvements~~, which provided entities the option to use the effective date as the date of initial application on transition to the new guidance. The Company elected this transition method, and as a result, the Company2019-12 did not ~~adjust comparative information for prior periods. For additional information about~~have a material impact on the ~~impact of the adoption of ASC 842, see Note 7,~~ ~~Leasing.~~Company's consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ~~ASU~~Accounting Standards Update No. 2016-13, ~~(“ASU 2016-13”),~~ Financial Instruments - Credit Loss (Topic 326)(“ASU 2016-13”), which updates the guidance on recognition and measurement of credit losses for financial assets. The new requirements, known as the current expected credit loss model ("CECL") will require entities to adopt an impairment model based on expected losses rather than incurred losses. ASU ~~20160-13~~2016-13 must be adopted on a modified-retrospective approach. This update was effective for fiscal years beginning after December 15, 2020 including interim periods within those fiscal years. In October 2019, the FASB approved an extension for all non-SEC filers, including small reporting companies, ~~(SRC)~~ to extend the effective date to fiscal years ~~being~~beginning after December 15, 2022, including interim periods within those fiscal years. Therefore,

the effective date for this update will be January 1, 2023. The Company is currently evaluating the potential impact of the adoption of the new standard on its consolidated statements of financial condition and results of operations.

Segment Reporting

The provisions of ASC 280, Segment Reporting, require public companies to report financial and descriptive information about their reportable operating segments. The Company identifies operating segments based on the various business activities that earn revenue and incur expense and whose operating results are reviewed by the Company's Chief Executive Officer, who is the

Company's chief operating decision maker. Because its operating segments have similar products and services, classes of customers, production processes, distribution methods and economic characteristics, the Company operates as a single reportable segment.

Risk and Uncertainties

The Company generates the majority of its revenue from sales of services and products to customers in the architectural, engineering, construction and building owner/operator ("AEC/O") industry. As a result, the Company’s operating results and financial condition can be significantly affected by economic factors that influence the AEC/O industry, such as non-residential construction spending, GDP growth, interest rates, unemployment rates, and office vacancy ~~rates.~~rates, all of which have been amplified due to the COVID-19 pandemic. Reduced activity (relative to historic levels) in the AEC/O industry would diminish demand for some of ARC’s services and products, and it would therefore negatively affect revenues and have a material adverse effect on ~~its~~ARC's business, operating results and financial condition.

As part of the Company’s growth strategy, ARC intends to continue to offer and grow a variety of service offerings, some of which are relatively new to the Company. The success of the Company’s efforts will be affected by its ability to acquire new customers for the Company’s new service offerings, as well as to sell the new service offerings to existing customers. The Company’s inability to successfully market and execute these relatively new service offerings could significantly affect its business and reduce its ~~long term~~long-term revenue, resulting in an adverse effect on its results of operations and financial condition.

2. Earnings per Share

The Company accounts for earnings per share in accordance with ASC 260, Earnings Per Share. Basic earnings per share is computed by dividing net income attributable to ARC by the weighted-average number of common shares outstanding for the period. Diluted earnings per common share is computed similarly to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if common shares subject to outstanding options and acquisition rights had been issued and if the additional common shares were dilutive. Common share equivalents are excluded from the computation if their effect is anti-dilutive. For the three and nine months ended September 30, ~~2019, 5 million and 5.4~~2020, 5.2 million common shares were excluded from the calculation of diluted net income attributable to ARC per common share, ~~respectively,~~ because they were anti-dilutive. For the three and nine months ended September 30, ~~2018~~, ~~4.0~~2019, 5.0 million and ~~5.1~~5.4 million common shares were excluded from the calculation of diluted net loss attributable to ARC per common share, ~~respectively,~~ because they were anti-dilutive. The Company's common share equivalents consist of stock options issued under the Company's stock plan.

Basic and diluted weighted average common shares outstanding were calculated as follows for the three and nine months ended September 30, ~~2019~~2020 and ~~2018~~:2019:


	Three Months Ended September 30,		Nine Months Ended September 30,
	2020	2019	2020	2019
Weighted average common shares outstanding during the period—basic	42,747	44,978	43,017	45,107
Effect of dilutive stock awards	171	14	143	106
Weighted average common shares outstanding during the period—diluted	42,918	44,992	43,160	45,213

Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 2019 2018
Weighted average common shares outstanding during the period—basic 44,978
44,983
45,107
44,888
Effect of dilutive stock options 14
205
106
105
Weighted average common shares outstanding during the period—diluted 44,992
45,188
45,213
44,993

3. ~~Restructuring~~

To better align the Company’s costs and resources with demand for its current portfolio of services and products, the Company initiated a restructuring plan in the third quarter of 2019. Activities associated with this restructuring plan are expected to conclude by the fourth quarter of 2019. The Company reduced sales and marketing infrastructure for its ancillary technology services, restructured its regional and corporate organization structure and labor force, and implemented system and equipment upgrades to increase operating efficiency. This restructuring will result in a reduction in headcount of approximately 50 employees, which represents approximately 2% of the Company’s total workforce.

Expenses related to employee terminations as a result of this restructuring totaled $0.3 million for the three months ended September 30, 2019. The Company had no such activities in 2018. The Company expects to pay an additional $0.05 million in the three months ended December 31, 2019 related to employee termination costs incurred as of September 30, 2019.

4. Goodwill and Other Intangibles

Goodwill

In accordance with ASC 350, Intangibles - Goodwill and Other, the Company assesses goodwill for impairment annually as of September 30, and more frequently if events and circumstances indicate that goodwill might be impaired. At September 30, ~~2019,~~2020, the Company performed its assessment and determined that goodwill was ~~not~~0t impaired.

Goodwill impairment testing is performed at the reporting unit level. Goodwill is assigned to reporting units at the date the goodwill is initially recorded. Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or internally generated, are available to support the value of the goodwill. In 2017, the Company elected to early-adopt ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies subsequent goodwill measurement by eliminating step two from the goodwill impairment test.

The Company determines the fair value of its reporting units using an income approach. Under the income approach, the Company determined fair value based on estimated discounted future cash flows of each reporting unit. Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates and EBITDA margins, discount rates and future market conditions, among others.The level of judgment and estimation is inherently higher in the current environment considering the uncertainty created by the COVID-19 pandemic. The Company has evaluated numerous factors disrupting its business and made significant assumptions which include the severity and duration of the business disruption, the timing and degree of economic recovery and the combined effect of these assumptions on the Company's future operating results and cash flows.

Given the ~~changing document and printing needs~~uncertainty regarding the ultimate financial impact of the ~~Company’s customers,~~COVID-19 pandemic and the ~~uncertainties regarding the effect on the Company’s business,~~ensuing economic recovery, there can be no assurance that the estimates and assumptions made for purposes of the Company’s goodwill impairment ~~test~~analysis in ~~2019~~2020 will prove to be accurate predictions of the future. If the Company’s assumptions, including forecasted EBITDA of certain reporting units, are not achieved, or its assumptions regarding disruptions caused by the pandemic, and its impact on the recovery from COVID-19 change, then the Company may be required to record ~~additional~~ goodwill impairment charges in future periods, whether in connection with the ~~Company’s~~ next annual impairment testing in the third quarter of ~~2020,~~2021, or on an interim basis, if any such change constitutes a triggering event (as defined under ASC 350, Intangibles-Goodwill and Other) outside of the quarter when the Company regularly performs its annual goodwill impairment test. It is not possible at this time to determine if any such future impairment charge would result or, if it does, whether such charge would be material. There was no0 change in the carrying amount of goodwill from January 1, ~~2018~~2019 through September 30, ~~2019.~~2020.

See “Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations for further information regarding the process and assumptions used in the goodwill impairment analysis.

Long-lived and Other Intangible Assets

The Company periodically assesses potential impairments of its long-lived assets in accordance with the provisions of ASC 360, Accounting for the Impairment or Disposal of Long-lived Assets. An impairment review is performed whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. The Company groups its assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of the other assets and liabilities. The Company has determined that the lowest level for which identifiable cash flows are available is the regional level, which is the operating segment level.

Factors considered by the Company include, but are not limited to, significant underperformance relative to historical or projected operating results; significant changes in the manner of use of the acquired assets or the strategy for the overall business; and significant negative industry or economic trends. When the carrying value of a long-lived asset may not be recoverable based upon the existence of one or more of the above indicators of impairment, the Company estimates the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future undiscounted cash flows and eventual disposition is less than the carrying amount of the asset, the Company recognizes an impairment loss. An impairment loss is reflected as the amount by which the carrying amount of the asset exceeds the fair value of the asset, based on the fair value if available, or discounted cash flows, if fair value is not available.

