Table of Contents



 

U.S.

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

(Mark One)

 

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended SeptemberJune 30, 20212022

or

 

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

 

For the transition period from            to          

 

Commission File Number: 001-07120

 

img002.jpg

 

 

HARTE HANKS, INC.

(Exact name of registrant as specified in its charter)

Delaware

74-1677284

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification Number)

2800 Wells Branch Parkway, Austin, Texas 787282 Executive Drive, Suite 103, Chelmsford, MA 01824

(Address of principal executive offices, including zip code)

 

(512) 434-1100

(Registrant’s telephone number including area code)

 

None

(Former name, former address and former fiscal year, if changed since last report)

 

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

Title of Each Class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

HRTHHHS

OTCQXNASDAQ

 

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 (Section 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 if the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes ☐  No ☒

 

The number of shares outstanding of the issuer’s common stock as of OctoJuly ber 15, 2021022 was 6,976,1447,032,528 shares.

 



 

 

 

HARTE HANKS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

FORM 10-Q REPORT

For the Quarterly Period Ended SeptemberJune 30, 20212022

 

  Page
   
Part I.Financial Information 
   
Item 1.Consolidated Financial Statements 

 

(Unaudited)

 

 

 

 

 

Condensed Consolidated Balance Sheets — SeptemberJune 30, 20212022 and December 31, 20202021

3

 

 

 

 

Condensed Consolidated Statements of Comprehensive  Income (Loss) — Three and Six months ended SeptemberJune 30, 20212022 and 20202021

4
Condensed Consolidated Statements of Comprehensive Income (Loss) — Nine months ended September 30, 2021 and 20205
   

 

Condensed Consolidated Statements of Changes in Stockholders’ Deficit — Three and NineSix months ended SeptemberJune 30, 20212022 and 20202021

6

 

 

 

 

Condensed Consolidated Statements of Cash Flows — NineSix months ended SeptemberJune 30, 20212022 and 20202021

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements

8

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

2825

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

3531

 

 

 

Item 4.

Controls and Procedures

3531

 

 

 
Part II.Other Information 

 

 

 

Item 1.

Legal Proceedings

3632

 

 

 

Item 1A.

Risk Factors

3632

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

3632

 

 

 

Item 3.

Defaults Upon Senior Securities

3632

 

 

 

Item 4.

Mine Safety Disclosure

3632

 

 

 

Item 5.

Other Information

3632

 

 

 

Item 6.

Exhibits

3733

 

2

 

 

Item 1.  Consolidated Financial Statements

 

Harte Hanks, Inc. and Subsidiaries Condensed Consolidated Balance Sheets

(Unaudited)

 

 

September 30,

 

December 31,

  

June 30,

 

December 31,

 

In thousands, except per share and share amounts

 

2021

  

2020

  

2022

  

2021

 

ASSETS

          

Current assets

          

Cash and cash equivalents

 $16,044  $29,408  $10,570  $11,911 

Restricted cash

 2,645 4,154  2,337 3,222 

Accounts receivable (less allowance for doubtful accounts of $411 at September 30, 2021 and $241 at December 31, 2020)

 52,574  41,533 

Accounts receivable (less allowance for doubtful accounts of $170 at June 30, 2022 and $266 at December 31, 2021)

 44,894  41,051 

Unbilled accounts receivable

 5,157 8,134 

Contract assets

 333  613  337  622 

Prepaid expenses

 2,436  2,256  2,763  1,948 

Prepaid income taxes and income tax receivable

 7,492  7,388  6,752  7,456 

Other current assets

  954   886   11,068   1,031 

Total current assets

  82,478   86,238   83,878   75,375 

Property, plant and equipment (less accumulated depreciation of $64,982 at September 30, 2021 and $69,662 at December 31, 2020)

 7,140  5,878 

Property, plant and equipment (less accumulated depreciation of $51,791 at June 30, 2022 and $52,512 at December 31, 2021)

