UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________________________________

Form 10-Q

_______________________________________

(Mark One)


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

For the quarterly period ended ~~September~~June 30, ~~2021~~2022


☐			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
(Address of principal executive offices)			(Zip Code)

(925) 949-5100

(Registrant's telephone number, including area code)

_______________________________________

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


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

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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	☐☒

Non-accelerated filer	☒☐	Smaller reporting company	☒

		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

The number of outstanding shares of the registrant's common stock, par value $0.001 per share, was ~~43,124,707~~42,998,268 as of ~~October 28, 2021.~~July 26, 2022.

ARC DOCUMENT SOLUTIONS, INC.

Form 10-Q

For the Quarter Ended ~~September~~June 30, ~~2021~~2022

Table of Contents


PART I—FINANCIAL INFORMATION			6
Item 1. Condensed Consolidated Financial Statements			6
Condensed Consolidated Balance Sheets as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 (Unaudited)			6
Condensed Consolidated Statements of Operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 (Unaudited)			7
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 (Unaudited)			8
Condensed Consolidated Statements of ~~Shareholders'~~ Equity for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 (Unaudited)			9
Condensed Consolidated Statements of Cash Flows for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 (Unaudited)			10
Notes to Condensed Consolidated Financial Statements (Unaudited)			11
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			2021
Item 3. Quantitative and Qualitative Disclosures About Market Risk			34
Item 4. Controls and Procedures			3435
PART II—OTHER INFORMATION			3536
Item 1. Legal Proceedings			3536
Item 1A. Risk Factors			3536
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			3536
Item 5. Other Information			36
Item 6. Exhibits			3637
Signatures			3738

In this Quarterly Report on Form 10-Q, “ARC Document Solutions,” “ARC,” “the Company,” “we,” “us,” and “our” refer to ARC Document Solutions, Inc., a Delaware corporation, and its consolidated subsidiaries, unless the context otherwise dictates.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact contained in this report are statements that could be deemed forward-looking statements, including without limitation statements with respect 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, and the Company's anticipated effective tax rate, and statements of assumptions underlying any of the foregoing. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

In some cases, you can identify forward-looking statements by terms such as “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “project,” “target,” “likely,” “will,” “would,” “could,” and other similar language, whether in the negative or affirmative. The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to a number of risks, uncertainties and assumptions as described under the section titled "Part I - Item 1A. Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as indicative of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Some of the key factors that could cause actual results to differ from our expectations ~~include:~~are listed below:

•The COVID-19 pandemic has and may continue to adversely affect our ~~financial condition and~~business, results of operations ~~for fiscal 2021~~ and ~~beyond have been and are expected to continue to be adversely affected by the recent novel coronavirus (or COVID-19) pandemic;~~financial condition.

•~~we are highly dependent on~~A significant portion of our revenue across all of our product and services is generated from customers in the architectural, engineering, construction and building owner/operator ~~(AEC/O) industry and any~~industry. Any decline in that industry could adversely affect our future revenue and ~~profitability;~~profitability.

•~~because~~Because a significant portion of our overall costs are fixed, our earnings are highly sensitive to changes in ~~revenue;~~revenue.

•~~if we are unable to charge for our value-added services to offset declines in print volumes, our long-term revenue could decline;~~

•weWe derive a significant percentage of net sales from within the State of California and our business could be disproportionately harmed by an economic downturn or natural disaster affecting ~~California;~~California.

•~~our~~Our growth strategy depends, in part, on our ability to successfully market and execute several different, but related, service ~~offerings;~~offerings. Failure to do so could impede our future growth and adversely affect our competitive position.

•weWe are dependent upon our vendors to continue to supply us equipment, parts, supplies, and services at comparable terms and price levels as the business ~~grows;~~grows.

•~~our failure to adequately protect the proprietary aspects of our technology, including SKYSITE, PlanWell, and Abacus may cause us to lose market share;~~

•~~our~~Our failure to protect our customers’ confidential information against security breaches could damage our reputation, harm our business and adversely affect our results of ~~operations;~~operation.

•Our failure to adequately protect the proprietary aspects of our technology solutions may cause us to lose market share.

•Our failure to comply with laws related to privacy and data security could adversely affect our financial ~~condition;~~condition.

•~~added~~Our information technology and telecommunications systems are susceptible to damage, breach or interruption.

•Added risks are associated with our international ~~operations;~~operations.

•~~a large percentage of our cash~~Our business could suffer if we fail to attract, retain, and ~~cash equivalents are held outside of the United States, and we could be subject to repatriation delays and costs which could reduce our financial flexibility;~~successfully integrate skilled personnel.

•~~the~~The market prices of our common stock is volatile, and is impacted by factors other than our financial performance, which could cause the value of an investment in our stock to ~~decline;~~decline.

•~~changes~~Changes in tax laws and interpretations could adversely affect our ~~business;~~business.

•~~our~~Our debt instruments impose certain restrictions on our ability to operate which in turn could negatively affect our ability to respond to business and market conditions and therefore could have an adverse effect on our business and results of ~~operations;~~operations.

•ifIf the interest rates on our borrowings increase, our access to capital and net income could be adversely ~~affected; and~~affected.

•weWe may be exposed to employment-related claims and costs and periodic litigation that could adversely affect our business and results of operations.

Except where otherwise indicated, the statements made in this Quarterly Report on Form 10-Q are made as of the date we filed this report with the 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 Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, and any amendments thereto, as well as our proxy statements.

TRADEMARKS AND TRADE NAMES

We own or have rights to a number of trademarks, service marks, and trade names that we use in conjunction with the operation of our business, including the name and design mark “ARC Document Solutions,” “ABACUS,” “METAPRINT,” “PlanWell,” “PlanWell PDS,” “Riot Creative Imaging,” “SKYSITE,” and various design marks associated therewith. In addition, we own or have rights to various trademarks, service marks, and trade names that we use regionally in conjunction with our operations. This report also includes trademarks, service marks and trade names of other companies.

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) 2021 2020
Assets
Current assets:
Cash and cash equivalents $ 54,903 $ 54,950
Accounts receivable, net of allowances for accounts receivable of $2,136 and $2,357
40,098 36,279
Inventory 9,144 9,474
Prepaid expenses 4,712 4,065
Other current assets 4,083 3,979
Total current assets 112,940 108,747
Property and equipment, net of accumulated depreciation of $229,074 and $219,834
47,385 57,830
Right-of-use assets from operating leases 32,189 37,859
Goodwill 121,051 121,051
Other intangible assets, net 355 515
Deferred income taxes 14,493 17,261
Other assets 2,306 2,175
Total assets $ 330,719 $ 345,438
Liabilities and Equity
Current liabilities:
Accounts payable $ 23,189 $ 18,661
Accrued payroll and payroll-related expenses 11,886 10,088
Accrued expenses 17,086 17,783
Current operating lease liability 10,700 12,158
Current portion of finance leases 14,364 17,557
Total current liabilities 77,225 76,247
Long-term operating lease liabilities 27,833 33,561
Long-term debt and finance leases 66,140 79,679
Other long-term liabilities 1,543 1,615
Total liabilities 172,741 191,102
Commitments and contingencies (Note 6) 0 0
Shareholders’ equity:
ARC Document Solutions, Inc. shareholders’ 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; 50,439 and 49,422 shares issued and 43,125 and 42,792 shares outstanding
50 49
Additional paid-in capital 129,076 127,755
Retained earnings 41,319 37,308
Accumulated other comprehensive loss (2,669) (2,787)
167,776 162,325
Less cost of common stock in treasury, 7,314 and 6,630 shares
16,250 14,657
Total ARC Document Solutions, Inc. shareholders’ equity 151,526 147,668
Noncontrolling interest 6,452 6,668
Total equity 157,978 154,336
Total liabilities and equity $ 330,719 $ 345,438


	June 30,		December 31,
(In thousands, except per share data)	2022		2021
Assets
Current assets:
Cash and cash equivalents	$	44,595	$	55,929
Accounts receivable, net of allowances for accounts receivable of $2,190 and $2,104	44,363		39,441
Inventory	9,882		8,842

Prepaid expenses	4,654		4,125
Other current assets	3,279		4,207
Total current assets	106,773		112,544
Property and equipment, net of accumulated depreciation of $233,976 and $229,803	41,384		45,153
Right-of-use assets from operating leases	29,329		29,360
Goodwill	121,051		121,051
Other intangible assets, net	243		325
Deferred income taxes	10,639		13,293
Other assets	2,236		2,273
Total assets	$	311,655	$	323,999
Liabilities and Equity
Current liabilities:
Accounts payable	$	23,690	$	22,753
Accrued payroll and payroll-related expenses	10,145		11,857
Accrued expenses	16,462		16,752
Current operating lease liability	10,126		10,284
Current portion of finance leases	12,137		13,816
Total current liabilities	72,560		75,462
Long-term operating lease liabilities	24,579		24,952
Long-term debt and finance leases	59,995		64,426

Other long-term liabilities	177		167
Total liabilities	157,311		165,007
Commitments and contingencies (Note 6)	0		0
Shareholders’ equity:
ARC Document Solutions, Inc. shareholders’ 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; 50,896 and 50,584 shares issued and 42,998 and 43,108 shares outstanding	51		50
Additional paid-in capital	131,119		129,881
Retained earnings	42,773		41,768
Accumulated other comprehensive loss	(3,549)		(2,501)
	170,394		169,198
Less cost of common stock in treasury, 7,898 and 7,476 shares	18,101		16,771
Total ARC Document Solutions, Inc. shareholders’ equity	152,293		152,427
Noncontrolling interest	2,051		6,565
Total equity	154,344		158,992
Total liabilities and equity	$	311,655	$	323,999

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,					Three Months Ended June 30,				Six Months Ended June 30,
(In thousands, except per share data)	(In thousands, except per share data)	2021		2020		2021		2020		(In thousands, except per share data)	2022		2021		2022		2021

Net sales	Net sales	$	72,432	$	72,379	$	202,961	$	225,123	Net sales	$	74,564	$	68,799	$	144,052	$	130,529
Cost of sales	Cost of sales	48,643		48,186		137,593		152,888		Cost of sales	49,026		46,007		96,065		88,950
Gross profit	Gross profit	23,789		24,193		65,368		72,235		Gross profit	25,538		22,792		47,987		41,579
Selling, general and administrative expenses	Selling, general and administrative expenses	18,829		19,186		54,373		60,816		Selling, general and administrative expenses	19,939		18,549		39,294		35,544
Amortization of intangible assets	Amortization of intangible assets	37		285		168		1,353		Amortization of intangible assets	35		56		70		131

Income from operations	Income from operations	4,923		4,722		10,827		10,066		Income from operations	5,564		4,187		8,623		5,904
Other income, net	Other income, net	(7)		(11)		(30)		(44)		Other income, net	(9)		(12)		(34)		(23)

Interest expense, net	Interest expense, net	495		871		1,691		3,111		Interest expense, net	446		576		876		1,196
Income before income tax provision	Income before income tax provision	4,435		3,862		9,166		6,999		Income before income tax provision	5,127		3,623		7,781		4,731
Income tax provision	Income tax provision	1,298		1,234		2,949		2,489		Income tax provision	2,001		1,155		2,799		1,651
Net income	Net income	3,137		2,628		6,217		4,510		Net income	3,126		2,468		4,982		3,080
Loss attributable to the noncontrolling interest	Loss attributable to the noncontrolling interest	41		163		324		425		Loss attributable to the noncontrolling interest	136		106		252		283
Net income attributable to ARC Document Solutions, Inc. shareholders	Net income attributable to ARC Document Solutions, Inc. shareholders	$	3,178	$	2,791	$	6,541	$	4,935	Net income attributable to ARC Document Solutions, Inc. shareholders	$	3,262	$	2,574	$	5,234	$	3,363
Earnings per share attributable to ARC Document Solutions, Inc. shareholders:	Earnings per share attributable to ARC Document Solutions, Inc. shareholders:									Earnings per share attributable to ARC Document Solutions, Inc. shareholders:
Basic	Basic	$	0.08	$	0.07	$	0.15	$	0.11	Basic	$	0.08	$	0.06	$	0.12	$	0.08
Diluted	Diluted	$	0.07	$	0.07	$	0.15	$	0.11	Diluted	$	0.08	$	0.06	$	0.12	$	0.08
Weighted average common shares outstanding:	Weighted average common shares outstanding:									Weighted average common shares outstanding:
Basic	Basic	42,073		42,747		42,213		43,017		Basic	42,250		42,304		42,172		42,284
Diluted	Diluted	42,724		42,918		42,629		43,160		Diluted	43,490		42,597		43,630		42,613

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

ARC DOCUMENT SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	(In thousands)	2021		2020		2021		2020		(In thousands)	2022		2021		2022		2021
Net income	Net income	$	3,137	$	2,628	$	6,217	$	4,510	Net income	$	3,126	$	2,468	$	4,982	$	3,080
Other comprehensive (loss) income, net of tax	Other comprehensive (loss) income, net of tax									Other comprehensive (loss) income, net of tax
Foreign currency translation adjustments, net of tax		(97)		444		226		(145)
Foreign currency translation adjustments										Foreign currency translation adjustments	(1,444)		244		(1,402)		323
Distribution to noncontrolling interest										Distribution to noncontrolling interest	(3,908)		—		(3,908)		—