Other intangible assets that have finite lives are amortized over their useful lives. Customer relationships are amortized using the accelerated method, based on customer attrition rates, over their estimated useful lives of 13 (weighted average) years.

The following table sets forth the Company’s other intangible assets resulting from business acquisitions as of September 30, ~~2019~~2020 and December 31, ~~2018~~2019 which continue to be amortized:


	September 30, 2019						December 31, 2018							September 30, 2020						December 31, 2019
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount			Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Amortizable other intangible assets													Amortizable other intangible assets
Customer relationships	$	99,152	$	96,813	$	2,339	$	99,136	$	94,345	$	4,791	Customer relationships	$	99,190	$	98,828	$	362	$	99,127	$	97,430	$	1,697
Trade names and trademarks	20,233		19,936		297		20,259		19,924		335		Trade names and trademarks	20,295		20,016		279		20,279		19,980		299
	$	119,385	$	116,749	$	2,636	$	119,395	$	114,269	$	5,126		$	119,485	$	118,844	$	641	$	119,406	$	117,410	$	1,996

Estimated future amortization expense of other intangible assets for the remainder of the ~~2019~~2020 fiscal year, and each of the subsequent four fiscal years and thereafter, are as follows:


2020 (excluding the nine months ended September 30, 2020)	$	150
2021	172
2022	109
2023	42
2024	40
Thereafter	128
	$	641

2019 (excluding the nine months ended September 30, 2019) $ 652
2020 1,518
2021 169
2022 96
2023 41
Thereafter 160
$ 2,636

5.4. Income Taxes

On a quarterly basis, the Company estimates its effective tax rate for the full fiscal year and records a quarterly income tax provision based on the anticipated annual effective rate and the recognition of any discrete items within the quarter.

The Company recorded an income tax provision of $1.2 million and $2.5 million in relation to pretax income of $3.9 million and $7.0 million for the three and nine months ended September 30, 2020, respectively, which resulted in an effective income tax rate of 32.0% and 35.6%, respectively. The Company recorded an income tax provision of $1.0 million and $5.2 million in relation to pretax income of $2.1 million and $7.2 million for the three and nine months ended September 30, 2019, respectively, which resulted in an effective income tax rate of 49.6% and 72.1%, respectively. The Company recorded an income tax provision of $0.6 million and $2.5 million and in relation to pretax income of $3.2 million and $9.6 million for the three and nine months ended September 30, 2018, respectively, which resulted in an effective income tax rate of 20.0% and 26.3%, respectively. The increase in the Company's effective income tax rate for the three and nine months ended September 30, ~~2019~~2020 was ~~due to deferred tax expense related to~~primarily impacted by certain stock-based compensation, ~~that expired~~change in ~~the second quarter of 2019.~~valuation allowances against certain deferred tax assets and non-deductible expenses.

In accordance with ASC 740-10, Income Taxes, the Company evaluates the need for deferred tax asset valuation allowances based on a more likely than not standard. The ability to realize deferred tax assets depends on the ability to generate sufficient taxable income within the carryback or carryforward periods provided for in the tax law for each applicable tax jurisdiction. The Company considers the following possible sources of taxable income when assessing the realization of deferred tax assets:

•Future reversals of existing taxable temporary differences;

•Future taxable income exclusive of reversing temporary differences and carryforwards;

•Taxable income in prior carryback years; and

•Tax-planning strategies.

The assessment regarding whether a valuation allowance is required or should be adjusted also considers all available positive and negative evidence factors, including but not limited to:

•Nature, frequency, and severity of recent losses;

•Duration of statutory carryforward periods;

•Historical experience with tax attributes expiring unused; and

•Near- and medium-term financial outlook.

The Company utilizes a rolling three years of actual and current year anticipated results as the primary measure of cumulative income/losses in recent years, as adjusted for permanent differences. The evaluation of deferred tax assets requires judgment in assessing the likely future tax consequences of events that have been recognized in the Company's financial statements or tax

returns and future profitability. The Company's accounting for deferred tax consequences represents its best estimate of those future events. Changes in the Company's current estimates, due to unanticipated events, such as the ultimate financial impact of and recovery from the COVID-19 pandemic or otherwise, could have a material effect on its financial condition and results of operations. The Company has a $2.3 million valuation allowance against certain deferred tax assets as of September 30, ~~2019.~~2020.

Based on the Company’s current assessment, the remaining net deferred tax assets as of September 30, ~~2019~~2020 are considered more likely than not to be realized. The valuation allowance of $2.3 million may be increased or reduced as conditions change or if the Company is unable to implement certain available tax planning strategies. The realization of the Company’s net deferred tax assets ultimately ~~depend~~depends on future taxable income, reversals of existing taxable temporary differences or through a loss carry back. The Company has income tax receivables of ~~$0.1~~$0.2 million as of September 30, ~~2019~~2020 included in other current assets in its interim Condensed Consolidated Balance Sheet primarily related to income tax refunds for prior years.

6.5. Long-Term Debt

Long-term debt consists of the following:

September 30, 2019 December 31, 2018
Term Loan maturing 2022, net of deferred financing fees of $417 and $556; 3.80% and 4.11% interest rate at September 30, 2019 and December 31, 2018
$ 49,083
$ 52,694
Revolving Loans; 4.31% and 4.74% interest rate at September 30, 2019 and December 31, 2018
15,500
26,750
Various finance leases; weighted average interest rate of 4.9% and 4.8% at September 30, 2019 and December 31, 2018; principal and interest payable monthly through September 2024
46,821
47,737
Various other notes payable with a weighted average interest rate of 10.7% at September 30, 2019 and December 31, 2018; principal and interest payable monthly through November 2019
9
11
111,413
127,192
Less current portion (22,976 ) (22,132 )
$ 88,437
$ 105,060


	September 30, 2020		December 31, 2019

Revolving Loans; 1.7% and 3.63% interest rate at September 30, 2020 and December 31, 2019	60,000		60,000
Various finance leases; weighted average interest rate of 4.8% and 4.9% at September 30, 2020 and December 31, 2019; principal and interest payable monthly through January 2026	46,122		46,157

	106,122		106,157
Less current portion	(18,748)		(17,075)
	$	87,374	$	89,082

Credit Agreement

On ~~July 14, 2017,~~December 17, 2019, the Company amended its Credit Agreement which was originally entered into on November 20, 2014 with Wells Fargo Bank, National Association, as administrative agent and the lenders party thereto.

Prior to the amendment, the Credit Agreement provided for the extension of term loans (“Term Loans”) in an aggregate principal amount of $175.0 million. In addition, prior to the amendment, the Credit Agreement provided for the extension of revolving loans (“Revolving Loans”) in an aggregate principal amount not to exceed $30.0 million. The amendment ~~in 2017~~ increased the maximum aggregate principal amount of ~~Revolving Loans~~revolving loans under ~~the agreement from $30.0 million to $80.0 million and reduced the outstanding principal amount of the Term Loan under the agreement to $60.0 million. Upon the execution of the amendment to~~ the Credit Agreement from $65 million to $80 million. Proceeds of a portion of the ~~total principal amount~~revolving loans available to be drawn under the Credit Agreement were used to fully repay the $49.5 million term loan that was outstanding under the agreement remained unchanged at $110.0 million. As a result of the amendment, the principal of the Term Loan amortizes at an annual rate of 7.5% during the first and second years following the date of the amendment and at an annual rate of 10% during the third, fourth and fifth years following the date of the amendment, with any remaining balance payable upon the maturity date. The amendment also extended the maturity date for both the Revolving Loans and the Term Loans until July 14, 2022. In November 2018, the Company reduced the $80.0 million Revolving Loan commitment by $15.0 million.Credit Agreement.

As of September 30, ~~2019,~~2020, the Company's borrowing availability of Revolving Loans under the Revolving Loan commitment was ~~$47.3~~$17.8 million, after deducting outstanding letters of credit of $2.2 million and outstanding Revolving Loans of ~~$15.5~~$60.0 million.

Loans borrowed under the Credit Agreement bear interest, in the case of LIBOR rate loans, at a per annum rate equal to the applicable LIBOR rate, plus a margin ranging from 1.25% to ~~2.25%~~1.75%, based on the Company’s Total Leverage Ratio (as defined in the Credit Agreement). Loans borrowed under the Credit Agreement that are not LIBOR rate loans bear interest at a per annum rate equal to (i) the greatest of (A) the Federal Funds Rate plus 0.50%, (B) the one month LIBOR rate plus 1.00%, per annum, and (C) the rate of interest announced, from time to time, by Wells Fargo Bank, National Association as its “prime rate,” plus (ii)

a margin ranging from 0.25% to ~~1.25%~~0.75%, based on the Company’s Total Leverage Ratio. ~~The amendment reduced the rate of interest payable on the loans borrowed under the Credit Agreement by 0.25%.~~

The Company pays certain recurring fees with respect to the credit facility, including administration fees to the administrative agent.