 9,328  7,747 

Right-of-use assets

 20,379  24,750  18,982  22,142 

Other assets

  2,467   2,632   1,972   2,597 

Total assets

 $112,464  $119,498  $114,160  $107,861 
  

LIABILITIES AND STOCKHOLDERS’ DEFICIT

          

Current liabilities

          

Accounts payable and accrued expenses

 $16,550   16,294  $17,444  $16,132 

Accrued payroll and related expenses

 6,256  5,248  4,858  7,028 

Short-term debt

 0 4,926 

Deferred revenue and customer advances

 4,977  4,661  6,164  3,942 

Customer postage and program deposits

 5,453  6,497  4,751  6,496 

Other current liabilities

 2,535  2,903  3,129  2,291 

Short-term lease liabilities

  6,615   6,663 

Current portion of lease liabilities

  5,307   6,553 

Total current liabilities

 42,386  47,192  41,653  42,442 
  

Long-term debt, net of current portion

 13,100  22,174 

Pensions

 64,341  67,490 

Long-term debt

 10,000  5,000 

Pension liabilities - Qualified plans

 26,088  27,359 

Pension liabilities - Nonqualified plan

 24,608  25,140 

Long-term lease liabilities, net of current portion

 17,546  21,295  16,594  19,215 

Other long-term liabilities

  3,755   4,747   3,205   3,697 

Total liabilities

  141,128   162,898   122,148   122,853 
  

Preferred Stock, $1 par value, 1,000,000 shares authorized; 9,926 shares of Series A Convertible Preferred Stock, issued and outstanding

  9,723   9,723      
  9,723 9,723 

Stockholders’ deficit

          

Common stock, $1 par value, 25,000,000 shares authorized;12,121,484 shares issued, 6,976,144 and 6,599,309 shares outstanding at September 30, 2021 and December 31, 2020, respectively

 12,121  12,121 

Common stock, $1 par value, 25,000,000 shares authorized;12,121,484 shares issued, 7,032,528 and 6,976,144 shares outstanding at June 30, 2022 and December 31, 2021, respectively

 12,121  12,121 

Additional paid-in capital

 290,333  383,043  272,727  290,711 

Retained earnings

 809,338  796,123  818,900  811,094 

Less treasury stock, 5,145,340 shares at cost at September 30, 2021 and 5,522,175 shares at cost at December 31, 2020

 (1,085,312) (1,178,799)

Less treasury stock, 5,088,956 shares at cost at June 30, 2022 and 5,145,340 shares at cost at December 31, 2021

 (1,066,608) (1,085,313)

Accumulated other comprehensive loss

  (64,867)  (65,611)  (54,851)  (53,328)

Total stockholders’ deficit

  (38,387)  (53,123)  (17,711)  (24,715)

Total liabilities, Preferred Stock and stockholders’ deficit

 $112,464  $119,498  $114,160  $107,861 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

3

 

 

Harte Hanks, Inc. and Subsidiaries Condensed Consolidated Statements of Comprehensive Income (Loss)  

(Unaudited)

 

 

Three Months Ended September 30,

  

Three Months Ended June 30,

 

In thousands, except per share amounts

 

2021

  

2020

  

2022

  

2021

 

Revenue

 $49,597  $47,702  $48,553  $49,259 

Operating expenses

          

Labor

 27,165  27,041  25,259  28,366 

Production and distribution

 12,146  13,176  14,737  12,460 

Advertising, selling, general and administrative

 4,516  4,540  3,960  4,591 

Restructuring expense

 937  1,419  0  1,744 

Depreciation expense

  607   741   586   663 

Total operating expenses

  45,371   46,917   44,542   47,824 

Operating income

 4,226  785  4,011  1,435 

Other (income) expenses

     

Other incomes, net

     

Interest expense, net

 222  274  95  155 

Other, net

  (572)  2,185 

Total other (income) expenses

  (350)  2,459 

Income (loss) before income taxes

 4,576  (1,674)