Other comprehensive (loss) income, net of tax	Other comprehensive (loss) income, net of tax	(97)		444		226		(145)		Other comprehensive (loss) income, net of tax	(5,352)		244		(5,310)		323
Comprehensive income		3,040		3,072		6,443		4,365
Comprehensive (loss) income attributable to noncontrolling interest, net of tax		(4)		44		(216)		(316)
Comprehensive (loss) income										Comprehensive (loss) income	(2,226)		2,712		(328)		3,403
Comprehensive loss attributable to noncontrolling interest, net of tax										Comprehensive loss attributable to noncontrolling interest, net of tax	(4,430)		(35)		(4,514)		(212)
Comprehensive income attributable to ARC Document Solutions, Inc. shareholders	Comprehensive income attributable to ARC Document Solutions, Inc. shareholders	$	3,044	$	3,028	$	6,659	$	4,681	Comprehensive income attributable to ARC Document Solutions, Inc. shareholders	$	2,204	$	2,747	$	4,186	$	3,615

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

ARC DOCUMENT SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF ~~SHAREHOLDERS'~~ 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) Income 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 June 30, 2021 50,403 $ 50 $ 128,524 $ 38,982 $ (2,535) $ (15,682) $ 6,456 $ 155,795
Stock-based compensation — — 481 481
Issuance of common stock under Employee Stock Purchase Plan 9 17 17
Stock options exercised 27 54 54
Treasury shares (568) (568)
Cash dividends - common stock ($0.02 per share) (841) (841)
Comprehensive income (loss) 3,178 (134) (4) 3,040
Balance at September 30, 2021 50,439 $ 50 $ 129,076 $ 41,319 $ (2,669) $ (16,250) $ 6,452 $ 157,978
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
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) Income Common Stock in
Treasury Noncontrolling
Interest Total
Balance at December 31, 2020 49,422 $ 49 $ 127,755 $ 37,308 $ (2,787) $ (14,657) $ 6,668 $ 154,336
Stock-based compensation 963 1 1,224 1,225
Issuance of common stock under Employee Stock Purchase Plan 27 43 43
Stock options exercised 27 54 54
Treasury shares (1,593) (1,593)
Cash dividends - common stock ($0.02 per share) (2,530) (2,530)
Comprehensive income (loss) 6,541 118 (216) 6,443
Balance at September 30, 2021 50,439 $ 50 $ 129,076 $ 41,319 $ (2,669) $ (16,250) $ 6,452 $ 157,978


	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 March 31, 2021	49,433	$	49	$	128,108	$	37,250	$	(2,708)	$	(14,813)	$	6,491	$	154,377
Stock-based compensation	963	1		404										405


Issuance of common stock under Employee Stock Purchase Plan	7			12										12

Treasury shares										(869)				(869)
Cash Dividends - common stock ($0.02 per share)						(842)								(842)




Comprehensive income (loss), net of tax						2,574		173				(35)		2,712
Balance at June 30, 2021	50,403	$	50	$	128,524	$	38,982	$	(2,535)	$	(15,682)	$	6,456	$	155,795

	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 March 31, 2022	50,830	$	51	$	130,639	$	41,624	$	(2,491)	$	(17,052)	$	6,481	$	159,252
Stock-based compensation	47			439										439
Stock options exercised	10			23										23
Issuance of common stock under Employee Stock Purchase Plan	9			18										18
Treasury shares										(1,049)				(1,049)
Cash Dividends - common stock ($0.05 per share)						(2,113)								(2,113)

Comprehensive income (loss), net of tax						3,262		(1,058)				(4,430)		(2,226)
Balance at June 30, 2022	50,896	$	51	$	131,119	$	42,773	$	(3,549)	$	(18,101)	$	2,051	$	154,344


	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, 2020	49,422	$	49	$	127,755	$	37,308	$	(2,787)	$	(14,657)	$	6,668	$	154,336
Stock-based compensation	963	1		743										744
Issuance of common stock under Employee Stock Purchase Plan	18			26										26

Treasury shares										(1,025)				(1,025)
Cash dividends - common stock ($0.02 per share)						(1,689)								(1,689)

Comprehensive income (loss), net of tax						3,363		252				(212)		3,403
Balance at June 30, 2021	50,403	$	50	$	128,524	$	38,982	$	(2,535)	$	(15,682)	$	6,456	$	155,795

	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, 2021	50,584	$	50	$	129,881	$	41,768	$	(2,501)	$	(16,771)	$	6,565	$	158,992
Stock-based compensation	152			890										890
Stock options exercised	145	1		310										311
Issuance of common stock under Employee Stock Purchase Plan	15			38										38
Treasury shares										(1,330)				(1,330)
Cash dividends - common stock ($0.05 per share)						(4,229)								(4,229)
Comprehensive income (loss), net of tax						5,234		(1,048)				(4,514)		(328)
Balance at June 30, 2022	50,896	$	51	$	131,119	$	42,773	$	(3,549)	$	(18,101)	$	2,051	$	154,344

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,						Six Months Ended June 30,
(In thousands)	(In thousands)		2021		2020		(In thousands)			2022		2021
Cash flows from operating activities	Cash flows from operating activities						Cash flows from operating activities
Net income	Net income		$	6,217	$	4,510	Net income			$	4,982	$	3,080
Adjustments to reconcile net income to net cash provided by operating activities:	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	Allowance for accounts receivable		164		706		Allowance for accounts receivable			201		6
Depreciation	Depreciation		18,760		21,402		Depreciation			10,547		12,768
Amortization of intangible assets	Amortization of intangible assets		168		1,353		Amortization of intangible assets			70		131
Amortization of deferred financing costs	Amortization of deferred financing costs		47		48		Amortization of deferred financing costs			30		32

Stock-based compensation	Stock-based compensation		1,224		1,333		Stock-based compensation			890		743
Deferred income taxes	Deferred income taxes		2,637		2,419		Deferred income taxes			2,578		1,434
Deferred tax valuation allowance	Deferred tax valuation allowance		125		22		Deferred tax valuation allowance			16		103

Other non-cash items, net	Other non-cash items, net		(167)		226		Other non-cash items, net			(106)		(79)
Changes in operating assets and liabilities:	Changes in operating assets and liabilities:						Changes in operating assets and liabilities:
Accounts receivable, net			(4,008)		9,310
Accounts receivable							Accounts receivable			(5,607)		(1,859)
Inventory	Inventory		338		3,469		Inventory			(1,156)		214
Prepaid expenses and other assets	Prepaid expenses and other assets		6,965		10,765		Prepaid expenses and other assets			5,197		5,323
Accounts payable and accrued expenses	Accounts payable and accrued expenses		(4,296)		(16,548)		Accounts payable and accrued expenses			(6,113)		(5,007)
Net cash provided by operating activities	Net cash provided by operating activities		28,174		39,015		Net cash provided by operating activities			11,529		16,889
Cash flows from investing activities	Cash flows from investing activities						Cash flows from investing activities
Capital expenditures	Capital expenditures		(3,391)		(5,053)		Capital expenditures			(2,666)		(1,554)

Other	Other		291		250		Other			142		220
Net cash used in investing activities	Net cash used in investing activities		(3,100)		(4,803)		Net cash used in investing activities			(2,524)		(1,334)
Cash flows from financing activities	Cash flows from financing activities						Cash flows from financing activities
Proceeds from stock option exercises	Proceeds from stock option exercises		54		—		Proceeds from stock option exercises			311		—
Proceeds from issuance of common stock under Employee Stock Purchase Plan	Proceeds from issuance of common stock under Employee Stock Purchase Plan		43		55		Proceeds from issuance of common stock under Employee Stock Purchase Plan			38		26
Share repurchases	Share repurchases		(1,593)		(2,432)		Share repurchases			(1,330)		(1,025)

Distribution to noncontrolling interest							Distribution to noncontrolling interest		(3,908)	—

Payments on finance leases	Payments on finance leases		(13,918)		(10,236)		Payments on finance leases			(7,827)		(9,565)
Borrowings under revolving credit facilities	Borrowings under revolving credit facilities		69,250		45,000		Borrowings under revolving credit facilities			76,000		38,750
Payments under revolving credit facilities	Payments under revolving credit facilities		(76,750)		(45,000)		Payments under revolving credit facilities			(78,500)		(45,000)
Payment of deferred financing costs	Payment of deferred financing costs		(281)		—		Payment of deferred financing costs			—		(281)

Dividends paid	Dividends paid		(2,112)		(870)		Dividends paid			(4,218)		(1,269)
Net cash used in financing activities	Net cash used in financing activities		(25,307)		(13,483)		Net cash used in financing activities			(19,434)		(18,364)
Effect of foreign currency translation on cash balances	Effect of foreign currency translation on cash balances		186		188		Effect of foreign currency translation on cash balances			(905)		231
Net change in cash and cash equivalents	Net change in cash and cash equivalents		(47)		20,917		Net change in cash and cash equivalents			(11,334)		(2,578)
Cash and cash equivalents at beginning of period	Cash and cash equivalents at beginning of period		54,950		29,425		Cash and cash equivalents at beginning of period			55,929		54,950
Cash and cash equivalents at end of period	Cash and cash equivalents at end of period		$	54,903	$	50,342	Cash and cash equivalents at end of period			$	44,595	$	52,372
Supplemental disclosure of cash flow information	Supplemental disclosure of cash flow information						Supplemental disclosure of cash flow information
Noncash investing and financing activities	Noncash investing and financing activities						Noncash investing and financing activities
Finance lease obligations incurred	Finance lease obligations incurred		$	4,771	$	9,624	Finance lease obligations incurred			$	4,363	$	2,094
Operating lease obligations incurred	Operating lease obligations incurred		$	2,115	$	4,582	Operating lease obligations incurred			$	4,799	$	1,198

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”~~" "ARC" or ~~the “Company”~~"the Company") is a ~~leading document solutions provider~~digital printing company. ARC provides digital printing and document-related services to ~~architectural, engineering, construction, and facilities management professionals, while also providing document solutions to businesses~~customers in a growing variety of ~~all types.~~industries. ARC offers ~~a variety of~~Digital Printing services, ~~including: Construction Document Information Management ("CDIM"),~~ Managed Print Services ("MPS"), and ~~Archive~~Scanning and ~~Information Management ("AIM").~~Digital Imaging services. 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~~six months ended ~~September~~June 30, ~~2021~~2022, are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2021.~~2022.

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 Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021.

Noncontrolling Interest

The Company accounted for its investment in UNIS Document Solutions Co. Ltd., ("UDS") under the purchase method of accounting, in accordance with ASC 805, Business Combinations. UDS has been consolidated in the Company's financial statements from the date of acquisition. Noncontrolling interest, which represents the 35% noncontrolling interest in UDS owned by the joint venture ("JV") partner, is reflected on the Company's Condensed Consolidated Financial Statements. During the second quarter of 2022, the Company completed an $11.2 million capital distribution from its Chinese JV. As the Company is 65% owner, $7.3 million came to the Company's US operations, and 35% or $3.9 million went to the JV partner, thus resulting in a $3.9 million decrease in the Company's consolidated cash and noncontrolling interest balance sheet accounts.

Revenue Recognition

Revenue is recognized when control of the promised goods or services is transferred to ~~our~~ARC's customers, in an amount that reflects the consideration ~~we expect~~it expects 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,
2021 2020 2021 2020
CDIM $ 44,890 $ 47,107 $ 125,413 $ 137,337
MPS(1)
18,497 17,648 53,837 61,189
AIM 4,073 2,910 10,382 9,163
Equipment and supplies sales 4,972 4,714 13,329 17,434
Net sales $ 72,432 $ 72,379 $ 202,961 $ 225,123


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Service Sales
Digital Printing	$	46,165	$	43,089	$	88,112	$	80,523
MPS(1)	19,248		18,005		37,902		35,340
Scanning and Digital Imaging	4,320		3,286		8,489		6,310
Total services sales	$	69,733	$	64,380	$	134,503	$	122,173
Equipment and Supplies Sales	4,831		4,419		9,549		8,356
Total net sales	$	74,564	$	68,799	$	144,052	$	130,529

(1) MPS includes ~~$17.1~~$17.8 million of rental income and $1.4 million of service income for the three months ended ~~September~~June 30, ~~2021~~2022 and ~~$49.3~~$35.0 million of rental income and ~~$4.5~~$2.9 million of service income for the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022. MPS includes ~~$16.1~~$16.5 million of rental income and ~~$1.6~~$1.5 million of service income for the three months ended ~~September~~June 30, ~~2020~~2021 and ~~$56.2~~$32.3 million of rental income and ~~$5.0~~$3.0 million of service income for the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021.

~~CDIM~~Digital Printing 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~~Digital Printing 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, which generally occurs with the transfer of control of the 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 orders. Revenue is measured as the amount of consideration ~~we expect~~the Company expects 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 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~~the Company's 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.

~~AIM~~Scanning and Digital Imaging 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~~Scanning and Digital Imaging includes ~~our~~the Company's hosted SKYSITE® software and ARC Facilities solution 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~~Scanning and Digital Imaging professional services, which ~~represents~~represent substantially all revenue for the ~~majority of AIM revenue,~~business line, 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, which~~satisfied; generally, this occurs with the transfer of control of the digital files. Transfer of control occurs at a specific ~~point in time,~~point-in-time, when the Scanned Documents are delivered to the customer either through SKYSITE, ARC Facilities, or onthrough other electronic media. Revenue is measured as the amount of consideration ~~we expect~~the Company expects 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~~Equipment and ~~supplies~~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, which~~satisfied; generally, this occurs with the transfer of control of the Goods. Transfer of control occurs at a specific ~~point in time,~~point-in-time, when the Goods are delivered to the customer’s site. Revenue is measured as the amount of consideration ~~we expect~~the Company expects 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.