Subject to certain exceptions, including, in certain circumstances, reinvestment rights, the loans extended under the Credit Agreement are subject to customary mandatory prepayment provisions with respect to: the net proceeds from certain asset sales; the net proceeds from certain issuances or incurrences of debt (other than debt permitted to be incurred under the terms of the Credit Agreement); the net proceeds from certain issuances of equity securities; and net proceeds of certain insurance recoveries and condemnation events of the Company.

The amendment also modified certain tests the Company is required to meet in order to pay dividends, repurchase stock and make other restricted payments. In order to make such payments which are permitted subject to certain customary conditions set forth in the Credit Agreement, the amount of all such payments will be limited to $15 million during any twelve-month period. Pursuant to the amendment, when calculating the fixed charge coverage ratio, the Company may exclude up to $10 million of such restricted payments that would otherwise constitute fixed charges in any twelve month period.

The amendment allows for payment of dividends. In February 2020, the Company's board of directors declared a quarterly cash dividend of $0.01 per share that was paid on May 29, 2020 to shareholders of record as of April 30, 2020. Due to the impact of the COVID-19 pandemic, the Company has temporarily suspended its dividend program.

The Credit Agreement contains customary events of default, including with respect to: nonpayment of principal, interest, fees or other amounts; failure to perform or observe covenants; material inaccuracy of a representation or warranty when made; cross-default to other material indebtedness; bankruptcy, insolvency and dissolution events; inability to pay debts; monetary judgment defaults; actual or asserted invalidity or impairment of any definitive loan documentation, repudiation of guaranties or subordination terms; certain ERISA related events; or a change of control.

The obligations of the Company’s subsidiary that is the borrower under the Credit Agreement are guaranteed by the Company and each of its other United States ~~domestic subsidiary of the Company.~~subsidiaries. The Credit Agreement and any interest rate protection and other hedging arrangements provided by any lender party to the credit facility or any affiliate of such a lender are secured on a first priority basis by a perfected security interest in substantially all of the borrower’s, the Company’s and each guarantor’s assets (subject to certain exceptions).

~~7. Leasing~~

~~Adoption of ASC Topic 842,~~ ~~Leases~~

~~In February 2016, the FASB issued ASC 842,~~ ~~Leases. The new guidance replaces the existing guidance in ASC 840,~~ ~~Leases~~. ASC 842 requires a dual approach for lessee accounting under which a lessee accounts for leases as finance leases or operating leases. Both finance leases and operating leases result in the lessee recognizing a ROU asset and a corresponding lease liability. For finance leases the lessee recognizes interest expense and amortization of the ROU asset, and for operating leases the lessee will recognize a straight-line total lease expense. In addition, ASC 842 changes the definition of a lease, which resulted in changes to the classification of certain service contracts with customers to lease arrangements. The Company adopted ASC 842 on January 1, 2019.

~~In July 2018, the FASB issued ASU 2018-11,~~ ~~Leases(Topic 842): Targeted Improvements~~, which provided entities the option to use the effective date as the date of initial application on transition to the new guidance. The Company elected this transition method, and as a result, the Company did not adjust comparative information for prior periods. The Company elected certain additional practical expedients permitted by the new guidance allowing the Company to carry forward historical accounting related to lease identification and classification for existing leases upon adoption. The Company elected, for its equipment asset classes, the practical expedient that allows lessees to treat the lease and non-lease components of leases as a single lease component. Leases with an initial term of 12 months or less are not recorded on the Company's consolidated balance sheet.

As part of the transition, the Company completed a comprehensive review of its lease portfolio, including significant leases by geography and by asset type that were impacted by the new guidance, and enhanced its controls around leasing. The adoption of ASC 842 resulted in an increase to total assets and liabilities due to the recording of operating lease ROU assets of approximately $46.9 million and operating lease liabilities of approximately $53.7 million, as of January 1, 2019. Finance leases were not impacted by the adoption of ASC 842, as finance lease liabilities and the corresponding ROU assets were already recorded in the balance

~~sheet under the previous guidance, ASC 840. The adoption did not materially impact the Company’s Consolidated Statements of Operations or Cash Flows.~~

~~Lessee Accounting~~

The Company determines whether an arrangement is a lease at contract inception. The Company's material lease contracts are generally for real estate or print equipment, and the determination of whether such contracts contain leases generally does not require significant estimates or judgments. The Company’s leases that are classified as operating leases primarily consist of real estate leases. The Company’s real estate leases contain both lease and non-lease components, which are accounted for separately. The Company’s leases that are classified as finance leases primarily consist of print equipment. Certain print equipment leases have lease and non-lease components, which are accounted for as a single lease component as discussed above. Other than the election to treat the Company's fixed lease payment as a single lease component, the accounting for finance leases will remain unchanged under ASC 842.

Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company's operating leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU assets also include any lease payments made and are reduced by any lease incentives received. The lease terms primarily range from one to ten years, with renewal terms that can extend the lease term from 1 to 5 years. A portion of the Company’s real estate leases are generally subject to annual changes in the Consumer Price Index (CPI), which are treated as variable lease payments and recognized in the period in which the obligation for those payments was incurred. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

The tables below present financial information associated with the Company's leases. This information is only presented as of, and for the three and nine months ended, September 30, 2019 because, as noted above, the Company adopted ASC 842 using a transition method that does not require application to periods prior to adoption.

Classification September 30, 2019
Assets
Operating lease assets Right-of-use assets from operating leases $ 40,753
Finance lease assets Property and equipment 85,943
Less accumulated depreciation (41,662 )
Property and equipment, net 44,281
Total lease assets $ 85,034

Liabilities
Current
Operating Current operating lease liabilities $ 10,899
Finance Current portion of long-term debt and finance leases 16,967
Long-term
Operating Long-term operating lease liabilities 37,008
Finance Long-term debt and finance leases 29,854
Total lease liabilities $ 94,728

Classification Three Months Ended September 30, 2019 Nine Months Ended September 30, 2019
Operating lease cost Cost of sales $ 3,718
$ 12,503
Selling, general and administrative expenses 837
2,578
Total operating lease cost⁽¹⁾
$ 4,555
$ 15,081

Finance lease cost
Amortization of leased assets Cost of sales $ 3,897
$ 13,197
Selling, general and administrative expenses 45
172
Interest on lease liabilities Interest expense, net 650
1,767
Total finance lease cost 4,592
15,136
Total lease cost $ 9,147
$ 30,217

⁽¹⁾ Includes variable lease costs and short-term lease costs of $653 and $60, respectively for the three months ended September 30, 2019, and variable lease costs and short-term lease costs of $2,140 and $364, respectively for the nine months ended September 30, 2019.

Maturity of lease liabilities (as of September 30, 2019)
Operating leases⁽¹⁾

Finance leases⁽²⁾
2019 $ 4,065
$ 5,007
2020 13,995
18,151
2021 11,332
14,084
2022 9,502
8,689
2023 7,923
4,212
2024 5,338
1,172
Thereafter 11,915
10
Total 64,070
51,325
Less amount representing interest 16,163
4,504
Present value of lease liability $ 47,907
$ 46,821

⁽¹⁾ Reflects payments for non-cancelable operating leases with initial terms of one year or more as of September 30, 2019. The table above does not include any legally binding minimum lease payments for leases signed but not yet commenced, and such leases are not material in the aggregate.