Income tax expense (benefit)

  172   (53)

Net income (loss)

 $4,404  $(1,621)

Gain from extinguishment of debt (Paycheck Protection Program Term Note)

 0 (10,000)

Other (income) expense

  (1,216)  456 

Total other income

  (1,121)  (9,389)

Income before income taxes

 5,132  10,824 

Income tax expense

  671   255 

Net income

 4,461  10,569 

Less: Preferred Stock dividends

 125  125  124  124 

Less: Earnings attributable to participating securities

  543   0   542   1,361 

Income (loss) attributable to common stockholders

 $3,736  $(1,746)

Income attributable to common stockholders

 $3,795  $9,084 
          

Earnings (loss) per common share

     

Earnings per common share

     

Basic

 $0.54 $(0.27) $0.54 $1.36 

Diluted

 $0.52 $(0.27) $0.52 $1.27 
          

Weighted average shares used to compute income (loss) per share attributable to common shares

     

Weighted average shares used to compute income per share attributable to common shares

     

Basic

 6,889  6,523  7,017  6,686 

Diluted

 7,162  6,523  7,388 7,193 
          

Comprehensive income (loss), net of tax:

     

Net income (loss)

 $4,404  $(1,621)

Comprehensive income, net of tax:

     

Net income

 $4,461 $10,569 
          

Adjustment to pension liability, net

 861 609  578 860 

Foreign currency translation adjustment

  (1,251)  1,129   (2,607)  (4)

Total other comprehensive (loss) income, net of tax

 $(390) $1,738  $(2,029) $856 
          

Comprehensive income

 $4,014  $117  $2,432 $11,425 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

4

 

Harte Hanks, Inc. and Subsidiaries Condensed Consolidated Statements of Comprehensive Income (Loss) 

(Unaudited)

 

 

Nine Months Ended September 30,

  

Six Months Ended June 30,

 

In thousands, except per share amounts

 

2021

  

2020

  

2022

  

2021

 

Operating revenues

 $142,610  $129,825  $97,615  $93,013 

Operating expenses

  

Labor

 81,883  76,601  51,204  54,718 

Production and distribution

 35,875  36,940  28,728  23,729 

Advertising, selling, general and administrative

 13,228  15,582  8,593  8,712 

Restructuring expense

�� 4,880  8,005  0  3,942 

Depreciation expense

  1,968   2,905   1,184   1,361 

Total operating expenses

  137,834   140,033   89,709   92,462 

Operating income (loss)

 4,776  (10,208)

Other (income) expenses, net

 

Operating income

 7,906  551 

Other income, net

 

Interest expense, net

 645  882  230  423 

Gain from extinguishment of debt (Paycheck Protection Program Term Note)

 (10,000) 0  0  (10,000)

Other, net

  (102)  4,511   (1,255)  471 

Total other (income) expenses, net

  (9,457)  5,393 

Income (loss) before income taxes

 14,233  (15,601)

Income tax expense (benefit)

  1,018   (12,863)

Net Income (loss)

 13,215  (2,738)

Total other income, net

  (1,025)  (9,106)

Income before income taxes

 8,931  9,657 

Income tax expense

  1,125   846 

Net income

 7,806  8,811 

Less: Preferred stock dividends

 372  372  246  246 

Less: Earnings attributable to participating securities

  1,661   0   946   1,118 

Income (loss) attributable to common stockholders

 $11,182  $(3,110)

Income attributable to common stockholders

 $6,614  $7,447 
  

Income (loss) per common share

 

Income per common share

 

Basic

 $1.66  $(0.48) $0.94  $1.12 

Diluted

 $1.57  $(0.48) $0.91  $1.05 
  

Weighted-average shares used to compute income (loss) per share attributable to common shares

  

Basic

 6,743  6,432  7,004  6,669 

Diluted

 7,153  6,432  7,338  7,131 
  

Comprehensive income (loss)

 

Net income (loss)

 $13,215  $(2,738)