Recent Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued Accounting Standards Update No. 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 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, to extend the effective date to fiscal years 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.~~operations, but does not currently expect a material impact on the Company's consolidated financial statements.

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~~a significant portion 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~~Company's results largely depend on the strength of that industry. The Company's historical operating results reflect the cyclical and ~~financial condition can be significantly affected by economic factors~~variable nature of the AEC/O industry. ARC believes that ~~influence~~ the AEC/O industry ~~such as non-residential construction spending, GDP growth, interest rates, unemployment rates,~~generally experiences downturns several months after a downturn in the general economy, and ~~office vacancy rates, all~~that there may be a similar delay in the recovery of ~~which have been amplified due to~~ the ~~COVID-19 pandemic. Reduced activity (relative to historic levels)~~AEC/O industry following a recovery of the general economy. A downturn in the AEC/O industry would diminish demand for ~~some~~all of ~~ARC’s services and~~the Company's products and itservices, and would therefore negatively affect the Company's revenues and have a material adverse effect on ~~ARC's~~the Company'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~~that are relatively new to the ~~Company.~~company. The success of the ~~Company’s~~Company's efforts will be affected by its ability to acquire new customers for the ~~Company’s~~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 shares of common stock 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 shares of common stock that would have been outstanding if shares subject to outstanding options and acquisition rights had been issued and if the additional shares were dilutive. Common share equivalents are excluded from the computation if their effect is anti-dilutive. For the three and ~~nine~~six months ended ~~September~~June 30, ~~2021, 4.4~~2022, 3.2 million and ~~4.6~~3.0 million shares of common stock, respectively, were excluded from the calculation of diluted net income attributable to ARC per common share, because they were anti-dilutive. For the three and ~~nine~~six months ended ~~September~~June 30, ~~2020, 5.2~~2021, 5.0 million shares of common stock were excluded from the calculation of diluted net loss attributable to ARC per common share, 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~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020:~~

Three Months Ended
September 30, Nine Months Ended
September 30,
2021 2020 2021 2020
Weighted average common shares outstanding during the period—basic 42,073 42,747 42,213 43,017
Effect of dilutive stock awards 651 171 416 143
Weighted average common shares outstanding during the period—diluted 42,724 42,918 42,629 43,160

2021:


	Three Months Ended June 30,		Six Months Ended June 30,
	2022	2021	2022	2021
Weighted average common shares outstanding during the period—basic	42,250	42,304	42,172	42,284
Effect of dilutive stock awards	1,240	293	1,458	329
Weighted average common shares outstanding during the period—diluted	43,490	42,597	43,630	42,613

3. 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, 2021, the Company performed its annual 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, 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.

Given the uncertainty regarding the ultimate financial impact of the COVID-19 pandemic and the ensuing economic recovery, there can be no assurance that the estimates and assumptions made for purposes of the Company’s goodwill impairment analysis in 2021 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 goodwill impairment charges in future periods, whether in connection with the next annual impairment testing in the third quarter of 2022, 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 no change in the carrying amount of goodwill from January 1, ~~2020~~2021 through ~~September~~June 30, ~~2021.~~2022.

See “Critical Accounting ~~Policies”~~Policies, Significant Judgements and Estimates" in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2021 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. The Company assessed potential impairments of its long-lived assets as of September 30, 2021 and concluded that there was no impairment.

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~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 which continue to be amortized:


		September 30, 2021						December 31, 2020							June 30, 2022						December 31, 2021
		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													Amortizable other intangible assets
Customer relationships	Customer relationships	$	99,427	$	99,330	$	97	$	99,425	$	99,191	$	234	Customer relationships	$	99,264	$	99,242	$	22	$	99,446	$	99,371	$	75
Trade names and trademarks	Trade names and trademarks	20,334		20,076		258		20,325		20,044		281		Trade names and trademarks	20,307		20,086		221		20,344		20,094		250
		$	119,761	$	119,406	$	355	$	119,750	$	119,235	$	515		$	119,571	$	119,328	$	243	$	119,790	$	119,465	$	325

Estimated future amortization expense of other intangible assets for the remainder of the ~~2021~~2022 fiscal year, and each of the subsequent four fiscal years and thereafter, are as follows:


2021 (excluding the nine months ended September 30, 2021)		$	30
2022		103
2022 (excluding the six months ended June 30, 2022)				2022 (excluding the six months ended June 30, 2022)	$	33
2023	2023	44		2023	43
2024	2024	42		2024	41
2025	2025	38		2025	37
2026				2026	36
Thereafter	Thereafter	98		Thereafter	53
		$	355		$	243

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 ~~$1.3~~$2.0 million and ~~$2.9~~$2.8 million in relation to pretax income of ~~$4.4~~$5.1 million and ~~$9.2~~$7.8 million, respectively for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021, respectively,~~2022, which resulted in an effective income tax rate of ~~29.3%~~39.0% and ~~32.2%~~36.0%, respectively, primarily impacted by state taxes, non-deductible compensation, certain stock-based compensation ~~change in valuation allowances against certain deferred tax assets~~ and other non-deductible expenses. The Company recorded an income tax provision of $1.2 million and ~~$2.5~~$1.7 million in relation to pretax income of ~~$3.9~~$3.6 million and ~~$7.0~~$4.7 million, respectively, for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020, respectively,~~2021, which resulted in an effective income tax rate of ~~32.0%~~31.9% and ~~35.6%~~34.9%, respectively, primarily ~~due to~~impacted by certain stock-based compensation, ~~a change~~changes in ~~valuations~~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 ~~$2.2~~$2.4 million valuation allowance against certain deferred tax assets as of ~~September~~June 30, ~~2021.~~2022.

Based on the Company’s current assessment, the remaining net deferred tax assets as of ~~September~~June 30, ~~2021~~2022 are considered more likely than not to be realized. The valuation allowance of ~~$2.2~~$2.4 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 depends on future taxable income, reversals of existing taxable temporary differences or through a loss carry back.

5. Long-Term Debt

Long-term debt consists of the following:

September 30, 2021 December 31, 2020
Revolving Loans; 1.7% and 2.2% interest rate at September 30, 2021 and December 31, 2020
$ 47,500 $ 55,000
Various finance leases; weighted average interest rate of 4.8% and 4.9% at September 30, 2021 and December 31, 2020, respectively; principal and interest payable monthly through September 2027
33,004 42,236
80,504 97,236
Less current portion (14,364) (17,557)
$ 66,140 $ 79,679


	June 30, 2022		December 31, 2021

Revolving Loans; 2.9% and 1.7% interest rate at June 30, 2022 and December 31, 2021	$	43,750	$	46,250
Various finance leases; weighted average interest rate of 4.8% and 4.7% at June 30, 2022 and December 31, 2021, respectively; principal and interest payable monthly through December 2027	28,382		31,992

	72,132		78,242
Less current portion	(12,137)		(13,816)
	$	59,995	$	64,426

Credit Agreement

On April 22, 2021, the Company entered into a Credit Agreement with U.S. Bank National Association, as administrative agent and the lender party thereto (the "2021 Credit Agreement"). The 2021 Credit Agreement provides for the extension of revolving loans in an aggregate principal amount not to exceed $70 million and replaces the Credit Agreement dated as of November 20, 2014, as amended (the "2014 Credit Agreement"). The 2021 Credit Agreement features terms similar to the 2014 Credit Agreement, including the ability to use excess cash of up to $15 million per year for restricted payments such as share repurchases and dividends. The obligation under the 2021 Credit Agreement matures on April 22, 2026.

As of ~~September~~June 30, ~~2021,~~2022, the Company's borrowing availability ~~of revolving loans~~ under the revolving loan commitment was ~~$20.3~~$24.1 million, after deducting outstanding letters of credit of $2.2 million and outstanding revolving loans of ~~$47.5~~$43.8 million.

Loans borrowed under the 2021 Credit Agreement bear interest, in the case of LIBOR loans, at a per annum rate equal to the applicable LIBOR (which rate shall not be less than zero), plus a margin ranging from 1.25% to 1.75%, based on the Company’s Total Leverage Ratio (as defined in the 2021 Credit Agreement). Loans borrowed under the 2021 Credit Agreement that are not LIBOR loans bear interest at a per annum rate (which rate shall not be less than zero) 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 U.S. Bank National Association as its “prime rate,” plus (ii) a margin ranging from 0.25% to 0.75%, based on the Company’s Total Leverage Ratio. As of June 30, 2022, LIBOR loans borrowed under the 2021 Credit Agreement accrued interest at 2.9%.

The Company pays certain recurring fees with respect to the 2021 Credit Agreement, 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 2021 Credit Agreement); the net proceeds from certain issuances of equity securities; and net proceeds of certain insurance recoveries and condemnation events of the Company.

Agreement), as of the last day of each fiscal quarter, an amount not less than 1.15 to 1.00. ~~We were~~ARC was in compliance with ~~our~~its covenants as of ~~September~~June 30, ~~2021.~~2022.

The 2021 Credit Agreement also includes 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 2021 Credit Agreement, the amount of all such payments will be limited to $15 million during any twelve-month period. 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 2021 Credit Agreement allows for payment of dividends. In ~~July 2021,~~April 2022, the Company's board of directors declared a quarterly cash dividend of ~~$0.02~~$0.05 per share that iswas payable on ~~November 30, 2021~~August 31, 2022 to shareholders of record as of ~~October~~July 29, ~~2021.~~2022. Accordingly, the Company recorded a dividend payable of ~~$841 thousand~~$2.1 million within accrued expenses as of ~~September~~June 30, ~~2021.~~2022.

The 2021 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 2021 Credit Agreement are guaranteed by the Company and each of the Company's other United States subsidiaries. The 2021 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).

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 7, Leasing, on ~~our~~the Company's Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 a schedule of the Company's future minimum operating lease payments.

Legal Proceedings. The Company is involved, and will continue to be involved, in legal proceedings arising out of the conduct of ~~our~~the Company's business, including commercial and employment-related lawsuits. Some of these lawsuits purport or may be determined to be class actions and seek substantial damages, and some may remain unresolved for several years. The Company establishes accruals for specific legal proceedings when it is considered probable that a loss has been incurred and the amount of the loss can be reasonably estimated. The Company's evaluation of whether a loss is reasonably probable is based on ~~our~~the Company's assessment and consultation with legal counsel regarding the ultimate outcome of the matter. As of ~~September~~June 30, ~~2021,~~2022, the Company has accrued for the potential impact of loss contingencies that are probable and reasonably estimable. The Company does not currently believe that the ultimate resolution of any of these matters will have a material adverse effect on its results of operations, financial condition, or cash flows. However, the results of these matters cannot be predicted with certainty, and an unfavorable resolution of one or more of these matters could have a material adverse effect on the Company's results of operations, financial condition, or cash flows.

Environmental Matters. The Company has accrued liabilities for environmental assessment and remediation matters relating to operations at certain locations conducted in the past by predecessor companies that do not relate to ARC's current operations. The Company has accrued these liabilities because it is probable that a loss or cost will be incurred and the amount of loss or cost can be reasonably estimated. These estimates could change as a result of changes in planned remedial actions, remediation technologies, site conditions, the estimated time to complete remediation, environmental laws and regulations, and other factors. Because of the uncertainties associated with environmental assessment and remediation activities, the Company's future expenses relating to these matters could be higher than the liabilities it has accrued. Based upon current information, the Company believes that the impact of the resolution of these matters would not be, individually or in the aggregate, material to its financial position, results of operations or cash flows.

7. Stock-Based Compensation

On April 29, 2021, the Company's shareholders approved the Company's 2021 Incentive Plan, replacing the 2014 Stock Incentive Plan, as amended, which is the only equity incentive plan under which the Company can currently grant equity incentive awards. The 2021 Incentive 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. The Company is authorized to issue up to 3.5 million shares plus such additional number of shares of common stock (up to 6,132,593 shares) as is equal to the number of shares of common stock subject to awards granted under the 2014 Incentive Plan and the Company's 2005 Stock Plan, which awards expire, terminate or are otherwise surrendered, cancelled, forfeited or repurchased by the Company pursuant to a contractual repurchase right. As of ~~September~~June 30, ~~2021, 2.6~~2022, 1.4 million shares remained available for issuance under the 2021 Incentive 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~~six months ended ~~September~~June 30, ~~2021,~~2022, the Company granted options to acquire a total of ~~0.7~~1.7 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. These stock options vest annually over three years to four years from the grant date and expire 10 years after the date of grant. During the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, the Company granted ~~0.9~~0.1 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 2816 thousand shares of restricted stock awards to each of the Company's 43 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 ~~$0.5~~$0.4 million and ~~$1.2~~$0.9 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, respectively, compared to stock-based compensation expense of $0.4 million and ~~$1.3~~$0.7 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, respectively.

As of ~~September~~June 30, ~~2021,~~2022, total unrecognized compensation cost related to unvested stock-based payments totaled ~~$2.8~~$3.5 million and is expected to be recognized over a weighted-average period of approximately 2.3 years.