⁽²⁾ ~~The table above does not include any legally binding minimum lease payments for leases signed but not yet commenced, and such leases are not material in the aggregate.~~

As previously disclosed in the Company's 2018 Annual Report on Form 10-K and under the previous lease accounting standard, future minimum lease payments for operating leases and capital lease obligation as of December 31, 2018 were as follows:

Maturity of lease liabilities (as of December 31, 2018) Operating leases Capital leases
2019 $ 16,355
$ 16,872
2020 12,956
13,817
2021 10,130
10,141
2022 8,510
5,274
2023 7,054
1,633
Thereafter 16,650
—
Total $ 71,655
$ 47,737



	~~September 30, 2019~~
~~Weighted average remaining lease term (years)~~
~~Operating leases~~	~~5.6~~
~~Finance leases~~	~~3.1~~

~~Weighted average discount rate~~
~~Operating leases~~	~~5.9~~	%
~~Finance leases~~	~~4.9~~	%

Other information Nine Months Ended September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases $ 8,888
Operating cash flows from finance leases $ 1,766
Financing cash flows from finance leases $ 13,801

~~Lessor Accounting~~

The Company concluded that certain of its contracts with customers contain leases under the new leasing standard and accordingly should be accounted for as operating leases upon adoption of ASC 842. Specifically, certain of the Company's MPS arrangements, which had previously been accounted for as service revenue under ASC 606, ~~Revenue from Contracts with Customers,~~ ~~are now accounted for as operating leases under ASC 842.~~

The Company's MPS arrangements consists of the placement, management, and optimization of print and imaging equipment in customers' offices, job sites, and other facilities under which the Company is paid a fixed rate per unit for each print produced (per-use), often referred to as a “click charge.” Accordingly, the fixed rate per unit charged to the customer covers the use of the equipment (i.e., the lease component), as well as the additional services performed by the Company as described above (i.e., the non-lease component). Certain of the Company's MPS contracts provide the customer the option to renew or terminate the agreement, which are considered when assessing the lease term. The Company elected the practical expedient to not separate certain lease and non-lease components related to its MPS arrangements, and accounts for the combined component under ASC 842. The pattern of revenue recognition for the Company's MPS revenue has remained substantially unchanged following the adoption of ASC 842.

MPS revenue includes $28.5 million of rental income and $2.1 million of service income for the three months ended September 30, 2019, and $86.5 million of rental income and $6.6 million of service income for the nine months ended September 30, 2019. The Company's property and equipment, net of accumulated depreciation, includes approximately $40 million of equipment subject to leases with customers under the Company's MPS arrangements. Following termination of an MPS arrangement, the Company will place existing equipment at an alternate customer site pursuant to an MPS arrangement, at one of the Company's service centers, or dispose of the equipment.

8.6. Commitments and Contingencies

Operating Leases. The Company leases machinery, equipment, and office and operational facilities under non-cancelable operating lease agreements used in the ordinary course of business. Certain lease agreements for the Company's facilities generally contain renewal options and provide for annual increases in rent based on the local Consumer Price Index. Refer to Note 8, Leasing, on our Annual Report on Form 10-K for a schedule of the Company's future minimum operating lease payments.

Indemnification Agreements. The Company has entered into indemnification agreements with each director and named executive officer which provide indemnification under certain circumstances for acts and omissions which may not be covered by any directors’ and officers’ liability insurance. The indemnification agreements may require the Company, among other things, to indemnify its officers and directors against certain liabilities that may arise by reason of their status or service as officers and directors (other than liabilities arising from willful misconduct of a culpable nature), to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified, and to obtain officers’ and directors’ insurance if available on reasonable terms. There have been no events to date which would require the Company to indemnify its officers or directors.

Legal Proceedings. We are involved in various legal proceedings and other legal matters from time to time in the normal course of business. We do not believe that the outcome of any of those matters will have a material effect on our consolidated financial position, results of operations or cash flows.

9.7. Stock-Based Compensation

The Company's stock plan provides for the grant of incentive and non-statutory stock options, stock appreciation rights, restricted stock, restricted stock units, stock bonuses and other forms of awards granted or denominated in the Company's common stock or units of the Company's common stock, as well as cash bonus awards, to employees, directors and consultants of the Company. On April 26, 2018, the Company's shareholders approved an amendment to the Company's stock plan to increase the aggregate number of shares authorized for issuance under such plan by 3.5 million shares. ~~The Company's stock plan, as amended, currently authorizes the Company to issue up to 7.0 million shares of common stock.~~ As of September 30, ~~2019, 1.9~~2020, 1.0 million shares remained available for issuance under the stock plan.

Stock options granted under the Company's stock plan generally expire no later than ten years from the date of grant. Options generally vest and become fully exercisable over a period of three to four years from date of award, except that options granted to non-employee directors may vest over a shorter time period. The exercise price of options is equal to at least 100% of the fair market value of the Company’s common stock on the date of grant. The Company allows for cashless exercises of vested outstanding options.

During the nine months ended September 30, ~~2019~~,2020, the Company granted options to acquire a total of ~~0.7~~0.5 million shares of the Company's common stock to certain key employees with an exercise price equal to the fair market value of the Company’s common stock on the date of grant. During the nine months ended September 30, ~~2019,~~2020, the Company granted ~~0.5~~0.3 million shares

of restricted stock awards to certain key employees with a deemed issuance price per share equal to the closing price of the Company's common stock on the date the restricted stock was granted. These stock options and restricted stock awards vest annually over three years from the grant date. In addition, the Company granted approximately 2686 thousand shares of restricted stock awards to each of the Company's ~~six~~4 non-employee members of its board of directors with a deemed issuance price per share equal to the closing price of the Company's common stock on the date the restricted stock was granted.

Stock-based compensation expense was $0.4 million and $1.3 million for the three and nine months ended September 30, 2020, respectively compared to stock-based compensation expense of $0.6 million and $1.9 million for the three and nine months ended September 30, 2019, ~~respectively, compared to stock-based compensation expense of $0.6 million and $1.8 million for the three and nine months ended September 30, 2018.~~respectively.

As of September 30, ~~2019,~~2020, total unrecognized compensation cost related to unvested stock-based payments totaled ~~$3.0~~$1.9 million and is expected to be recognized over a weighted-average period of approximately ~~1.9~~1.6 years.

~~10.~~8. Fair Value Measurements

In accordance with ASC 820, Fair Value Measurement, the Company has categorized its assets and liabilities that are measured at fair value into a three-level fair value hierarchy. If the inputs used to measure fair value fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement. The three levels of the hierarchy are defined as follows:

Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.

As of September 30, ~~2019,~~2020, the Company's assets and liabilities that are measured at fair value were not material.

Fair Values of Financial Instruments.The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments for disclosure purposes:

Cash equivalents: Cash equivalents are time deposits with maturity of three months or less when purchased, which are highly liquid and readily convertible to cash. Cash equivalents reported in the Company’s interim Condensed Consolidated Balance Sheet were ~~$8.4~~$7.2 million as of September 30, ~~2019~~2020 and ~~$7.3~~$9.3 million as of December 31, ~~2018~~,2019, and are carried at cost and approximate fair value due to the relatively short period to maturity of these instruments.

Short and long-term debt: The carrying amount of the Company’s finance leases reported in the interim Condensed Consolidated Balance Sheets approximates fair value based on the Company’s current incremental borrowing rate for similar types of borrowing arrangements. The carrying amount reported in the Company’s interim Condensed Consolidated Balance Sheet as of September 30, ~~2019~~2020 for borrowings under its Credit Agreement is ~~$65.0 million, excluding unamortized deferred financing fees.~~$60.0 million. The Company

has determined, utilizing observable market quotes, that the fair value of borrowings under its Credit Agreement is ~~$65.0~~$60.0 million as of September 30, ~~2019~~.2020.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our interim Condensed Consolidated Financial Statements and the related notes and other financial information appearing elsewhere in this report, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our ~~2018~~2019 Form 10-K and this Quarterly Report on Form 10-Q for the quarter ended September 30, ~~2019.~~2020.

Business Summary

ARC Document Solutions, Inc. (“ARC Document Solutions,” “ARC,” “we,” “us,” or “our”) is a leading document solutions provider to design, engineering, construction, and facilities management professionals, while also providing document solutions to businesses of all types.

Our customers need us to manage the scale, complexity and workflow of their documents. We help them reduce their costs and increase their efficiency by improving their access and control over documents, and we offer a wide variety of ways to access, distribute, collaborate on, and store documents.

Each of our service offerings is enabled through a suite of supporting proprietary technology and a wide variety of value-added services. We have categorized our service and product offerings to report distinct sales recognized from:

Construction Document and Information Management (CDIM), which consists of professional services and software services to manage and distribute documents and ~~information primarily related to construction projects.~~information. CDIM sales include software services such as SKYSITE^®, our cloud-based project communication application, as well as providing document and information management services that are often technology-enabled. The bulk of our current revenue from CDIM comes from large-format and small-format printing services we provide in both black and white and in color.

The sale of services addresses a variety of customer needs including the provision of project communication tools, project information management, building information modeling, digital document distribution services, printing services, and others.

Managed Print Services (MPS), consists of placement, management, and optimization of print and imaging equipment in our customers' offices, job sites, and other facilities. MPS relieves our customers of the burden of owning and managing print devices and print networks, and shifts their costs to a “per-use” basis. MPS is supported by our proprietary technology, Abacus^®, which allows our customers to capture, control, manage, print, and account for their documents. MPS revenue is derived from two sources: 1) an engagement with the customer to place primarily large-format equipment, that we own or lease, at a construction site or in our customers’ offices, and 2) an arrangement by which our customers outsource their printing function to us, including all office printing, copying, and reprographics printing. In both cases this is recurring, contracted revenue in which we are paid a single cost per unit of material used, often referred to as a “click charge.” MPS sales are driven by the ongoing print needs of our customers at their facilities.