Comprehensive income

 

Net income

 $7,806  $8,811 
  

Adjustment to pension liability

 2,457  1,827  1,588  1,596 

Foreign currency translation adjustment

  (1,713)  1,067   (3,111)  (462)

Total other comprehensive income, net of tax

 $744  $2,894 

Total other comprehensive (loss) income, net of tax

 $(1,523) $1,134 
  

Comprehensive income

 $13,959  $156  $6,283  $9,945 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

5

 

 

Harte Hanks, Inc. and Subsidiaries Condensed Consolidated Statements of Changes in Stockholders' Deficit

(Unaudited)

 

                

Accumulated

                   

Accumulated

   
       

Additional

       

Other

 

Total

        

Additional

       

Other

 

Total

 
 

Preferred

 

Common

 

Paid-in

 

Retained

 

Treasury

 

Comprehensive

 

Stockholders’

  

Preferred

 

Common

 

Paid-in

 

Retained

 

Treasury

 

Comprehensive

 

Stockholders’

 

In thousands

 

Stock

  

Stock

  

Capital

  

Earnings

  

Stock

  

Loss

  

Deficit

  

Stock

  

Stock

  

Capital

  

Earnings

  

Stock

  

Loss

  

Deficit

 

Balance at December 31, 2019

 $9,723  $12,121  $447,022  $797,817  $(1,243,509) $(63,134) $(49,683)

Stock-based compensation

 0  0  223  0  0  0  223 

Vesting of RSU's

 0  0  (29,667) 0  29,667  0  0 

Net income

 0  0  0  5,118  0  0  5,118 

Other comprehensive income

  0   0   0   0   0   51   51 

Balance at March 31, 2020

 $9,723  $12,121  $417,578  $802,935  $(1,213,842) $(63,083) $(44,291)

Balance at December 31, 2020

 $9,723  $12,121  $383,043  $796,123  $(1,178,799) $(65,611) $(53,123)

Stock-based compensation

 0  0 81 0 0 0 81  0  0  210  0  0  0  210 

Vesting of RSU's

 0  0 (7,416) 0 7,416 0 0  0  0  (16,010) 0  15,980  0  (30)

Net loss

 0  0 0 (6,235) 0 0 (6,235) 0  0  0  (1,758) 0  0  (1,758)

Other comprehensive income

  0   0   0   0   0   1,105   1,105   0   0   0   0   0   278   278 

Balance at June 30, 2020

 $9,723  $12,121  $410,243  $796,700  $(1,206,426) $(61,978) $(49,340)

Balance at March 31, 2021

 $9,723  $12,121  $367,243  $794,365  $(1,162,819) $(65,333) $(54,423)

Exercise of Stock Options

 0 0 (6,708) 0 6,802 0 94 

Stock-based compensation

 0   0 277 0 0 0 277  0  0 527 0 0 0 527 

Vesting of RSU's

 0  0 (16,975) 0 16,961 0 (14) 0  0 (24,124) 0 23,942 0 (182)

Net loss

 0  0 0 (1,621) 0 0 (1,621)

Net Income

 0  0 0 10,569 0 0 10,569 

Other comprehensive income

  0   0  0  0   0   1,738   1,738   0   0   0   0   0   856   856 

Balance at September 30, 2020

 $9,723  $12,121  $393,545  $795,079  $(1,189,465) $(60,240) $(48,960)

Balance at June 30, 2021

 $9,723  $12,121  $336,938  $804,934  $(1,132,075) $(64,477) $(42,559)

 

                

Accumulated

                   

Accumulated

   
       

Additional

        

Other

 

Total

        

Additional

        

Other

 

Total

 
 

Preferred

 

Common

 

Paid-in

  

Retained

 

Treasury

 

Comprehensive

 

Stockholders’

  

Preferred

 

Common

 

Paid-in

  

Retained

 

Treasury

 

Comprehensive

 

Stockholders’

 

In thousands

 

Stock

  