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~~June 30, ~~2021,~~2022, 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 ~~Sheets~~Sheet were ~~$13.5~~$1.9 million as of ~~September~~June 30, ~~2021~~2022 and ~~$13.2~~$15.4 million as of December 31, ~~2020~~2021 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~~June 30, ~~2021~~2022 for borrowings under its 2021 Credit Agreement is ~~$47.5~~$43.8 million. The Company has determined, utilizing observable market quotes, that the fair value of borrowings under its 2021 Credit Agreement is ~~$47.5~~$43.8 million as of ~~September~~June 30, ~~2021.~~2022.

1920

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 Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 and this Quarterly Report on Form 10-Q for the quarter ended ~~September~~June 30, ~~2021.~~2022.

Business Summary

ARC Document Solutions Inc. ~~(“ARC Document Solutions,” “ARC,” “we,” “us,” or “our”)~~ is a ~~leading~~digital printing company. We provide digital printing and document-related services to customers in a growing variety of industries. Our primary services and product offering are:

•digital printing of general and specialized business documents such as those found in marketing and advertising, engineering and construction and other industries, as well as producing highly-customized display graphics of all types and sizes;

•acquiring, placing and managing ARC-certified office printing equipment with proprietary device tracking and print management software at our customers’ offices and job sites;

•scanning documents, indexing them and adding digital search features for use in digital document ~~solutions provider to design, engineering~~, ~~construction,~~management, document archives and facilities management, ~~professionals, while also~~as well as providing ~~document solutions to businesses of all types.~~other digital imaging services; and,

~~Our customers need us to manage the scale, complexity,~~•reselling digital printing equipment 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.supplies.

Each of ~~our service offerings is enabled through a suite~~these services frequently include additional logistics services in the form of ~~supporting proprietary technology~~distributing and ~~a wide variety~~delivering finished documents, installing display graphics, or the digital storage of ~~value-added services.~~ graphic files.

We have categorized our service and product offerings to report distinct sales recognized from:

~~Construction Document~~Digital Printing: We print documents of any size in color and ~~Information Management (CDIM),~~ which consists of professional services to manage and distribute documents and information related to construction projects and related project-based businesses outside of the architectural, engineering and construction (AEC) industry. Our reconfiguration of the Company's sales and marketing functions in late-2019, as well as customer needs driven by the COVID-19 pandemic, have led to the significant expansion of the non-AEC segment of our CDIM business, primarily through the provision of color graphics and signage. CDIM sales also 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 on a variety of materials including plain paper, vinyl, fabric, metal, wood and ~~in color.~~

other three-dimensional substrates. While we can and do print high-page count work such as manuals or catalogs, the documents we typically produce are usually characterized by their high-quality production, low-volume and quick turnaround, and are produced using highly-sophisticated digital printing equipment.

Managed Print ~~Services (MPS),~~Services: ~~which consists of placement, management,~~We acquire and ~~optimization of print~~manage digital printing equipment and ~~imaging equipment~~place it in our customers' ~~offices, job sites, and other facilities. MPS relieves~~facilities for their use, based on a service level agreement. We lease or own the equipment ourselves, while our customers pay for what they use. Per-use minimum charges are often part of our service agreements. We operate more than 10,500 managed print services, or MPS locations, ranging in size from one or two pieces of equipment in a single office, to hundreds of pieces equipment in offices around the ~~burden of owning and managing print devices and print networks, and shifts their costs~~world. We also provide proprietary software to ~~a “per-use” basis. MPS is supported by our proprietary technology, Abacus, which allows~~ our customers to ~~capture,~~ control ~~manage,~~their print expenses and ~~account~~connect their remote employees with their offices and ARC print centers nationwide. This software is developed and integrated by ARC.

Scanning and Digital Imaging: We scan hard-copy small format or large format documents in color or black and white, typically providing them to our customers as searchable PDF files. We also use our patented optical character recognition technology to make documents searchable, and we host them on proprietary applications for ~~their documents. MPS sales represent recurring, contracted revenue in which we are paid a single cost per unit of material used, often referred to~~use as ~~a “click charge.” MPS sales are driven by the ongoing print needs~~part of our ~~customers at their facilities. Because~~ARC Facilities solutions. The types of documents that we scan include office files, construction plans and other small or large documents. We also process, distribute and print-on-demand images we capture for our customers. Our large, centralized Scanning and Digital Imaging centers are compliant with the ~~recent pandemic has forced a large number~~Health Insurability Portability and Accountability Act of ~~our clients to direct their employees to work from home, MPS volume~~1996, or HIPAA, so we can convert documents that include protected health information. Our unique software creates efficient search tags on scanned data for easy search and ~~sales have declined over the past year.~~

~~Archiving and Information Management (AIM),~~ ~~which consists of~~retrieval. We offer Cloud-based document management software and ~~professional~~other digital hosting 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 application~~customers or make files available for our customers 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. A growing portion of our sales are being driven by our ability to handle protected health information (PHI) as our regional scanning centers are HIPAA-compliant. AIM sales are driven by the need to leverage past intellectual property 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. Remote access to digital documents driven by work-from-home conditions created by the recent pandemic have also contributed to recent sales in this area of our business.

host themselves.

Equipment and Supplies Sales: We sell equipment and supplies to a small segment of our customer base. We also provide ancillary services such as equipment service and maintenance, often as a way to generate recurring revenue in addition to a one-time sale. In addition, we offer certified used equipment available for sale or for use in our MPS offering.

In previous years, our services were characterized by the primary industries/markets in which ~~consists~~they were meant to be sold, e.g., the construction industry or the document archiving and storage market. Having expanded the variety of ~~reselling printing, imaging,~~the markets and ~~related equipment~~industries we serve over the past several years, we now believe it is more useful to ~~customers primarily to architectural, engineering~~report our services by production method. Specifically, we previously described Digital Printing as “construction document and ~~construction firms.~~information management” or “CDIM,” and Scanning and Digital Imaging as “archiving and information management” or “AIM.”

~~We have expanded our business beyond the services we traditionally provided to the architectural, engineering, construction,~~The methods for financial reporting and building owner/operator (AEC/O) industry in the past and are currently focused on growing MPS, AIM and CDIM, as 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, and away from its historical emphasis on large-format construction drawings produced “offsite”revenue recognition in our renamed service ~~centers.~~lines remain unchanged. Likewise, “Managed Print Services” or “MPS” and “Equipment Sales and Supplies” are also reported identically from previous years.

2021

~~We deliver~~The majority of our products and services are available from each of our service centers. Our primary operational objective is to optimize our business performance by driving as much customer work through our service center network as is practical, leveraging our production infrastructure, workforce, and production-grade equipment. All our production centers are digitally connected and we operate standard software and systems to support seamless movement of customers digital data and print anywhere within the ARC system.

In addition, we can provide many of our services ~~via~~in our customers’ offices. Our geographic presence is concentrated in the ~~cloud, through a nationwide network of~~U.S., with additional service centers ~~regionally-based technical specialists, locally-based sales executives,~~in Canada, the United Arab Emirates (UAE), China, India, and the United Kingdom. Our origin as a ~~national/regional sales force known as Global Solutions.~~

~~Based on our analysis~~company was in California, and the initial expansion of our ~~operating results, we estimate that sales to the AEC/O industry accounted for~~business was concentrated there. We derive approximately ~~67%~~32% of our ~~net sales~~total revenue from the products and services delivered in California.

All of our production facilities are connected via a Software-Defined Wide Area Network (SD-WAN). Our cloud offerings are hosted by Amazon Web Services. We employ a combination of proprietary and industry-leading technologies to provide redundancy, backup and security of all data in our systems. All of our technology operations are designed to meet ISO 29001 standards for ~~the nine months ended September 30, 2021, with the remaining 33% consisting~~data security, and several of ~~sales~~our service centers are HIPAA-compliant allowing us to ~~businesses outside of the AEC/O industry.~~manage document conversions and other scanning tasks involving protected health information, or PHI.

Costs and Expenses

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

~~We maintain low levels~~The effects of ~~inventory.~~ global supply chain disruptions have been confined primarily to price increases for production materials and the demand for greater flexibility in inventory practices, such as purchasing in greater volume to leverage better economics or to ensure production continuity by having materials on hand. As noted above, price increases are often passed on to our customers. Labor costs have increased moderately to retain valuable employees or to compete for new hires. While these increases had an effect, we believe our cost optimization program will continue to make them manageable in the future.

Historically, our capital expenditure requirements have varied ~~due~~based on our need for printing equipment in our MPS locations and service centers. Over the past two years, the pandemic has reduced the number of employees in our customers’ locations, which has, in turn, reduced the need for equipment. We believe this equipment trend is likely to become permanent and, as a result, we think the ~~cost and availability~~past two years are more indicative of ~~finance lease lines of credit. Our~~future capital needs than historical trends.

Because our relationships with credit providers ~~have provided~~allows us to obtain attractive lease rates, ~~over the recent years, and as a result,~~ we chose to lease rather than purchase ~~equipment in a significant portion~~most of our ~~engagements.~~equipment over the past two years.

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

2122

COVID-19 Pandemic

The ~~global spread~~COVID-19 pandemic continued to have adverse effects on our financial performance during 2021, but barring further negative developments of the ~~novel coronavirus (COVID-19) has negatively impacted~~virus and its impact on personal and economic well-being, we expect that the ~~global economy, disrupted global supply chains~~worst of those effects are behind us. We expect a hybrid office to remain the norm in 2022, but for print volumes to increase marginally as employers bring their employees back into the office at higher rates than we saw in 2021. We believe work-from-home practices benefit our scanning business as employees need access to documents, regardless of where they are working, and ~~created significant volatility and disruption of financial markets. The impact of this pandemic has created significant prolonged uncertainty~~document scanning is the first step in making them accessible in the global economy and has negatively affected our business, employees, suppliers, and customers. In 2021, the negative effects of the recent pandemic began to subside with increasing economic activity and our sales began to increase, however there is still uncertainty regarding COVID-19 variants, including but not limited to the Delta variant. 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 "Part I - Item 1A. Risk Factors" ~~of our Annual Report on Form 10-K for the year ended December 31, 2020.~~cloud.

~~To adapt to the uncertainty and shifting demands brought on by the COVID-19 pandemic, we transformed our business during~~Throughout the second quarter of ~~2020 into a smaller but stronger company, offering a range of products beyond~~2022, we believe 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, postponing capital expenditures, reducing operating costs, initiating workforce 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 considered an essential business. We also serve the housing, healthcare, and technology industries, and have been able to keep almost all of our service centers open during the pandemic, though at reduced volumes, in order to fulfill our customers' needs. However, there is uncertainty around the extent and duration of interruptionsdisruption to our business related to the COVID-19 pandemic ~~as well as~~has largely dissipated and we are now working under conditions that are likely to continue for the ~~pandemic's overall impact on~~foreseeable future. A lasting effect of the ~~U.S. economy, on~~pandemic appears to be the use of hybrid work schedules for many of our ~~clients' ongoing~~office-based clients. While this could change and more people may come back to work in offices, there is no indication of a mass return to offices throughout the country and thus we believe that our managed print services business ~~operations,~~line is likely to remain muted relative to periods prior to the pandemic. This does not preclude year-over-year growth in this part of our business, but at this time we do not expect revenues to ramp up quickly to levels prior to 2020 and ~~on our results of operations and financial condition. While our~~ultimately, may never do so. Our management team is actively monitoring the continuing impacts of the COVID-19 pandemic and may take further voluntary or required actions ~~altering~~to alter our business operations ~~that we determine are in the best interests of our~~to protect 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 2021 and beyond cannot be estimated at this point.customers. The following discussions are subject to the future effects of the COVID-19 pandemic on our ongoing business operations.