Archiving and Information Management (AIM), combines software and professional services to facilitate the capture, management, access and retrieval of documents and information that have been produced in the past. AIM includes our SKYSITE software to organize, search and retrieve documents, as well as the provision of services that include the capture and conversion of hardcopy and electronic documents, and their cloud-based storage and maintenance. AIM sales are driven by the need to leverage past legacy information and documents for present or future use, facilitate cost savings and efficiency improvements over current hardcopy and digital storage methods, as well as comply with regulatory and records retention requirements.

Equipment and Supplies, which consists of reselling printing, imaging, and related equipment to customers primarily in architectural, engineering and construction firms.

We have expanded our business beyond the services we traditionally provided to the architectural, engineering, construction, and building owner/operator (AEC/O) industry in the past and ~~are currently focused on growing MPS, AIM~~have diversified our offerings ranging beyond the construction vertical and ~~CDIM, as we~~historical print segments. We believe the mix of services demanded by the AEC/O industry continues to shift toward document management ~~at customer locations~~ and ~~in the cloud,~~color graphics and away from its historical emphasis on large-format construction drawings produced “offsite” in our service centers.

We deliver our services via the cloud, through a nationwide network of service centers, regionally-based technical specialists,

locally-based sales executives, and a national/regional sales force known as Global Solutions.

Based on our analysis of our operating results, we estimate that sales to the AEC/O industry accounted for approximately ~~79%~~ 70%

of our net sales for the nine months ended September 30, ~~2019,~~2020, with the remaining ~~21%~~30% consisting of sales to businesses outside of the AEC/O industry.

Costs and Expenses

Our cost of sales consists primarily of materials (paper, toner, and other consumables), labor, and ~~“indirect costs”~~indirect costs, which consist primarily of equipment expenses related to our MPS contracts and our service center facilities. Facilities and equipment expenses include maintenance, repairs, ~~rents,~~rental payments, insurance, and depreciation. Paper is the largest component of our material cost; however, paper pricing typically does not significantly affect our operating margins due, in part, to our efforts to pass increased costs on to our customers. We closely monitor material cost as a percentage of net sales to measure volume and waste. We also track labor utilization, or net sales per employee, to measure productivity and determine staffing levels.

We maintain low levels of inventory. Historically, our capital expenditure requirements have varied due to the cost and availability of finance lease lines of credit. Our relationships with credit providers ~~has~~have provided attractive lease rates over the recent years, and as a result, we chose to lease rather than purchase equipment in a significant portion of our engagements.

Research and development costs consist mainly of the salaries, leased building space, and computer equipment that comprises our data storage and development centers in San Ramon, California, and Kolkata, India. Such costs are primarily recorded to cost of sales.

COVID-19 Pandemic

The global spread of the novel coronavirus (COVID-19) has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets. The impact of this pandemic has created significant prolonged uncertainty in the global economy and has negatively affected our business, employees, suppliers, and customers. Despite a strong start to the year, the decline in demand for our products and services that began in late March 2020 as a result of the COVID-19 pandemic, negatively impacted our sales and profitability during 2020. The duration of these trends and the magnitude of such impacts cannot be precisely estimated at this time, as they are affected by a number of factors, many of which are outside management’s control, including those presented in Item 1A. Risk Factors of this Quarterly Report. To adapt to the uncertainty and shifting demands brought on by the COVID-19 pandemic, we began to transform our business during the second quarter of 2020 into a smaller but stronger company, offering a range of products beyond the construction vertical and our historical print segments, and reconfiguring our operations and cost structure to fit the needs of our customers in the current market. We have repositioned the Company based on the belief that there is potential for new growth and similar, if not better margins, barring any unforeseen changes that may arise due to the COVID-19 pandemic or otherwise.

Sustained adverse impacts to us, as well as to certain of our suppliers, dealers or customers may also affect our future valuation of certain assets and therefore may increase the likelihood of an impairment charge, write-off, or reserve associated with such assets, including goodwill, intangible assets, property and equipment, inventories, accounts receivable, tax assets, and other assets.

We believe that we have taken appropriate measures to mitigate the impacts of the COVID-19 pandemic as it relates to the health and safety of our employees and customers. As the situation continues to persist, we will continue to analyze additional mitigation measures that may be needed to preserve the health and safety of our workforce and our customers, and the ongoing continuity of our business operations. Those measures might include temporarily suspending operations at select service centers, modifying workspaces, continuing social distancing protocols, incorporating additional personal protective equipment and/or incorporating health screening policies at our facilities, or such other industry best practices needed to comply with applicable government orders and to continue to maintain a healthy and safe environment for our employees during the COVID-19 pandemic.

Given the ongoing economic uncertainty resulting from the COVID-19 pandemic, we have taken actions to improve our current liquidity position, including reducing working capital, temporarily suspending share repurchases and future dividends, postponing capital expenditures, reducing operating costs, initiating workforce reductions and salary reductions, and substantially reducing discretionary spending.

We are the largest document services provider to industries that build and maintain our country's infrastructure and thus were considered an essential business and permitted to remain open in most markets during 2020. We also serve the housing, healthcare, and technology industries, and we were able to keep almost all of our 170 service centers open, though at reduced volumes, in order to fulfill our customers' needs. However, there is uncertainty around the extent and duration of interruptions to our business related to the COVID-19 pandemic, as well as the pandemic's overall impact on the U.S. economy, on our clients' ongoing business operations, and on our results of operations and financial condition. While our management team is actively monitoring the impacts of the COVID-19 pandemic, and may take further actions altering our business operations that we determine are in the best interests of our employees and clients or as required by federal, state, or local authorities, the full impact of the COVID-19 pandemic on the results of our operations, financial condition, or liquidity for the remainder of fiscal year 2020 and beyond cannot be estimated at this point. The following discussions are subject to the future effects of the COVID-19 pandemic on our ongoing business operations.

Results of Operations


	Three Months Ended September 30,				Increase (decrease)					Nine Months Ended September 30,				Increase (decrease)						Three Months Ended September 30,				Increase (decrease)				Nine Months Ended September 30,				Increase (decrease)
(In millions, except percentages)	2019		2018 (2)		$			%		2019 (2)		2018 (2)		$			%		(In millions, except percentages)	2020(2)		2019		$		%		2020		2019		$		%
CDIM	$	50.5	$	52.4	$	(1.9	)	(3.7	)%	$	155.7	$	160.3	$	(4.6	)	(2.9	)%	CDIM	$	47.1	$	50.5	$	(3.4)	(6.7)	%	$	137.3	$	155.7	$	(18.4)	(11.8)	%
MPS	30.6		32.4		(1.8		)	(5.5	)%	93.1		97.2		(4.1		)	(4.2	)%	MPS	17.6		30.6		(13.0)		(42.3)	%	61.2		93.1		(31.9)		(34.3)	%
AIM	3.5		3.6		(0.1		)	(2.8	)%	10.4		9.7		0.7			6.9	%	AIM	2.9		3.5		(0.6)		(17.2)	%	9.2		10.4		(1.2)		(11.7)	%

Equipment and supplies sales	9.5		12.1		(2.6		)	(21.4	)%	30.9		35.2		(4.3		)	(12.2	)%	Equipment and supplies sales	4.7		9.5		(4.8)		(50.3)	%	17.4		30.9		(13.5)		(43.6)	%
Total net sales	$	94.1	$	100.5	$	(6.4	)	(6.3	)%	$	290.1	$	302.4	$	(12.3	)	(4.1	)%	Total net sales	$	72.4	$	94.1	$	(21.7)	(23.1)	%	$	225.1	$	290.1	$	(65.0)	(22.4)	%

Gross profit	$	30.4	$	32.7	$	(2.3	)	(6.9	)%	$	94.9	$	98.7	$	(3.8	)	(3.8	)%	Gross profit	$	24.2	$	30.4	$	(6.2)	(20.4)	%	$	72.2	$	94.9	$	(22.7)	(23.9)	%
Selling, general and administrative expenses	$	26.0	$	27.0	$	(0.9	)	(3.5	)%	$	80.9	$	81.8	$	(0.9	)	(1.1	)%	Selling, general and administrative expenses	$	19.2	$	26.0	$	(6.8)	(26.3)	%	$	60.8	$	80.9	$	(20.1)	(24.8)	%
Amortization of intangibles	$	0.7	$	0.9	$	(0.2	)	(24.3	)%	$	2.5	$	2.9	$	(0.5	)	(15.7	)%
Amortization of intangible assets																			Amortization of intangible assets	$	0.3	$	0.7	$	(0.4)	(60.3)	%	$	1.4	$	2.5	$	(1.1)	(45.4)	%