Stock

  

Capital

  

Earnings

  

Stock

  

Loss

  

Deficit

  

Stock

  

Stock

  

Capital

  

Earnings

  

Stock

  

Loss

  

Deficit

 

Balance at December 31, 2020

 $9,723  $12,121  $383,043  $796,123  $(1,178,799) $(65,611) $(53,123)

Stock-based compensation

 0  0  210  0  0  0  210 

Vesting of RSU's

 0  0  (16,010) 0  15,980  0  (30)

Net loss

 0  0  0  (1,758) 0  0  (1,758)

Other comprehensive income

  0   0   0   0   0   278   278 

Balance at March 31, 2021

 $9,723  $12,121  $367,243  $794,365  $(1,162,819) $(65,333) $(54,423)

Exercise of Stock Options

 0  0 (6,708) 0 6,802 0 94 

Balance at December 31, 2021

 $9,723  $12,121  $290,711  $811,094  $(1,085,313) $(53,328) $(24,715)

Stock-based compensation

 0  0 527  0 0 0 527  0  0  427  0  0  0  427 

Vesting of RSU's

 0  0 (24,124) 0 23,942 0 (182) 0  0  (12,706) 0  12,572  0  (134)

Net Income

 0  0 0  10,569 0 0 10,569  0  0  0  3,345  0  0  3,345 

Other comprehensive income

  0   0   0   0   0   856   856   0   0   0   0   0   506   506 

Balance at June 30, 2021

 $9,723  $12,121  $336,938  $804,934  $(1,132,075) $(64,477) $(42,559)

Balance at March 31, 2022

 $9,723  $12,121  $278,432  $814,439  $(1,072,741) $(52,822) $(20,571)

Exercise of Stock Options

 0  0 (6,266) 0 6,133 0 (133)

Stock-based compensation

 0  0 329  0 0 0 329  0  0 561  0 0 0 561 

Vesting of RSU's

 0  0 (46,934) 0 46,763 0 (171)

Net Income

 0  0 0  4,404 0 0 4,404  0  0   4,461 0 0 4,461 

Other comprehensive loss

  0   0   0   0   0   (390)  (390)  0   0   0   0   0   (2,029)  (2,029)

Balance at September 30, 2021

 $9,723  $12,121  $290,333  $809,338  $(1,085,312) $(64,867) $(38,387)

Balance at June 30, 2022

 $9,723  $12,121  $272,727  $818,900  $(1,066,608) $(54,851) $(17,711)

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

6

 

 

Harte Hanks, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

Nine Months Ended September 30,

  

Six Months Ended June 30,

 

In thousands

 

2021

  

2020

  

2022

  

2021

 

Cash Flows from Operating Activities

          

Net Income (loss)

 $13,215  $(2,738)

Adjustments to reconcile net income (loss) to net cash used in operating activities

     

Net income

 $7,806   $8,811 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

     

Depreciation expense

 1,968  2,905  1,184   1,361 

Restructuring

 728  3,113  0   309 

Stock-based compensation

 1,092  590  850   762 

Gain from extinguishment of debt (Paycheck Protection Program Term Note)

 (10,000) 0  0   (10,000)

Net pension (payment) cost

 (692) 736 

Deferred income taxes

 0  (776)

Net pension payment

 (365)  (596)

Changes in assets and liabilities:

          

Increase in accounts receivable and contract assets

 (10,761) (6,752) (581)  (5,932)

Decrease (Increase) in prepaid expenses, income tax receivable and other current assets

 199  (7,303)

Decrease in accounts payable and accrued expenses

 503  692 

Increase in other accrued expenses and liabilities

  (2,190)  (1,900)

Net cash used in operating activities

  (5,938)  (11,433)

Decrease (increase) in prepaid expenses, income tax receivable and other current assets

 526   (590)

Increase in accounts payable and accrued expenses

 1,510   653 

(Decrease) increase in other accrued expenses and liabilities

  (1,068)   508 

Net cash provided by (used in) operating activities

  9,862    (4,714)
          