2223

Results of Operations


		Three Months Ended September 30,				Increase (decrease)				Nine Months Ended September 30,				Increase (decrease)					Three Months Ended June 30,				Increase (decrease)				Six Months Ended June 30,				Increase (decrease)
(In millions, except percentages)	(In millions, except percentages)	2021(1)		2020(1)		$ (1)		%		2021(1)		2020(1)		$ (1)		%		(In millions, except percentages)	2022(1)		2021(1)		$		%		2022(1)		2021(1)		$		%
CDIM		$	44.9	$	47.1	$	(2.2)	(4.7)	%	$	125.4	$	137.3	$	(11.9)	(8.7)	%
Digital Printing																		Digital Printing	$	46.2	$	43.1	$	3.1	7.1	%	$	88.1	$	80.5	$	7.6	9.4	%
MPS	MPS	18.5		17.6		0.8		4.8	%	53.8		61.2		(7.4)		(12.0)	%	MPS	19.2		18.0		1.2		6.9	%	37.9		35.3		2.6		7.2	%
AIM		4.1		2.9		1.2		40.0	%	10.4		9.2		1.2		13.3	%
Scanning and Digital Imaging																		Scanning and Digital Imaging	4.3		3.3		1.0		31.5	%	8.5		6.3		2.2		34.5	%

Equipment and supplies sales	Equipment and supplies sales	5.0		4.7		0.3		5.5	%	13.3		17.4		(4.1)		(23.5)	%	Equipment and supplies sales	4.8		4.4		0.4		9.3	%	9.5		8.4		1.2		14.3	%
Total net sales	Total net sales	$	72.4	$	72.4	$	0.1	0.1	%	$	203.0	$	225.1	$	(22.2)	(9.8)	%	Total net sales	$	74.6	$	68.8	$	5.8	8.4	%	$	144.1	$	130.5	$	13.5	10.4	%

Gross profit	Gross profit	$	23.8	$	24.2	$	(0.4)	(1.7)	%	$	65.4	$	72.2	$	(6.9)	(9.5)	%	Gross profit	$	25.5	$	22.8	$	2.7	12.0	%	$	48.0	$	41.6	$	6.4	15.4	%
Selling, general and administrative expenses	Selling, general and administrative expenses	$	18.8	$	19.2	$	(0.4)	(1.9)	%	$	54.4	$	60.8	$	(6.4)	(10.6)	%	Selling, general and administrative expenses	$	19.9	$	18.5	$	1.4	7.5	%	$	39.3	$	35.5	$	3.8	10.6	%
Amortization of intangible assets	Amortization of intangible assets	$	—	$	0.3	$	(0.2)	(87.0)	%	$	0.2	$	1.4	$	(1.2)	(87.6)	%	Amortization of intangible assets	$	—	$	0.1	$	—	(37.5)	%	$	0.1	$	0.1	$	(0.1)	(46.6)	%

Interest expense, net	Interest expense, net	$	0.5	$	0.9	$	(0.4)	(43.2)	%	$	1.7	$	3.1	$	(1.4)	(45.6)	%	Interest expense, net	$	0.4	$	0.6	$	(0.1)	(22.6)	%	$	0.9	$	1.2	$	(0.3)	(26.8)	%
Income tax provision	Income tax provision	$	1.3	$	1.2	$	0.1	5.2	%	$	2.9	$	2.5	$	0.5	18.5	%	Income tax provision	$	2.0	$	1.2	$	0.8	73.2	%	$	2.8	$	1.7	$	1.1	69.5	%
Net income attributable to ARC	Net income attributable to ARC	$	3.2	$	2.8	$	0.4	13.9	%	$	6.5	$	4.9	$	1.6	32.5	%	Net income attributable to ARC	$	3.3	$	2.6	$	0.7	26.7	%	$	5.2	$	3.4	$	1.9	55.6	%
Non-GAAP (2)	Non-GAAP (2)																	Non-GAAP (2)
Adjusted net income attributable to ARC (2)	Adjusted net income attributable to ARC (2)	$	3.2	$	2.9	$	0.3	11.2	%	$	6.8	$	5.3	$	1.5	28.0	%	Adjusted net income attributable to ARC (2)	$	3.7	$	2.6	$	1.1	39.8	%	$	5.7	$	3.6	$	2.1	59.2	%
EBITDA (2)	EBITDA (2)	$	11.0	$	12.1	$	(1.1)	(9.2)	%	$	30.1	$	33.3	$	(3.2)	(9.6)	%	EBITDA (2)	$	10.9	$	10.7	$	0.2	2.0	%	$	19.5	$	19.1	$	0.4	2.2	%
Adjusted EBITDA (2)	Adjusted EBITDA (2)	$	11.5	$	12.5	$	(1.1)	(8.4)	%	$	31.3	$	34.6	$	(3.3)	(9.5)	%	Adjusted EBITDA (2)	$	11.3	$	11.1	$	0.3	2.3	%	$	20.4	$	19.9	$	0.6	2.8	%

(1)Column does not foot ~~or crossfoot~~ due to rounding.

(2)See "Non-GAAP Financial Measures" ~~on pg. 26~~following "Results of Operations" for ~~additional information.~~definitions, reconciliations and more information related to our Non-GAAP disclosures.

The following table provides information on the percentages of certain items of selected financial data as a percentage of net sales for the periods indicated:


		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 June 30,				Six Months Ended June 30,
		2021 (1)		2020(1)		2021 (1)		2020			2022 (1)		2021 (1)		2022(1)		2021(1)
Net sales	Net sales	100.0	%	100.0	%	100.0	%	100.0	%	Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	Cost of sales	67.2		66.6		67.8		67.9		Cost of sales	65.8		66.9		66.7		68.1
Gross profit	Gross profit	32.8		33.4		32.2		32.1		Gross profit	34.2		33.1		33.3		31.9
Selling, general and administrative expenses	Selling, general and administrative expenses	26.0		26.5		26.8		27.0		Selling, general and administrative expenses	26.7		27.0		27.3		27.2
Amortization of intangible assets	Amortization of intangible assets	0.1		0.4		0.1		0.6		Amortization of intangible assets	—		0.1		—		0.1

Income from operations	Income from operations	6.8		6.5		5.3		4.5		Income from operations	7.5		6.1		6.0		4.5

Interest expense, net	Interest expense, net	0.7		1.2		0.8		1.4		Interest expense, net	0.6		0.8		0.6		0.9
Income before income tax provision	Income before income tax provision	6.1		5.3		4.5		3.1		Income before income tax provision	6.9		5.3		5.4		3.6
Income tax provision	Income tax provision	1.8		1.7		1.5		1.1		Income tax provision	2.7		1.7		1.9		1.3
Net income	Net income	4.3		3.6		3.1		2.0		Net income	4.2		3.6		3.5		2.4
Loss attributable to the noncontrolling interest	Loss attributable to the noncontrolling interest	0.1		0.2		0.2		0.2		Loss attributable to the noncontrolling interest	0.2		0.2		0.2		0.2
Net income attributable to ARC	Net income attributable to ARC	4.4	%	3.9	%	3.2	%	2.2	%	Net income attributable to ARC	4.4	%	3.7	%	3.6	%	2.6	%
Non-GAAP (2)	Non-GAAP (2)									Non-GAAP (2)
EBITDA (2)	EBITDA (2)	15.2	%	16.7	%	14.8	%	14.8	%	EBITDA (2)	14.6	%	15.5	%	13.6	%	14.6	%
Adjusted EBITDA (2)	Adjusted EBITDA (2)	15.9	%	17.3	%	15.4	%	15.4	%	Adjusted EBITDA (2)	15.2	%	16.1	%	14.2	%	15.2	%

(1)Column does not foot due to rounding.

2324

Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2021~~2022 Compared to Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2020~~2021

Net Sales

Net sales for the three and six months ended ~~September~~June 30, ~~2021~~2022 increased ~~0.1%~~8.4% and 10.4%, respectively, compared to the same ~~period~~periods in ~~2020.~~2021. The increase in net sales in ~~the third quarter of 2021~~2022 is primarily due to ~~increasing year-over-year~~the expansion of the number of industries we serve and an increase in sales of our services to existing customers. The increase in economic activity ~~as the negative effects of the COVID-19 pandemic began to subside. Sales~~ in ~~the third quarter also benefited from targeted marketing of services to address the changing graphic printing and scanning needs of customers.~~

~~Net sales for the nine months ended September 30, 2021 decreased 9.8%~~2022 as compared to 2021 has also contributed to the ~~same period in 2020. The decrease in net~~ sales ~~is primarily due to stronger pre-pandemic results during the three months ended March 31, 2020, which are included in the comparative period.~~growth.

~~CDIM~~Digital Printing. Year-over-year sales of ~~CDIM~~Digital Printing services ~~decreased $2.2~~increased $3.1 million, or ~~4.7%~~7.1%, for the three months ended ~~September~~June 30, ~~2021 compared to the same period in 2020.~~2022. Year-over-year sales of ~~CDIM~~Digital Printing services ~~decreased $11.9~~increased $7.6 million, or ~~8.7%~~9.4%, for the ~~nine~~six months ended ~~September~~June 30, ~~2021 compared~~2022. The increase is due to ~~the same period~~an increase in ~~2020. CDIM~~digital color graphic printing from new and existing customers, as well as an increase in sales in digital plan printing from our construction-oriented customers. Digital Printing services represented 62% and 61% of total net sales for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, respectively, compared to ~~65%~~63% and ~~61%~~62% for the three and ~~nine~~six months ended ~~September~~June 30, 2020, respectively. The impact of the COVID-19 pandemic on sales from CDIM was not as pronounced as it was on other parts of our business due to the changes we made in 2019 and 2020 to expand the sale of our products and services beyond the construction vertical ("Expanded Offerings"), and to improve our sales and marketing functions. During the third quarter of 2021, the year-over-year sales decrease was due to reduced demand of graphic printing related to the COVID-19 pandemic, partially offset by sales of our Expanded Offerings and demand from new and existing customers driven by increases in general economic activity.2021.

MPS. Year-over-year sales of MPS services for the three months ended ~~September~~June 30, ~~2021~~2022 increased ~~$0.8~~$1.2 million, or ~~4.8%~~6.9%. ~~MPS sales increased as work-from-home directives ended for some of our customers, which in turn, led to increased demand for our services performed on site.~~

~~Year-over year~~Year-over-year sales of MPS services for the ~~nine~~six months ended ~~September~~June 30, 2021 ~~decreased $7.4~~increased $2.6 million, or ~~12.0%~~7.2%. The ~~decline~~increase in MPS sales reflect an increase in on-site printing volume as moderation of work-from-home directives encouraged more employees to return to offices during the nine months ended September 30, 2021, was primarily caused by employer work-from-home directives issued in 2020 that significantly reduced the volume of printing done in our customers' offices. Declines in print volumes were mitigated byperiod, as well as continuing ~~MPS~~ activity on construction job sites ~~and by customers who accepted minimum print volumes as a part~~where our equipment is often placed in job trailers for the duration of ~~their MPS agreement.~~building projects.

MPS sales represented approximately 26% ~~and 27%~~ of total net sales for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021, respectively,~~2022, compared to ~~24%~~26% and 27% for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021.

The number of MPS locations ~~have declined slightly year over year to~~has remained relatively flat year-over-year at approximately ~~10,770~~10,800 as of ~~September~~June 30, ~~2021, representing a net decrease of approximately 30 locations compared to September 30, 2020.~~2022 and 2021.

~~AIM~~Scanning and Digital Imaging. Year-over-year sales of ~~AIM~~Scanning and Digital Imaging services increased ~~$1.2~~$1.0 million, or ~~40.0%~~31.5%, and ~~$1.2~~$2.2 million or ~~13.3%~~34.5% for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, respectively. The increase in sales of our ~~AIM~~Scanning and Digital Imaging services was primarily attributable to ~~the end of work-from-home directives for some of our customers which resulted in greater~~increased demand for ~~our scanning services.~~paper-to-digital document conversions in re-opened offices. We continue to drive an expansion of our addressable market for ~~AIM~~Scanning and Digital Imaging services bywith increased marketing activity, as well as targeting building owners and facility managers that require on-demand access to their legacy documents to operate their assets efficiently. We believe that, with the expansion of ~~our addressable market~~the markets and industries we serve and the desire of our existing customers to have digital access to documents, our ~~AIM~~Scanning and Digital Imaging services will continue to grow in the future.

Equipment and Supplies Sales. Year-over-year sales of Equipment and Supplies increased ~~$0.3~~$0.4 million, or ~~5.5%~~9.3%, for the three months ended ~~September~~June 30, ~~2021 compared to the same period in 2020. The increase reflects more favorable economic conditions in 2021 when compared to the third quarter of 2020, especially in the U.S.~~

2022. Year-over-year sales of Equipment and Supplies ~~decreased $4.1~~increased $1.2 million, or ~~23.5%~~14.3%, for the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022. The ~~decline in Equipment and Supplies sales for the nine months ended September 30, 2021 was primarily~~increase is driven by demand from offices and job sites as they re-opened to employees, especially in the economic slowdown in China related to the COVID-19 pandemic, which decreased sales from UNIS Document Solutions Co. Ltd (“UDS”), our Chinese joint venture. Equipment and Supplies sales at UDS were $1.1 million and $2.7 million for the three and nine months ended September 30, 2021, respectively, compared to $1.3 million and $6.1 million for the three and nine months ended September 30, 2020.

U.S.

Gross Profit

During the three months ended ~~September~~June 30, ~~2021,~~2022, gross profit ~~and gross margin decreased slightly~~increased to ~~$23.8~~$25.5 million, or ~~32.8%~~34.2%, compared to ~~$24.2~~$22.8 million, or ~~33.4%~~33.1% during ~~the three months ended September 30, 2020, on sales that were flat compared to prior year.~~

During the nine months ended September 30, 2021, gross profit decreased to $65.4 million and gross margin increased to 32.2%, compared to $72.2 million, or 32.1% during the nine months ended September 30, 2020, on a sales decline of $22.2 million.

~~During~~ the three months ended June 30, ~~2020, we began to reconfigure our operating structure and costs to serve new customer needs and to reflect the reduction in our revenues as a result of the COVID-19 pandemic. The leverage provided~~2021, primarily driven by the ~~new and permanent cost structure resulted~~increase in ~~current year and prior year third quarter margins being above 32%. The benefits~~net sales of $5.8 million.

During the six months ended June 30, 2022, gross profit increased to $48.0 million, or 33.3%, compared to $41.6 million, or 31.9% during the six months ended June 30, 2021, primarily driven by the increase in net sales of $13.5 million.

Gross margin improvement was largely driven by the new cost structure ~~also increased year-over-year~~we put in place in 2020, and through our efforts to drive more work through our service centers which allows us to leverage our infrastructure, cross-trained workforce, and production-grade equipment. The improved gross ~~margin~~margins driven by our ability to better leverage our costs, were partially offset by an increase in ~~the first nine-months of 2021 by 10 basis points, despite significantly lower sales compared to the same period in 2020.~~labor and material costs resulting from current inflationary pressures.