Restructuring expense	$	0.3	$	—	$	0.3		—	%	$	0.3	$	—	$	0.3		—	%	Restructuring expense	$	—	$	0.3	$	(0.3)	(100.0)	%	$	—	$	0.3	$	(0.3)	(100.0)	%

Interest expense, net	$	1.3	$	1.5	$	(0.2	)	(14.5	)%	$	4.1	$	4.4	$	(0.4	)	(8.3	)%	Interest expense, net	$	0.9	$	1.3	$	(0.4)	(31.1)	%	$	3.1	$	4.1	$	(1.0)	(23.5)	%
Income tax provision	$	1.0	$	0.6	$	0.4		61.1	%	$	5.2	$	2.5	$	2.7		106.7	%	Income tax provision	$	1.2	$	1.0	$	0.2	18.4	%	$	2.5	$	5.2	$	(2.7)	(52.3)	%
Net income attributable to ARC	$	1.1	$	2.6	$	(1.5	)	(58.0	)%	$	2.2	$	7.3	$	(5.1	)	(69.8	)%	Net income attributable to ARC	$	2.8	$	1.1	$	1.7	159.6	%	$	4.9	$	2.2	$	2.7	125.2	%
Non-GAAP ⁽¹⁾																			Non-GAAP (1)
Adjusted net income attributable to ARC ⁽¹⁾	$	1.6	$	2.3	$	(0.7	)	(30.7	)%	$	5.4	$	7.0	$	(1.6	)	(23.1	)%	Adjusted net income attributable to ARC (1)	$	2.9	$	1.6	$	1.3	77.7	%	$	5.3	$	5.4	$	(0.1)	(1.3)	%
EBITDA ⁽¹⁾	$	11.1	$	13.0	$	(1.9	)	(14.5	)%	$	35.6	$	38.9	$	(3.3	)	(8.5	)%	EBITDA (1)	$	12.1	$	11.1	$	1.0	8.9	%	$	33.3	$	35.6	$	(2.3)	(6.4)	%
Adjusted EBITDA ⁽¹⁾	$	12.1	$	13.6	$	(1.6	)	(11.4	)%	$	37.7	$	40.7	$	(3.0	)	(7.3	)%	Adjusted EBITDA (1)	$	12.5	$	12.1	$	0.5	3.9	%	$	34.6	$	37.7	$	(3.1)	(8.2)	%

Nine Months Ended
September 30,
(In thousands) 2019 2018
Net cash provided by operating activities $ 29,794
$ 30,062
Net cash used in investing activities $ (8,064 ) $ (9,907 )
Net cash used in financing activities $ (29,881 ) $ (28,961 )

Operating Activities

Cash flows from operations are primarily driven by sales and net profit generated from these sales, excluding non-cash charges.

The ~~decrease~~increase in cash flows from operations during the three and nine months ended September 30, ~~2019~~2020, compared to the same period in ~~2018 was primarily a result of the decline in net income, partially offset by~~2019, resulted from improved management of operating assets and liabilities. Days sales outstanding (“DSO”) was 51 days as of September 30, 2020 as compared to 55 days as of September 30, ~~2019 and 56 days as~~2019. We are closely managing cash collections which have remained consistent since the outbreak of ~~September 30, 2018~~the COVID-19 pandemic.

Investing Activities

Net cash used in investing activities was primarily related to capital expenditures. We incurred capital expenditures totaling ~~$8.4~~$5.1 million and ~~$10.5~~$8.4 million for the nine months ended September 30, ~~2019~~2020 and ~~2018,~~2019, respectively. The ~~change~~decrease in capital expenditures is driven primarily by a concerted effort to reduce and closely manage capital expenditures during the ~~timing of equipment purchases, and whether such equipment is leased or purchased with available cash.~~COVID-19 pandemic.

Financing Activities

Net cash of ~~$29.9~~$13.5 million used in financing activities during the nine months ended September 30, ~~2019~~2020 primarily relates to payments on finance leases and share repurchases. As part of our ~~debt agreements and finance leases. During~~cash management initiatives during the ~~third quarter~~COVID-19 pandemic, we successfully negotiated a deferment of ~~2019, we continued~~approximately $4.4 million of equipment capital lease payments during 2020, which were primarily added to ~~pay down~~ the ~~outstanding revolving loans under our Credit Agreement.~~back end of each individual equipment lease end date.

Our cash position, working capital, and debt obligations as of September 30, ~~2019~~2020 and December 31, ~~2018~~2019 are shown below and should be read in conjunction with our interim Condensed Consolidated Balance Sheets and related notes ~~thereto~~ contained elsewhere in this report.


(In thousands)	September 30, 2020		December 31, 2019
Cash and cash equivalents	$	50,342	$	29,425
Working capital	$	33,071	$	20,008

Borrowings from revolving credit facility	$	60,000	$	60,000
Other debt obligations	46,122		46,157
Total debt obligations	$	106,122	$	106,157

(In thousands) September 30, 2019 December 31, 2018
Cash and cash equivalents $ 20,803
$ 29,433
Working capital $ 17,978
$ 34,425

Borrowings from credit agreement ^{(1) (2)}
$ 64,583
$ 79,444
Other debt obligations 46,830
47,748
Total debt obligations $ 111,413
$ 127,192

~~(1) Net of deferred financing fees of~~ ~~$0.4 million~~We have taken a conservative and ~~$0.6 million at September 30, 2019 and December 31, 2018, respectively.~~

~~(2) Includes~~ ~~$15.5 million~~ ~~and $26.8 million of revolving loans outstanding under our Credit Agreement at September 30, 2019 and December 31, 2018, respectively.~~

~~The decrease of $16.4 million in working capital in 2019~~ ~~was primarily due~~cautious approach to the ~~addition~~current COVID-19 pandemic with respect to our cash management practices. To that end, we drew down $15 million from our revolving credit facility in March 2020 which we paid back in September 2020, as we did not have a use for the additional funds once the impact of the current portion of operating lease liabilities on the balance sheet due to the new lease accounting rules that came into effect in 2019, as well as the decline in cash resulting from the timing of cash outlays related to accounts payable and accrued expenses.COVID-19 pandemic became more apparent. To manage our working capital, we chiefly focus on our DSO and monitor the aging of our accounts receivable, as receivables are the most significant element of our working capital.

We believe that our current cash and cash equivalents balance of ~~$20.8~~$50.3 million, combined with availability under our revolving credit facility, availability under our equipment lease lines, and cash flows provided by operations should be ~~adequate~~sufficient to cover the next twelve months of working capital needs, ~~debt service~~leasing requirements consisting of scheduled principal and interest payments, and planned capital expenditures, to the extent such items are known or are reasonably determinable based on current business and market conditions. However, as the impact of the COVID-19 pandemic on the economy and our operations evolves, we will continue to assess our liquidity needs. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets. An extended period of global supply chain and economic disruption could materially affect our business, results of operations, ability to meet debt covenants, access to sources of liquidity and financial condition. Given the economic uncertainty as a result of the COVID-19 pandemic, we have taken actions to improve our current liquidity position by reducing working capital, temporarily suspending share repurchases and dividend payouts, postponing capital expenditures, reducing operating costs, initiating workforce reductions and salary reductions, and substantially reducing discretionary spending. Additionally, we have actively deferred equipment lease payments with certain lessors and deferred facility rent payments with some landlords. We have already seen the benefits of these action plans as evidenced by the increase of our U.S. cash balance as of September 30, 2020, by more than $20 million since December 31, 2019. Based upon our recent financial performance, as well as the improved liquidity position, we intend to

reinstate dividends and our share repurchase program in the near future. See “Debt Obligations” section for further information related to our revolving credit facility.

We generate the majority of our revenue from sales of services and products to the AEC/O industry. As a result, our operating results and financial condition can be significantly affected by economic factors that influence the AEC/O industry, ~~such as~~including the COVID-19 pandemic which has already reduced non-residential and residential construction spending. Additionally, a general economic downturn may adversely affect the ability of our customers and suppliers to obtain financing for significant operations and purchases, and to perform their obligations under their agreements with us. We believe that credit constraints in the financial markets could result in a decrease in, or cancellation of, existing business, could limit new business, and could negatively affect our ability to collect our accounts receivable on a timely basis.

~~While we~~We have not been actively seeking growth through acquisition, nor do we ~~continue~~intend to ~~selectively evaluate potential acquisitions.~~

in the near future.