Cash Flows from Investing Activities

          

Purchases of property, plant and equipment

 (2,478) (1,374) (3,616)  (984)

Proceeds from sale of property, plant and equipment

  101   1,891   57    101 

Net cash (used in) provided by investing activities

  (2,377)  517 

Net cash used in investing activities

  (3,559)   (883)
          

Cash Flows from Financing Activities

          

Borrowings

 0 10,000  5,000   0 

Repayment of borrowings

 (4,000) (1,600) 0   (4,000)

Debt financing costs

 (386) (517) (123)  (301)

Payment of finance leases

 (169) (357) (101)  (112)

Treasury stock activities

  (290)  (14)  (268)   (118)

Net cash (used in) provided by financing activities

  (4,845)  7,512 

Net cash provided by (used in) financing activities

  4,508    (4,531)
          

Effect of exchange rate changes on cash, cash equivalents and restricted cash

 (1,713) 1,067  (3,111)  (462)
          

Net decrease in cash and cash equivalents and restricted cash

 (14,873) (2,337)

Net increase (decrease) in cash and cash equivalents and restricted cash

 7,700   (10,590)

Cash and cash equivalents and restricted cash at beginning of period

  33,562   34,122   15,133    33,562 

Cash and cash equivalents and restricted cash at end of period

 $18,689  $31,785  $22,833 

(1)

 $22,972 
          

Supplemental disclosures

          

Cash paid for interest

 $327  $547  $186   $264 

Cash paid for income taxes, net

 $1,134  $3,295  $478   $959 

Non-cash investing and financing activities

          

Purchases of property, plant and equipment included in accounts payable

 $2,752  $1,651  $2,576   $1,322 
     

(1) This amount is comprised of the below balances:

     

Cash and cash equivalents

 $10,570   $11,911 

Restricted cash

 2,337   3,222 

Cash held in Escrow account included in other current assets (see Note E)

  9,926    0 
 $22,833   $22,972 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

7

 

Harte Hanks, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

Note A - Overview and Significant Accounting Policies

 

Background

 

Harte Hanks, Inc. together with its subsidiaries (“Harte Hanks,” “Company,” “we,” “our,” or “us”) is a leading global customer experience company.  With offices in North America, Asia-Pacific and Europe, Harte Hanks works with some of the world’s most respected brands.

 

The Company is closely monitoring the impact of the COVID-19 pandemic on all aspects of its business. In connection with the pandemic, some of our customersand related economic repercussions have reduced their demand for our services while other customers have requested accommodations including extensions of payment or restructuring of agreements.  In addition, some of our customers have declared bankruptcycreated significant volatility, uncertainty, and it is possible that additional customers will file for bankruptcyturmoil in the coming months.  Our Customer Care business has experienced increases in volumes and has added new business from existing clients as well as new clients due to the increased demand for these services driven by COVID-19.environment generally. While the COVID-19 pandemic has not had a material adverse impact on the Company’s business operations, liquidity or ability to comply with covenants to date, the pandemic has caused significant volatility in the global markets and has caused many companies to slow production or find alternative means for employees to perform their work. Itit is possible that the COVID-19pandemic itself, as well as the measures taken by governments around the globe, including in connection with the emergence of new variants of the virus and the resulting economic impact may materially and adversely affect the Company’s results of operations, cash flows and financial position as well as the financial stability of its customers. The COVID-19 pandemic may also exacerbate other risks discussed in Part I, “ItemItem 1A. Risk Factors” in our Annual Report on Form-10K for the fiscal year ended December 31, 20202021 filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 24, 2021, and as amended on April 30, 202121, 2022 (the 20202021 10-K”), which could materially affect our business, financial condition, or future results.  We recommend that you review "Item 1A. Risk Factors" in our 202010-K for a further discussion on COVID-19 and the risks the Company currently faces..