Selling, General and Administrative Expenses

Selling, general and administrative expenses ~~decreased $0.4~~increased by $1.4 million, or ~~1.9%~~7.5%, for the three months ended ~~September~~June 30, ~~2021,~~2022 compared to the three months ended ~~September~~June 30, ~~2020, primarily driven by reduced bonuses and commissions paid.~~

2021. Selling, general and administrative expenses ~~decreased $6.4~~increased $3.8 million or 10.6%, for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022 compared to the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. The ~~reduction was~~increases are due to ~~cost savings initiated~~selective increases in ~~response~~salaries to retain existing employees or attract new hires, as well as commissions, bonuses, and travel

resulting from increased sales and profitability. It should be noted that in the ~~current~~first quarter of 2021, salary reductions as a result of the COVID-19 pandemic ~~that included headcount reductions, suspension of business travel, reduced consulting expenses, reduced commissions, and the elimination of discretionary spending.~~were still in effect.

Amortization of Intangibles

Amortization of intangibles ~~was~~decreased to less than $0.1 ~~million and $0.2~~ million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021, respectively, a decrease of $0.2~~2022, compared to $0.1 million ~~and $1.2 million compared to~~for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020, respectively,~~2021, due to the completed amortization of certain customer relationship intangibles related to historical acquisitions.

Interest Expense, Net

Net interest expense of ~~$0.5~~$0.4 million and ~~$1.7~~$0.9 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, respectively, decreased ~~by $0.4~~compared to $0.6 million and ~~$1.4~~$1.2 million ~~compared to~~for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020, respectively,~~2021, respectively. The decrease is due to the continued ~~pay-down~~pay down of our long-term debt, aand decrease in ~~LIBOR, and a decrease in the~~ bank debt interest spread due to anthe improvement in our leverage ratio.

Income Taxes

We recorded an income tax provision of ~~$1.3~~$2.0 million and ~~$2.9~~$2.8 million ~~and~~ in relation to pretax income of ~~$4.4~~$5.1 million and ~~$9.2~~$7.8 million for the three and ~~nine~~six months ended ~~September~~June 30, 2022, respectively, which resulted in an effective income tax rate of 39.0% and 36.0%, respectively. Our effective income tax rate for the three and six months ended June 30, 2022 was primarily impacted by state taxes, non-deductible compensation, certain stock-based compensation and other non-deductible expenses. Excluding the impact of certain stock-based compensation, our effective income tax rate would have been 30.3% and 29.8%, respectively, for the three and six months ended June 30, 2022.

By comparison, we recorded an income tax provision of $1.2 million and $1.7 million in relation to pretax income of $3.6 million and $4.7 million for the three and six months ended June 30, 2021, respectively, which resulted in an effective income tax rate of ~~29.3%~~31.9% and ~~32.2%.~~34.9%, respectively. Our effective income tax rate for the three and ~~nine~~six months ended ~~September~~June 30, 2021 was primarily ~~affected~~impacted by certain stock-based compensation, a change in valuation allowances against certain deferred tax assets and non-deductible expenses. Excluding the impact of the change in valuation allowances, certain nondeductible stock-based compensation, and other discrete tax items, our effective income tax rate would have been ~~29.1%~~29.9% and ~~28.5%~~28.7%, respectively, for the three and ~~nine~~six months ended ~~September~~June 30, 2021.

By comparison, we 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%. The increase in our effective income tax rate for the three and nine months ended September 30, 2020, was primarily affected by certain stock-based compensation, a change in valuation allowances against certain deferred tax assets, and non-deductible expenses. Excluding the impact of the change in valuation allowances, certain nondeductible stock-based compensation, and other discrete tax items, our effective income tax rate would have been 28.4% and 28.7% for the three and nine months ended September 30, 2020.

We have a ~~$2.2~~$2.4 million valuation allowance against certain deferred tax assets as of ~~September~~June 30, ~~2021.~~

2022.

Noncontrolling Interest

Net loss attributable to noncontrolling interest represents 35% of the income/loss of UDS and its subsidiaries, which together comprise our Chinese joint venture operations.

Net Income Attributable to ARC

Net income attributable to ARC increased to ~~$3.2~~$3.3 million and ~~$6.5~~$5.2 million during the three and ~~nine~~six months ended ~~September~~June 30, 2022, respectively, as compared to $2.6 million and $3.4 million during the three and six months ended June 30, 2021, respectively. The increase in net income attributable to ARC ~~compared to~~was primarily driven by the ~~prior year period for~~increase in net sales and the ~~three and nine months ending September 30, 2020 was driven primarily by a reduction in amortization expense, and significantly lower net interest expense as a result of debt pay-downs and a~~year-to-date decrease in ~~LIBOR.~~depreciation expense of $2.2 million, partially offset by the increase in selling, general and administrative expenses described above. As hybrid work schedules reduced office printing volumes, our need for printing equipment has significantly decreased and reduced our depreciation expense.

EBITDA

EBITDA margin and Adjusted EBITDA margin is not a recognized measure under GAAP. When analyzing our operating performance, investors should use EBITDA margin and Adjusted EBITDA in addition to, and not as an alternative for, operating income or any other performance measure presented in accordance with GAAP. It is a measure we use to measure our performance and liquidity. We believe EBITDA margin and Adjusted EBITDA reflect an additional way of viewing aspects of our operations that, when viewed with our GAAP results, provides a more complete understanding of factors and trends affecting our business. We believe the measure is used by investors and is a useful indicator to measure our performance. Because not all companies use identical calculations, our presentation of EBITDA margin and Adjusted EBITDA may not be comparable to similarly titled measures of other companies. See Non-GAAP Financial Measures below for additional discussion.

EBITDA margin decreased to ~~15.2%~~14.6% for the three months ended ~~September~~June 30, ~~2021,~~2022, from ~~16.7%~~15.5% for the same period in ~~2020.~~2021. Excluding the effect of stock-based compensation, adjusted EBITDA margin decreased to ~~15.9%~~15.2% during the three months ended ~~September~~June 30, ~~2021,~~2022, as compared to ~~17.3%~~16.1% for the same period in ~~2020.~~2021. The decrease in adjusted EBITDA margin for the three and six months ended ~~September~~June 30, ~~2021,~~2022, was ~~primarily~~ due to the ~~decrease~~increase in ~~gross profit, excluding~~direct material and labor costs in absolute dollars and as a percentage of sales due to the ~~impact of depreciation.~~current market inflationary pressures.

EBITDA margin ~~was 14.8%~~decreased to 13.6% for the ~~nine~~six months ended ~~September~~June 30, ~~2021 and 2020.~~2022, from 14.6% for the same period in 2021. Excluding the effect of stock-based compensation, adjusted EBITDA margin ~~was 15.4%~~decreased to 14.2% during the ~~nine~~three months ended ~~September~~June 30, ~~2021~~2022, as compared to 15.2% for the same period in 2021. The decrease in adjusted EBITDA margin for the six months ended June 30, 2022, was due to the increase in direct material and ~~2020.~~labor costs in absolute dollars and as a percentage of sales due to the current market inflationary pressures.

Impact of Inflation

We ~~do not~~ believe we have been able to minimize the impact of inflation ~~has had a significant effect on our operations. Price~~to an immaterial amount as price increases for raw materials, such as paper and fuel charges, ~~typically~~mostly have been, and we expect will continue to be, passed on to customers in the ordinary course of business.

Non-GAAP Financial Measures

EBITDA and related ratios presented in this report are supplemental measures of our performance that are not required by or presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These measures are not measurements of our financial performance under GAAP and should not be considered as alternatives to net income, income from operations, net income margin or any other performance measures derived in accordance with GAAP or as an alternative to cash flows from operating, investing or financing activities as a measure of our liquidity.

EBITDA represents net income before interest, taxes, depreciation and amortization. EBITDA margin is a non-GAAP measure calculated by dividing EBITDA by net sales.

We have presented EBITDA and related ratios because we consider them important supplemental measures of our performance and liquidity. We believe investors may also find these measures meaningful, given how our management makes use of them. The following is a discussion of our use of these measures.

We use EBITDA to measure and compare the performance of our operating ~~segments.~~divisions. Our operating ~~segments’~~divisions’ financial performance includes all of the operating activities except debt and taxation which are managed at the corporate level for U.S. operating ~~segments.~~divisions. We use EBITDA to compare the performance of our operating ~~segments~~divisions and to measure performance for determining consolidated-level compensation. In addition, we use EBITDA to evaluate potential acquisitions and potential capital expenditures.

EBITDA and related ratios have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are as follows:

•They do not reflect our cash expenditures, or future requirements for capital expenditures and contractual commitments;

•They do not reflect changes in, or cash requirements for, our working capital needs;

•They do not reflect the significant interest expense, or the cash requirements necessary, to service interest or principal payments on our debt;

•Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements; and

•Other companies, including companies in our industry, may calculate these measures differently than we do, limiting their usefulness as comparative measures.

Because of these limitations, EBITDA and related ratios should not be considered as measures of discretionary cash available to us to invest in business growth or to reduce our indebtedness. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA and related ratios only as supplements.

Our presentation of adjusted net income and adjusted EBITDA over certain periods is an attempt to provide meaningful comparisons to our historical performance for our existing and future investors. The unprecedented changes in our end markets

over the past several years have required us to take measures that are unique in our history and specific to individual circumstances. Comparisons inclusive of these actions make normal financial and other performance patterns difficult to discern under a strict GAAP presentation. Each non-GAAP presentation, however, is explained in detail in the reconciliation tables below.

Specifically, we have presented adjusted net income attributable to ARC and adjusted earnings per share attributable to ARC shareholders for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 to reflect the exclusion of changes in the valuation allowances related to certain deferred tax assets and other discrete tax items. This presentation facilitates a meaningful comparison of our operating results for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020.~~2021. We believe these ~~charges~~changes were the result of items which are not indicative of our actual operating performance.

We have presented adjusted EBITDA for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 to exclude stock-based compensation expense. The adjustment to exclude stock-based compensation expense to EBITDA is consistent with the definition of adjusted EBITDA in our 2021 Credit Agreement; therefore, we believe this information is useful to investors in assessing our financial performance.

The following is a reconciliation of cash flows provided by operating activities to EBITDA:

Three Months Ended
September 30, Nine Months Ended
September 30,
(In thousands) 2021 2020 2021 2020
Cash flows provided by operating activities $ 11,285 $ 12,760 $ 28,174 $ 39,015
Changes in operating assets and liabilities (328) (808) 1,001 (6,996)
Non-cash expenses, including depreciation and amortization (7,820) (9,324) (22,958) (27,509)
Income tax provision 1,298 1,234 2,949 2,489
Interest expense, net 495 871 1,691 3,111
Loss attributable to the noncontrolling interest 41 163 324 425
Depreciation and amortization 6,029 7,223 18,928 22,755
EBITDA $ 11,000 $ 12,119 $ 30,109 $ 33,290


	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2022		2021		2022		2021
Cash flows provided by operating activities	$	8,598	$	11,514	$	11,529	$	16,889
Changes in operating assets and liabilities	2,094		(1,165)		7,679		1,329
Non-cash expenses, including depreciation and amortization	(7,566)		(7,881)		(14,226)		(15,138)
Income tax provision	2,001		1,155		2,799		1,651
Interest expense, net	446		576		876		1,196
Loss attributable to the noncontrolling interest	136		106		252		283
Depreciation and amortization	5,188		6,375		10,617		12,899
EBITDA	$	10,897	$	10,680	$	19,526	$	19,109

The following is a reconciliation of net income attributable to ARC Document Solutions, Inc. to EBITDA and adjusted EBITDA:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	(In thousands)	2021		2020		2021		2020		(In thousands)	2022		2021		2022		2021
Net income attributable to ARC Document Solutions, Inc.	Net income attributable to ARC Document Solutions, Inc.	$	3,178	$	2,791	$	6,541	$	4,935	Net income attributable to ARC Document Solutions, Inc.	$	3,262	$	2,574	$	5,234	$	3,363
Interest expense, net	Interest expense, net	495		871		1,691		3,111		Interest expense, net	446		576		876		1,196
Income tax provision	Income tax provision	1,298		1,234		2,949		2,489		Income tax provision	2,001		1,155		2,799		1,651
Depreciation and amortization	Depreciation and amortization	6,029		7,223		18,928		22,755		Depreciation and amortization	5,188		6,375		10,617		12,899
EBITDA	EBITDA	11,000		12,119		30,109		33,290		EBITDA	10,897		10,680		19,526		19,109

Stock-based compensation	Stock-based compensation	481		413		1,224		1,333		Stock-based compensation	439		404		890		743
Adjusted EBITDA	Adjusted EBITDA	$	11,481	$	12,532	$	31,333	$	34,623	Adjusted EBITDA	$	11,336	$	11,084	$	20,416	$	19,852

The following is a reconciliation of net income margin attributable to ARC Document Solutions, Inc. to EBITDA margin and adjusted EBITDA margin:

Three Months Ended
September 30, Nine Months Ended
September 30,
2021
2020 (1)
2021 2020
Net income margin attributable to ARC Document Solutions, Inc. 4.4 % 3.9 % 3.2 % 2.2 %
Interest expense, net 0.7 1.2 0.8 1.4
Income tax provision 1.8 1.7 1.5 1.1
Depreciation and amortization 8.3 10.0 9.3 10.1
EBITDA margin 15.2 16.7 14.8 14.8
Stock-based compensation 0.7 0.6 0.6 0.6
Adjusted EBITDA margin 15.9 % 17.3 % 15.4 % 15.4 %

~~(1) Column does not foot due to rounding.~~


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Net income margin attributable to ARC Document Solutions, Inc.	4.4	%	3.7	%	3.6	%	2.6	%
Interest expense, net	0.6		0.8		0.6		0.9
Income tax provision	2.7		1.7		1.9		1.3
Depreciation and amortization	7.0		9.3		7.4		9.9
EBITDA margin	14.6		15.5		13.6		14.6




Stock-based compensation	0.6		0.6		0.6		0.6
Adjusted EBITDA margin	15.2	%	16.1	%	14.2	%	15.2	%

The following is a reconciliation of net income attributable to ARC Document Solutions, Inc. to adjusted net income and adjusted earnings per share attributable to ARC Document Solutions, Inc.:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
(In thousands, except per share amounts)	(In thousands, except per share amounts)	2021		2020		2021		2020		(In thousands, except per share amounts)	2022		2021		2022		2021
Net income attributable to ARC Document Solutions, Inc.	Net income attributable to ARC Document Solutions, Inc.	$	3,178	$	2,791	$	6,541	$	4,935	Net income attributable to ARC Document Solutions, Inc.	$	3,262	$	2,574	$	5,234	$	3,363

Deferred tax valuation allowance and other discrete tax items	Deferred tax valuation allowance and other discrete tax items	37		99		236		358		Deferred tax valuation allowance and other discrete tax items	432		68		438		199
Adjusted net income attributable to ARC Document Solutions, Inc.	Adjusted net income attributable to ARC Document Solutions, Inc.	$	3,215	$	2,890	$	6,777	$	5,293	Adjusted net income attributable to ARC Document Solutions, Inc.	$	3,694	$	2,642	$	5,672	$	3,562

Actual:	Actual:									Actual:
Earnings per share attributable to ARC Document Solutions, Inc. shareholders:	Earnings per share attributable to ARC Document Solutions, Inc. shareholders:									Earnings per share attributable to ARC Document Solutions, Inc. shareholders:
Basic	Basic	$	0.08	$	0.07	$	0.15	$	0.11	Basic	$	0.08	$	0.06	$	0.12	$	0.08
Diluted	Diluted	$	0.07	$	0.07	$	0.15	$	0.11	Diluted	$	0.08	$	0.06	$	0.12	$	0.08
Weighted average common shares outstanding:	Weighted average common shares outstanding:									Weighted average common shares outstanding:
Basic	Basic	42,073		42,747		42,213		43,017		Basic	42,250		42,304		42,172		42,284
Diluted	Diluted	42,724		42,918		42,629		43,160		Diluted	43,490		42,597		43,630		42,613
Adjusted:	Adjusted:									Adjusted:
Earnings per share attributable to ARC Document Solutions, Inc. shareholders:	Earnings per share attributable to ARC Document Solutions, Inc. shareholders:									Earnings per share attributable to ARC Document Solutions, Inc. shareholders:
Basic	Basic	$	0.08	$	0.07	$	0.16	$	0.12	Basic	$	0.09	$	0.06	$	0.13	$	0.08
Diluted	Diluted	$	0.08	$	0.07	$	0.16	$	0.12	Diluted	$	0.08	$	0.06	$	0.13	$	0.08
Weighted average common shares outstanding:	Weighted average common shares outstanding:									Weighted average common shares outstanding:
Basic	Basic	42,073		42,747		42,213		43,017		Basic	42,250		42,304		42,172		42,284
Diluted	Diluted	42,724		42,918		42,629		43,160		Diluted	43,490		42,597		43,630		42,613

Liquidity and Capital Resources

Our principal sources of cash have been cash flows from operations and borrowings under our debt and lease agreements. Our recent historical uses of cash have been for ongoing operations, payment of principal and interest on outstanding debt obligations, capital expenditures ~~dividends~~ and stock repurchases.

Total cash and cash equivalents as of ~~September~~June 30, ~~2021~~2022 was ~~$54.9~~$44.6 million. Of this amount, ~~$16.6~~$4.0 million was held in foreign countries, with ~~$14.6~~$2.8 million held in China. Repatriation of some of our cash and cash equivalents in foreign countries could be subject to delay for local country approvals and could have potential adverse tax consequences. As a result of holding cash and cash equivalents outside of the U.S., our financial flexibility may be reduced. During the second quarter of 2022, we completed an $11.2 million capital distribution from our Chinese joint venture ("JV"). As we are 65% owners, $7.3 million came to our

US operations, and 35% or $3.9 million went to our JV partner, thus resulting in a $3.9 million decrease in our consolidated cash and noncontrolling interest balance sheet account.

Supplemental information pertaining to our historical sources and uses of cash is presented as follows and should be read in conjunction with our interim Condensed Consolidated Statements of Cash Flows and notes thereto included elsewhere in this report.


		Nine Months Ended September 30,						Six Months Ended June 30,
(In thousands)	(In thousands)		2021		2020		(In thousands)		2022		2021
Net cash provided by operating activities	Net cash provided by operating activities		$	28,174	$	39,015	Net cash provided by operating activities		$	11,529	$	16,889
Net cash used in investing activities	Net cash used in investing activities		$	(3,100)	$	(4,803)	Net cash used in investing activities		$	(2,524)	$	(1,334)
Net cash used in financing activities	Net cash used in financing activities		$	(25,307)	$	(13,483)	Net cash used in financing activities		$	(19,434)	$	(18,364)

Operating Activities

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

The decrease in cash flows from operations during the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, compared to the same period in ~~2020, reflect normalized levels of cash generation and collectibles for the period, compared~~2021, was primarily due to the ~~same period in 2020 when aggressive measures were implemented to manage working capital~~timing of accounts receivable collections and ~~preserve cash in response to the COVID-19 pandemic.~~timing of payroll. Days sales outstanding, ~~(“DSO”)~~or DSO, was 54 days as of June 30, 2022 and 50 days as of ~~September~~June 30, ~~2021 and 51 as of September 30, 2020.~~2021. We are closely managing cash collections which have remained ~~relatively~~ consistent since the outbreak of the COVID-19 pandemic.

DSO is calculated by taking the respective years June 30th, accounts receivable balance divided by the net sales for the quarter multiplied by the number of total days in a quarter. Other companies, including companies in our industry, may calculate DSO differently than we do, limiting its usefulness as a comparative measure.

We have presented DSO because we consider it an important metric as it is a valuable indicator of the efficiency of the business and quality of our cash flows. We believe investors may also find this metric meaningful given the importance of cash flows from operations and management's ability to efficiently manage our working capital.

We use DSO to measure and compare the cash management performance of our operating divisions.

Investing Activities

Net cash used in investing activities was primarily related to capital expenditures. We incurred capital expenditures totaling ~~$3.4~~$2.7 million and ~~$5.1~~$1.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively. The ~~decrease~~year-over-year increase in capital expenditures is driven primarily by ~~a concerted effort to reduce and closely manage capital expenditures during~~ the ~~COVID-19 pandemic.~~fact that in the prior year we made fewer purchases than normal.

~~As we continue to foster~~Because our relationships with credit providers ~~and~~allow us to obtain attractive lease rates, we ~~have increasingly chosen~~usually choose to lease rather than purchase ~~equipment.~~equipment unless there is a compelling reason to do otherwise.

Financing Activities

Net cash of ~~$25.3~~$19.4 million used in financing activities during the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, primarily relates to payments on our revolver debt agreement, finance leases, dividends, share repurchases and ~~share repurchases.~~a capital distribution to the noncontrolling interest owner of our Chinese joint venture for $3.9 million.

Our cash position, working capital, and debt obligations as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 are shown below and should be read in conjunction with our interim Condensed Consolidated Balance Sheets and related notes contained elsewhere in this report.

(In thousands) September 30, 2021 December 31, 2020
Cash and cash equivalents $ 54,903 $ 54,950
Working capital $ 35,715 $ 32,500
Borrowings from revolving credit facility $ 47,500 $ 55,000
Other debt obligations 33,004 42,236
Total debt obligations $ 80,504 $ 97,236


(In thousands)	June 30, 2022		December 31, 2021
Cash and cash equivalents	$	44,595	$	55,929
Working capital	$	34,213	$	37,082

Borrowings from revolving credit facility	$	43,750	$	46,250
Other debt obligations	28,382		31,992
Total debt obligations	$	72,132	$	78,242

The ~~increase~~decrease of ~~$3.2~~$2.9 million in working capital was primarily driven by the decrease in cash of $11.2 million related to our capital distribution from our Chinese joint venture, partially offset by the increase in accounts receivable of $4.9 million and a $1.0 million increase in inventory, in addition to a decrease in the current portion of operating and finance lease liabilities, as we entered into fewer ~~leases since the beginning of the COVID-19 pandemic.~~leases. 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. The decrease in cash is in part due to the $3.9 million distribution to our Chinese joint venture partner as well as a timing difference in account receivables collections and payroll payments. We expect the cash balance to increase in the second half of 2022.

We believe that our current cash and cash equivalents balance of ~~$54.9~~$44.6 million, ~~combined with~~the availability under our ~~revolving credit facility,~~2021 Credit Agreement, the availability under our equipment lease lines, and cash flows provided by operations should be ~~sufficient~~adequate to cover the next twelve months and beyond of working capital needs, ~~leasing~~debt 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, reducing capital expenditures, reducing operating costs, initiating workforce reductions, and substantially reducing discretionary spending. See ~~“Debt Obligations”~~“Debt Obligations” section for further information related to our ~~revolving credit facility.~~2021 Credit Agreement.

~~We generate the majority~~A significant portion of our revenue across all of our product and services is generated from ~~sales of services and products to~~customers in 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, including the COVID-19 ~~pandemic which has already reduced non-residential and residential construction spending.~~pandemic. 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.

We have not been actively seeking growth through acquisition ~~nor do~~since 2009, and while we remain opportunistic with regard to opportunities, we don’t intend to pursue them in the near future.

Debt Obligations

Credit Agreement

On April 22, 2021, we entered into a Credit Agreement with U.S. Bank National Association, as administrative agent and the lender party thereto (the "2021 Credit Agreement"). The 2021 Credit Agreement provides for the extension of revolving loans in an aggregate principal amount not to exceed $70 million and replaces the ~~2014~~ Credit Agreement dated as of November 20, 2014, as amended (the "2014 Credit Agreement"). The 2021 Credit Agreement features terms similar to the 2014 Credit Agreement, including the ability to use excess cash of up to $15 million per year for restricted payments such as share repurchases and dividends. The obligation under the 2021 Credit Agreement matures on April 22, 2026.

The 2021 Credit Agreement also includes 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 2021 Credit Agreement, the amount of all such payments will be limited to $15 million during any twelve-month period. When calculating the fixed charge coverage ratio, we may exclude up to $10 million of such restricted payments that would otherwise constitute fixed charges in any twelve-month period.

As of ~~September~~June 30, ~~2021,~~2022, our borrowing availability under the revolving loan commitment was ~~$20.3~~$24.1 million, after deducting outstanding letters of credit of $2.2 million and outstanding revolving loans of ~~$47.5~~$43.8 million.

time to time, by U.S. Bank National Association as its “prime rate,” plus (ii) a margin ranging from 0.25% to 0.75%, based on our Total Leverage Ratio. As of June 30, 2022, LIBOR loans borrowed under the 2021 Credit Agreement accrued interest at 2.9%. We pay certain recurring fees with respect to the 2021 Credit Agreement, including administration fees to the administrative agent.

We will transition to Secured Overnight Financing Rates ("SOFR") by March 31, 2023 and away from LIBOR loan rates. We believe this transition will not have a material impact on our interest expense for the year of transition.

Subject to certain exceptions, including, in certain circumstances, reinvestment rights, the loans extended under the 2021 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 2021 Credit Agreement); the net proceeds from certain issuances of equity securities; and net proceeds of certain insurance recoveries and condemnation events.

The 2021 Credit Agreement contains customary representations and warranties, subject to limitations and exceptions, and customary covenants restricting the ability (subject to various exceptions) ~~of us~~we and our ~~subsidiaries to:~~subsidiaries: 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~~make certain distributions or repurchase our equity ~~interest~~securities or those of ~~us or~~ our subsidiaries; change the nature of their business; prepay or amend certain indebtedness; engage in certain transactions with affiliates; amend ~~our~~their organizational documents; or enter into certain restrictive agreements. In addition, the 2021 Credit Agreement contains financial covenants which requires ~~us to~~we maintain (i) at all times, a Total Leverage Ratio in an amount not to exceed 2.75 to 1.00; and (ii) a Fixed Charge Coverage Ratio (as defined in the 2021 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, 2021. 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 other options available to us, we currently believe we will be in compliance with our covenants for the remainder of the term ofunder the 2021 Credit ~~Agreement. The impact~~Agreement as 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" ~~of our Annual Report on Form 10-K for the year ended December 31, 2020~~, ~~for more information.~~June 30, 2022.