Debt Obligations

Credit Agreement

On ~~July 14, 2017,~~December 17, 2019, we ~~amended~~entered into an amendment (the "2019 Amendment") to our ~~credit agreement~~Credit Agreement, dated as of November 20, 2014 ("Credit Agreement")~~, which was originally entered into on November 20, 2014~~ with Wells Fargo ~~Bank, National Association, as administrative agent and the lenders party thereto.~~Bank.

The 2019 Amendment also modified certain tests we are required to meet in order to pay dividends, repurchase stock and make other restricted payments. In order to make such payments which are permitted subject to certain customary conditions set forth in the Credit Agreement, the ~~total principal~~ amount ~~outstanding under~~of all such payments will be limited to $15 million during any twelve-month period. Per the ~~agreement remained unchanged at $110.0 million. As a result~~2019 Amendment, when calculating the fixed charge coverage ratio, we may exclude up to $10 million of the amendment, the principal of the Term Loan amortizes at an annual rate of 7.5% during the first and second years following the date of the amendment and at an annual rate of 10% during the third, fourth and fifth years following the date of the amendment, withsuch restricted payments that would otherwise constitute fixed charges in any remaining balance payable upon the maturity date. The amendment also extended the maturity date for both the Revolving Loans and the Term Loans until July 14, 2022. In November 2018, we reduced the $80.0 million Revolving Loan commitment by $15.0 million.twelve-month period.

As of September 30, ~~2019,~~2020, our borrowing availability under the Revolving Loan commitment was ~~$47.3~~$17.8 million, after deducting outstanding letters of credit of $2.2 million and outstanding Revolving Loans of ~~$15.5~~$60.0 million.

Loans borrowed under the Credit Agreement bear interest, in the case of LIBOR rate loans, at a per annum rate equal to the applicable LIBOR rate, plus a margin ranging from 1.25% to ~~2.25%~~1.75%, based on our Total Leverage Ratio (as defined in the Credit Agreement). Loans borrowed under the Credit Agreement that are not LIBOR rate loans bear interest at a per annum rate equal to (i) the greatest of (A) the Federal Funds Rate plus 0.50%, (B) the one month LIBOR rate plus 1.00%, per annum, and (C) the rate of interest announced, from time to time, by Wells Fargo Bank, National Association as its “prime rate,” plus (ii) a margin ranging from 0.25% to ~~1.25%~~0.75%, based on our Total Leverage Ratio. ~~The amendment reduced the rate of interest payable on the loans borrowed under~~We pay certain recurring fees with respect to the Credit Agreement, ~~by 0.25%.~~

including administration fees to the administrative agent.

The Credit Agreement contains customary representations and warranties, subject to limitations and exceptions, and customary covenants restricting the ability (subject to various exceptions) of us and our subsidiaries to: incur additional indebtedness (including guarantee obligations); incur liens; sell certain property or assets; engage in mergers or other fundamental changes; consummate acquisitions; make investments; pay dividends, other distributions or repurchase equity interest of us or our subsidiaries; change the nature of their business; prepay or amend certain indebtedness; engage in certain transactions with affiliates; amend our organizational documents; or enter into certain restrictive agreements. In addition, the Credit Agreement contains financial covenants which requires us to maintain (i) at all times, a Total Leverage Ratio in an amount not to exceed ~~3.25~~2.75 to 1.00; and (ii) a Fixed Charge Coverage Ratio (as defined in the Credit Agreement), as of the last day of each fiscal quarter, an amount not less than 1.15 to 1.00. We were in compliance with our covenants as of September 30, ~~2019~~2020. After considering a variety of potential effects the COVID-19 pandemic could have on our consolidated sales, as well as the actions we have already taken and ~~are~~other options available to us, we currently ~~forecasted to remain~~believe we will be in compliance with our covenants for the remainder of the term of the Credit Agreement. The impact of the COVID-19 pandemic, however, and the speed of economic recovery in the markets we serve is highly uncertain. If conditions change in the future due to the ongoing COVID-19 pandemic or for other reasons and we expect to be out of compliance as a result, we will likely seek waivers from the lenders

prior to any covenant violation. Any covenant waiver may lead to increased costs, increased interest rates, additional restrictive covenants and other available lender protections that would be applicable. There can be no assurance that we would be able to obtain any such waivers in a timely manner, or on acceptable terms, or at all. If we were not able to obtain covenant violation waivers or repay our debt facilities, this would lead to an event of default and potential acceleration of amounts due under all of our outstanding debt. As a result, the failure to obtain covenant violation waivers or repay our debt obligations when they become due would have a material adverse effect on us. Refer to Part I, Item 1A. Risk Factors, for more information.

The obligations of our subsidiary that is the borrower under the Credit Agreement are guaranteed by us and each of our other United States domestic subsidiaries. The Credit Agreement and any interest rate protection and other hedging arrangements provided by any lender party to the credit facility or any affiliate of such a lender are secured on a first priority basis by a perfected security interest in substantially all of our and each guarantor’s assets (subject to certain exceptions).

Finance Leases

As of September 30, ~~2019,~~2020, we had ~~$46.8~~$46.1 million of finance lease obligations outstanding, with a weighted average interest rate of ~~4.9%~~4.8% and maturities between 2019 and ~~2024.~~2026. Refer to Note 8, Leasing, as previously disclosed on our 2019 Annual Form 10-K for the schedule on maturities of finance lease liabilities, as there have been no material changes to report as of September 30, 2020.

Off-Balance Sheet Arrangements

As of September 30, ~~2019~~,2020, we did not have any off-balance-sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.

Contractual Obligations and Other Commitments

Operating Leases. We have entered into various non-cancelable operating leases primarily related to facilities, equipment and vehicles used in the ordinary course of business. Refer to Note 8, Leasing, as previously disclosed on our 2019 Annual Form 10-K for the schedule on maturities of operating lease liabilities as there were no material changes as of September 30, 2020.

Critical Accounting Policies

Critical accounting policies are those accounting policies that we believe are important to the portrayal of our financial condition and results and require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our ~~2018~~2019 Annual Report on Form 10-K includes a description of certain critical accounting policies, including those with respect to goodwill, revenue recognition, and income taxes. There have been no material changes to our critical accounting policies described in our ~~2018~~2019 Annual Report on Form 10-K.

Goodwill Impairment

In accordance with ASC 350, Intangibles - Goodwill and Other, we assess goodwill for impairment annually as of September 30, and more frequently if events and circumstances indicate that goodwill might be impaired. At September 30, ~~2019,~~2020, the Company performed its assessment and determined that goodwill was not impaired.

Goodwill impairment testing is performed at the reporting unit level. Goodwill is assigned to reporting units at the date the goodwill is initially recorded. Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or internally generated, are available to support the value of the goodwill. In 2017, we elected to early-adopt ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies subsequent goodwill measurement by eliminating step

two from the goodwill impairment test. As a result, we compare the fair value of a reporting unit with its respective carrying value, and recognized an impairment charge, if any, for the amount by which the carrying amount exceeds the reporting unit’s fair value.

We determine the fair value of our reporting units using an income approach. Under the income approach, we determined fair value based on estimated discounted future cash flows of each reporting unit. Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates and EBITDA margins, discount rates and future market conditions, among others.The level of judgment and estimation is inherently higher in the current environment considering the uncertainty created by the COVID-19 pandemic. We have evaluated numerous factors disrupting our business and made significant assumptions which include the severity and duration of our business disruption, the timing and degree of economic recovery and ultimately, the combined effect of these assumptions on our future operating results and cash flows.

~~For our~~The results of the annual goodwill impairment test, as of September 30, 2017, we elected to early-adopt ASU 2017-04 which simplifies subsequent goodwill measurement by eliminating step two from the goodwill impairment test. As a result, we compare the fair value of a reporting unit with its respective carrying value, and recognized an impairment charge, if any, for the amount by which the carrying amount exceeds the reporting unit’s fair value.