The obligations of our subsidiary that is the borrower under the 2021 Credit Agreement are guaranteed by us and each of our other United States domestic subsidiaries. The 2021 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~~June 30, ~~2021,~~2022, we had ~~$33.0~~$28.4 million of finance lease obligations outstanding, with a weighted average interest rate of 4.8% and maturities between ~~2021~~2022 and 2027. Refer to Note 7, Leasing, as previously disclosed on our Annual Form 10-K for the fiscal year ended for December 31, ~~2020~~2021, for the schedule on maturities of finance lease liabilities, as there have been no material changes to report as of ~~September~~June 30, ~~2021.~~2022.

~~Off-Balance Sheet Arrangements~~

~~As of September 30, 2021, 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 7, Leasing, as previously disclosed inon our Annual ~~Report on~~ Form 10-K for the fiscal year ended for December 31, ~~2020~~2021, for the schedule on maturities of operating lease liabilities as there were no material changes as of ~~September~~June 30, ~~2021.~~2022.

Legal Proceedings. We are involved, and will continue to be involved, in legal proceedings arising out of the conduct of our business, including commercial and employment-related lawsuits. Some of these lawsuits purport or may be determined to be class actions and seek substantial damages, and some may remain unresolved for several years. We establish accruals for specific legal proceedings when it is considered probable that a loss has been incurred and the amount of the loss can be reasonably estimated. ~~Our evaluation of~~We evaluate whether a loss is reasonably probable is based on our assessment and consultation with legal counsel regarding the ultimate outcome of the matter. As of ~~September~~June 30, ~~2021~~2022, we have accrued for the potential impact of loss contingencies that are probable and reasonably estimable. We do not currently believe that the ultimate resolution of any of these matters will have a material adverse effect on our results of operations, financial condition, or cash flows. However, the results of these matters cannot be predicted with certainty, and an unfavorable resolution of one or more of these matters could have a material adverse effect on our results of operations, financial condition, or cash flows.

~~Critical Accounting Policies~~

~~Critical accounting policies are those accounting policies~~Environmental Matters. We have accrued liabilities for environmental assessment and remediation matters relating to operations at certain locations conducted in the past by predecessor companies that ~~we believe are important~~do not relate to our current operations. We have accrued these liabilities because it is probable that a loss or cost will be incurred and the ~~portrayal~~amount of ~~our financial condition and results and require our most difficult, subjective~~loss or ~~complex judgments, often~~cost can be reasonably estimated. These estimates could change as a result of changes in planned remedial actions, remediation technologies, site conditions, the ~~need~~estimated time to complete remediation, environmental laws and regulations, and other factors. Because of the uncertainties associated with environmental assessment and remediation activities, our future expenses relating to these matters could be higher than the liabilities we have accrued. Based upon current information, we believe that the impact of the resolution of these matters would not be, individually or in the aggregate, material to our financial position, results of operations or cash flows.

Critical Accounting Policies and Significant Judgements and Estimates

Our management prepares financial statements in conformity with GAAP. When we prepare these consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates and judgments, including those related to accounts receivable, inventories, deferred tax assets, goodwill and intangible assets, long-lived assets and leases. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for our judgments about the ~~effect~~carrying values of ~~matters~~assets and liabilities that are ~~inherently uncertain.~~not readily apparent from other sources. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. Our Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021, includes a description of certain critical accounting policies, including those with respect to goodwill, revenue recognition, and income ~~taxes.~~taxes, which we believe are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management's judgments and estimates. There have been no material changes to ~~our~~the critical accounting policies, significant judgements and estimates described in our Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021.

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, 2021, the Company performed its ~~annual~~ 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 which simplifies subsequent goodwill measurement by eliminating step two from the goodwill impairment test.

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.

The results of the annual goodwill impairment test, as of September 30, 2021, were as follows:


(Dollars in thousands)	Number of Reporting Units	Representing Goodwill of
No goodwill balance	6	$	—

Fair value of reporting units exceeds their carrying values by more than 50%	2	121,051
	8	$	121,051

Based upon a sensitivity analysis, a reduction of approximately 50-basis points of projected EBITDA in ~~2021~~2020 and beyond, assuming all other assumptions remain constant, would result in no impairment of goodwill.

Based upon a separate sensitivity analysis, a 50-basis point increase to the weighted average cost of capital would result in no

further impairment of goodwill.

Given the uncertainty regarding the ultimate financial impact of the COVID-19 pandemic and the proceeding economic recovery, and the changing document and printing needs of our customers and the uncertainties regarding the effect on our business, there can be no assurance that the estimates and assumptions made for purposes of our goodwill impairment testing in 2021 will prove to be accurate predictions of the future. If our assumptions, including forecasted EBITDA of certain reporting units, are not achieved, or our assumptions change regarding disruptions caused by the pandemic, and the impact on the recovery from COVID-19 change, then we may be required to record goodwill impairment charges in future periods, whether in connection with our next annual impairment testing in the third quarter of 2022, 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 we regularly perform our 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.

Income Taxes

Deferred tax assets and liabilities reflect temporary differences between the amount of assets and liabilities for financial and tax reporting purposes. Such amounts are adjusted, as appropriate, to reflect changes in tax rates expected to be in effect when the temporary differences reverse. A valuation allowance is recorded to reduce our deferred tax assets to the amount that is more

likely than not to be realized. Changes in tax laws or accounting standards and methods may affect recorded deferred taxes in future periods.

When establishing a valuation allowance, we consider future sources of taxable income such as future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards and tax planning strategies. A tax planning strategy is an action that: is prudent and feasible; an enterprise ordinarily might not take but would take to prevent an operating loss or tax credit carryforward from expiring unused; and would result in realization of deferred tax assets. In the event we determine that our deferred tax assets, more likely than not, will not be realized in the future, the valuation adjustment to the deferred tax assets will be charged to earnings in the period in which we make such a determination. We have a ~~$2.2~~$2.4 million valuation allowance against certain deferred tax assets as of ~~September~~June 30, ~~2021.~~2022.

In future quarters we will continue to evaluate our historical results for the preceding twelve quarters and our future projections to determine whether we will generate sufficient taxable income to utilize our deferred tax assets, and whether a valuation allowance is required.

We calculate our current and deferred tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed in subsequent years. Adjustments based on filed returns are recorded when identified.

Income taxes have not been provided on certain undistributed earnings of foreign subsidiaries because such earnings are considered to be permanently reinvested.

The amount of taxable income or loss we report to the various tax jurisdictions is subject to ongoing audits by federal, state and foreign tax authorities. We estimate of the potential outcome of any uncertain tax issue is subject to management’s assessment of relevant risks, facts, and circumstances existing at that time. We use a more-likely-than-not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. We record a liability for the difference between the benefit recognized and measured and tax position taken or expected to be taken on its tax return. To the extent that our assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made. We report tax-related interest and penalties as a component of income tax expense.

Recent Accounting Pronouncements

See Note 1, “Description of Business and Basis of Presentation” to our interim Condensed Consolidated Financial Statements for disclosure on recent accounting pronouncements not yet adopted.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are a smaller reporting company, as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, and are not required to provide the information required under this Item 3.

~~Not applicable.~~

Item 4. Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934 ("Exchange Act") are recorded, processed, summarized, and reported within the time periods specified in the U.S. Securities and Exchange Commission’s ("SEC") rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of ~~September~~June 30, ~~2021.~~2022. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that as of ~~September~~June 30, ~~2021,~~2022, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There were no changes to internal control over financial reporting during the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

3435

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

We are involved, and will continue to be involved, in legal proceedings arising out of the conduct of our business, including commercial and employment-related lawsuits. Some of these lawsuits purport or may be determined to be class actions and seek substantial damages, and some may remain unresolved for several years. We establish accruals for specific legal proceedings when it is considered probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Our evaluation of whether a loss is reasonably probable is based on our assessment and consultation with legal counsel regarding the ultimate outcome of the matter. As of ~~September~~June 30, ~~2021,~~2022, we have accrued for the potential impact of loss contingencies that are probable and reasonably estimable. We do not currently believe that the ultimate resolution of any of these matters will have a material adverse effect on our results of operations, financial condition, or cash flows. However, the results of these matters cannot be predicted with certainty, and an unfavorable resolution of one or more of these matters could have a material adverse effect on our results of operations, financial condition, or cash flows.

Item 1A. Risk Factors

Information concerning certain risks and uncertainties are set forth in "Part I - Item 1A. Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 filed with the SEC on February 24, ~~2021.~~2022.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

(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
July 1, 2021 - July 31, 2021 — — $ 9,039
August 1, 2021 - August 31, 2021 136 $ 2.70 136 $ 8,672
September 1, 2021 - September 30, 2021 74 $ 2.68 74 $ 8,475
Total 210 210


(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, 2022 - April 30, 2022	—	—		—	$	7,802
May 1, 2022 - May 31, 2022	193	$	3.13	193	$	7,198
June 1, 2022 - June 30, 2022	75	$	3.06	75	$	6,968
Total repurchases	268			268

(1) On May 1, 2019, ~~the Company~~we announced that ~~its~~our Board of Directors approved a stock repurchase program that authorizes ~~the Company~~us to purchase up to $15.0 million of ~~the Company's~~our outstanding common stock through March 31, 2021, which authorization was subsequently extended through March 31, 2023. Under the repurchase program, purchases of shares of common stock may be made from time to time in the open market, or in privately negotiated transactions, in compliance with applicable state and federal securities laws. The timing and amounts of any purchases will be based on market conditions and other factors including price, regulatory requirements, and capital availability. The stock repurchase program does not obligate us to acquire any specific number of shares in any period, and may be expanded, extended, modified or discontinued at any time without prior notice.

Item 5.Other Information

On August 2, 2022, the Company entered into an amendment to the Amended and Restated Executive Employment Agreement with Jorge Avalos, the Company’s Chief Financial Officer. Under the amendment to Mr. Avalos’ employment agreement, he is eligible to receive an annual long term equity incentive award of $100,000 per year, payable in the form of a stock option award under the Company’s 2021 Incentive Plan. The foregoing description of the amendment is qualified in its entirety by reference to the full text of the amendment, which is filed as Exhibit 10.49 to this Quarterly Report on Form 10-Q.

3536

Item 6. Exhibits


Exhibit Number						Description

3.1						Restated Certificate of Incorporation of the Registrant (filed as Exhibit 3.2 to the Registrant’s Form 10-K filed on March 13, 2013 and incorporated herein by reference)

3.2						Second Amended and Restated Bylaws of the Registrant (filed as Exhibit 3.1 to Registrant’s Form 8-K filed on October 6, 2009 and incorporated herein by reference)

10.49						Amendment No. 4 to the Amended and Restated Executive Employment Agreement, dated June 29, 2022, between ARC Document Solutions, Inc. and Jorge Avalos *^

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 *

104						Cover Page Interactive Data File (embedded within the Inline XBRL document)


*			Filed herewith
^			Indicates management contract or compensatory plan or agreement

3637

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: ~~November~~August 4, ~~2021~~2022


ARC DOCUMENT SOLUTIONS, INC.

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

/s/ JORGE AVALOS
Jorge Avalos
Chief Financial Officer

3738


	September 30,		December 31,
(In thousands, except per share data)	2021		2020
Assets
Current assets:
Cash and cash equivalents	$	54,903	$	54,950
Accounts receivable, net of allowances for accounts receivable of $2,136 and $2,357	40,098		36,279
Inventory	9,144		9,474

Prepaid expenses	4,712		4,065
Other current assets	4,083		3,979
Total current assets	112,940		108,747
Property and equipment, net of accumulated depreciation of $229,074 and $219,834	47,385		57,830
Right-of-use assets from operating leases	32,189		37,859
Goodwill	121,051		121,051
Other intangible assets, net	355		515
Deferred income taxes	14,493		17,261
Other assets	2,306		2,175
Total assets	$	330,719	$	345,438
Liabilities and Equity
Current liabilities:
Accounts payable	$	23,189	$	18,661
Accrued payroll and payroll-related expenses	11,886		10,088
Accrued expenses	17,086		17,783
Current operating lease liability	10,700		12,158
Current portion of finance leases	14,364		17,557
Total current liabilities	77,225		76,247
Long-term operating lease liabilities	27,833		33,561
Long-term debt and finance leases	66,140		79,679

Other long-term liabilities	1,543		1,615
Total liabilities	172,741		191,102
Commitments and contingencies (Note 6)	0		0
Shareholders’ equity:
ARC Document Solutions, Inc. shareholders’ 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; 50,439 and 49,422 shares issued and 43,125 and 42,792 shares outstanding	50		49
Additional paid-in capital	129,076		127,755
Retained earnings	41,319		37,308
Accumulated other comprehensive loss	(2,669)		(2,787)
	167,776		162,325
Less cost of common stock in treasury, 7,314 and 6,630 shares	16,250		14,657
Total ARC Document Solutions, Inc. shareholders’ equity	151,526		147,668
Noncontrolling interest	6,452		6,668
Total equity	157,978		154,336
Total liabilities and equity	$	330,719	$	345,438


	September 30, 2021		December 31, 2020

Revolving Loans; 1.7% and 2.2% interest rate at September 30, 2021 and December 31, 2020	$	47,500	$	55,000
Various finance leases; weighted average interest rate of 4.8% and 4.9% at September 30, 2021 and December 31, 2020, respectively; principal and interest payable monthly through September 2027	33,004		42,236

	80,504		97,236
Less current portion	(14,364)		(17,557)
	$	66,140	$	79,679