~~The results of the latest annual goodwill impairment test, as of September 30, 2019,~~2020, were as follows:


(Dollars in thousands)	Number of Reporting Units	Representing Goodwill of		(Dollars in thousands)	Number of Reporting Units	Representing Goodwill of
No goodwill balance	6	$	—	No goodwill balance	6	$	—
Fair value of reporting units exceeds their carrying values by more than 100%	2	121,051
	8	$	121,051
Fair value of reporting units exceeds their carrying values by more than 50%				Fair value of reporting units exceeds their carrying values by more than 50%	2	121,051
					8	$	121,051


(In thousands, except for price per share)	(a) Total Number of Shares Purchased (1)	(b) Average Price Paid per Share ($)		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	(d) Approximate Dollar Value of Shares That May Yet Be Purchased Under The Plans or Programs (1)(2)
Period
March 1, 2020 - March 31, 2020	2,011	$	1.17	2,011	$	10,704
Total	2,011			2,011



(In thousands, except for price per share)	(a) Total Number of Shares Purchased (1)	(b) Average Price Paid per Share ($)		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	(d) Approximate Dollar Value of Shares That May Yet Be Purchased Under The Plans or Programs (1)
Period
April 1, 2019—April 30, 2019	—	$	—	—	$	—
May 1, 2019—May 31, 2019	236	$	2.10	236	$	14,503
June 1, 2019—June 30, 2019	118	$	2.12	118	$	14,252
July 1, 2019—July 31, 2019	—	$	—	—	14,252
August 1, 2019—August 31, 2019	205	$	1.54	205	13,938
September 1, 2019—September 30, 2019	—	$	—	—	13,938
Total	559			559



Exhibit Number						Description

31.1						Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

31.2						Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

32.1						Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

32.2						Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

101.INS						XBRL Instance Document *

101.SCH						XBRL Taxonomy Extension Schema *

101.CAL						XBRL Taxonomy Extension Calculation Linkbase *

101.DEF						XBRL Taxonomy Extension Definition Linkbase *

101.LAB						XBRL Taxonomy Extension Label Linkbase *

101.PRE						XBRL Taxonomy Extension Presentation Linkbase *


ARC DOCUMENT SOLUTIONS, INC.

~~ARC DOCUMENT SOLUTIONS, INC.~~

/s/ KUMARAKULASINGAM SURIYAKUMAR
Kumarakulasingam Suriyakumar
Chairman, President and Chief Executive Officer

/s/ JORGE AVALOS
Jorge Avalos
Chief Financial Officer



Exhibit Number						Description

31.1						Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

31.2						Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

32.1						Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

32.2						Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

101.INS						XBRL Instance Document *

101.SCH						XBRL Taxonomy Extension Schema *

101.CAL						XBRL Taxonomy Extension Calculation Linkbase *

101.DEF						XBRL Taxonomy Extension Definition Linkbase *

101.LAB						XBRL Taxonomy Extension Label Linkbase *

101.PRE						XBRL Taxonomy Extension Presentation Linkbase *



ý☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



2019 (excluding the nine months ended September 30, 2019)	$	652
2020	1,518
2021	169
2022	96
2023	41
Thereafter	160
	$	2,636



	September 30, 2019			December 31, 2018
Term Loan maturing 2022, net of deferred financing fees of $417 and $556; 3.80% and 4.11% interest rate at September 30, 2019 and December 31, 2018	$	49,083		$	52,694
Revolving Loans; 4.31% and 4.74% interest rate at September 30, 2019 and December 31, 2018	15,500			26,750
Various finance leases; weighted average interest rate of 4.9% and 4.8% at September 30, 2019 and December 31, 2018; principal and interest payable monthly through September 2024	46,821			47,737
Various other notes payable with a weighted average interest rate of 10.7% at September 30, 2019 and December 31, 2018; principal and interest payable monthly through November 2019	9			11
	111,413			127,192
Less current portion	(22,976		)	(22,132		)
	$	88,437		$	105,060



	Classification	September 30, 2019
Assets
Operating lease assets	Right-of-use assets from operating leases	$	40,753
Finance lease assets	Property and equipment	85,943
	Less accumulated depreciation	(41,662		)
	Property and equipment, net	44,281
Total lease assets		$	85,034

Liabilities
Current
Operating	Current operating lease liabilities	$	10,899
Finance	Current portion of long-term debt and finance leases	16,967
Long-term
Operating	Long-term operating lease liabilities	37,008
Finance	Long-term debt and finance leases	29,854
Total lease liabilities		$	94,728



	Classification	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Operating lease cost	Cost of sales	$	3,718	$	12,503
	Selling, general and administrative expenses	837		2,578
Total operating lease cost⁽¹⁾		$	4,555	$	15,081

Finance lease cost
Amortization of leased assets	Cost of sales	$	3,897	$	13,197
	Selling, general and administrative expenses	45		172
Interest on lease liabilities	Interest expense, net	650		1,767
Total finance lease cost		4,592		15,136
Total lease cost		$	9,147	$	30,217



Maturity of lease liabilities (as of September 30, 2019)	Operating leases⁽¹⁾		Finance leases⁽²⁾
2019	$	4,065	$	5,007
2020	13,995		18,151
2021	11,332		14,084
2022	9,502		8,689
2023	7,923		4,212
2024	5,338		1,172
Thereafter	11,915		10
Total	64,070		51,325
Less amount representing interest	16,163		4,504
Present value of lease liability	$	47,907	$	46,821



Maturity of lease liabilities (as of December 31, 2018)	Operating leases		Capital leases
2019	$	16,355	$	16,872
2020	12,956		13,817
2021	10,130		10,141
2022	8,510		5,274
2023	7,054		1,633
Thereafter	16,650		—
Total	$	71,655	$	47,737



Other information	Nine Months Ended September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	8,888
Operating cash flows from finance leases	$	1,766
Financing cash flows from finance leases	$	13,801


~~(1)~~	~~See "Non-GAAP Financial Measures" on pg. 25 for additional information.~~


	As Percentage of Net Sales				As Percentage of Net Sales					As Percentage of Net Sales				As Percentage of Net Sales
	Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
	2019 ⁽¹⁾		2018 ⁽¹⁾		2019		2018 ⁽¹⁾			2020 (1)		2019 (1)		2020		2019
Net Sales	100.0	%	100.0	%	100.0	%	100.0	%	Net Sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	67.7		67.5		67.3		67.4		Cost of sales	66.6		67.7		67.9		67.3
Gross profit	32.3		32.5		32.7		32.6		Gross profit	33.4		32.3		32.1		32.7
Selling, general and administrative expenses	27.7		26.8		27.9		27.0		Selling, general and administrative expenses	26.5		27.7		27.0		27.9
Amortization of intangibles	0.8		0.9		0.9		1.0
Amortization of intangible assets									Amortization of intangible assets	0.4		0.8		0.6		0.9

Restructuring expense	0.3		—		0.1		—		Restructuring expense	—		0.3		—		0.1
Income from operations	3.6		4.7		3.9		4.6		Income from operations	6.5		3.6		4.5		3.9

Interest expense, net	1.3		1.5		1.4		1.5		Interest expense, net	1.2		1.3		1.4		1.4
Income before income tax provision	2.2		3.2		2.5		3.2		Income before income tax provision	5.3		2.2		3.1		2.5
Income tax provision	1.1		0.6		1.8		0.8		Income tax provision	1.7		1.1		1.1		1.8
Net income	1.1		2.6		0.7		2.3		Net income	3.6		1.1		2.0		0.7
Loss attributable to the noncontrolling interest	—		—		0.1		0.1		Loss attributable to the noncontrolling interest	0.2		—		0.2		0.1
Net income attributable to ARC	1.1	%	2.5	%	0.8	%	2.4	%	Net income attributable to ARC	3.9	%	1.1	%	2.2	%	0.8	%
Non-GAAP ⁽²⁾									Non-GAAP (2)
EBITDA ⁽²⁾	11.8	%	13.0	%	12.3	%	12.9	%	EBITDA (2)	16.7	%	11.8	%	14.8	%	12.3	%
Adjusted EBITDA ⁽²⁾	12.8	%	13.6	%	13.0	%	13.5	%	Adjusted EBITDA (2)	17.3	%	12.8	%	15.4	%	13.0	%


~~(2)~~	~~Column does not foot due to rounding.~~


	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands, except per share amounts)	2020		2019		2020		2019
Net income attributable to ARC Document Solutions, Inc.	$	2,791	$	1,075	$	4,935	$	2,191


Restructuring expense	—		311		—		311



Income tax benefit related to above items	—		(81)		—		(81)
Deferred tax valuation allowance and other discrete tax items	99		321		358		2,939
Adjusted net income attributable to ARC Document Solutions, Inc.	$	2,890	$	1,626	$	5,293	$	5,360

Actual:
Earnings per share attributable to ARC Document Solutions, Inc. shareholders:
Basic	$	0.07	$	0.02	$	0.11	$	0.05
Diluted	$	0.07	$	0.02	$	0.11	$	0.05
Weighted average common shares outstanding:
Basic	42,747		44,978		43,017		45,107
Diluted	42,918		44,992		43,160		45,213
Adjusted:
Earnings per share attributable to ARC Document Solutions, Inc. shareholders:
Basic	$	0.07	$	0.04	$	0.12	$	0.12
Diluted	$	0.07	$	0.04	$	0.12	$	0.12
Weighted average common shares outstanding:
Basic	42,747		44,978		43,017		45,107
Diluted	42,918		44,992		43,160		45,213