Segment Reporting

 

The Company operates 3 business segments: Marketing Services; Customer Care; and Fulfillment & Logistics Services. Our Chief Executive Officer (“CEO”) is considered to be our chief operating decision maker. Our CEO reviews our operating results on an aggregate basis for purposes of allocating resources and evaluating financial performance by using the three financial measures: revenue, operating income (loss) and operating income (loss) plus depreciation and amortization (“EBITDA”).

 

Accounting Principles 

 

Our unaudited interim condensed consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management, the unaudited interim condensed consolidated financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with information included in our 20202021 10-K.

 

Consolidation

 

The accompanying unaudited interim condensed consolidated financial statements include the accounts of Harte Hanks, Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.  As used in this report, the terms “Harte Hanks,” “the Company,” “we,” “us,” or “our” may refer to Harte Hanks, Inc., one or more of its consolidated subsidiaries, or all of them taken as a whole, as the context may require.

 

8

 

Interim Financial Information

 

The condensed consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Rule 8-01 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAPU.S.GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.  Certain prior period amounts in the condensed consolidated financial statements and accompanying notes have been reclassified to conform to the current period's presentation.

 

Use of Estimates

 

The preparationPreparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported amounts of assets, liabilities, revenue, and expenses.disclosed in the financial statements and the accompanying notes. Actual results and outcomes could differ materially from those estimates and assumptions.due to uncertainties. Such estimates include, but are not limited to, estimates related to lease accounting; pension accounting; fair value for purposes of assessing long-lived assets for impairment; revenue recognition; income taxes; stock-based compensation;compensation and contingencies. On an ongoing basis, management reviews its estimates and assumptions based on currently available information. Changes in facts and circumstances could result in revised estimates and assumptions.

 

Operating Expense Presentation in Condensed Consolidated Statements of Comprehensive Income (Loss) 

 

The “Labor” line in the Condensed Consolidated Statements of Comprehensive Income (Loss) includes all employee payroll and benefits costs, including stock-based compensation, along with temporary labor costs. The “Production and distribution” and “Advertising, selling, general and administrative” lines do not include any labor, depreciation, or amortization expense.

 

Revenue Recognition

 

We recognize revenue upon the transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to be entitled to receive in exchange for such products or services based on the relevant contract. We apply the following five-step revenue recognition model:

 

 

Identification of the contract, or contracts, with a customer

 

Identification of the performance obligations in the contract

 

Determination of the transaction price

 

Allocation of the transaction price to the performance obligations in the contract

 

Recognition of revenue when (or as) we satisfy the performance obligation

 

Certain client programs provide for adjustments to billings based upon whether we achieve certain performance criteria. In these circumstances, revenue is recognized when the performance criteria are met. We record revenue net of any taxes collected from customers and subsequently remitted to governmental authorities. Any payments received in advance of the performance of services or delivery of the product are recorded as deferred revenue until such time as the services are performed or the product is delivered. Costs incurred for search engine marketing solutions payable to the engine host and postage costs of mailings are billed to our clients and are not directly reflected in our revenue.

 

Revenue from all our segmentsagency and digital services, direct mail, logistics, fulfillment and contact center is recognized when control of the promised goods or services is transferred to the customer.  Fees for these services are determined by the terms set forth in each contract. These fees are typically set at a fixed price or rate by transaction occurrence, service provided, time spent, or product delivered.

 

For arrangements requiring design and build of a database, revenue is not recognized until client acceptance occurs. Up-front fees billed during the setup phase for these arrangements are deferred and direct build costs are capitalized. Pricing for these types of arrangements is typically based on a fixed price determined in the contract. Revenue from other database marketing solutions is recognized ratably over the contractual service period. Pricing for these services is typically based on a fixed price per month or per contract.

 

9

 

Fair Value of Financial Instruments

 

FASB ASC 820, Fair Value Measurements and Disclosures, (“ASC 820”) defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a fair value hierarchy that prioritizes the inputs used in valuation methodologies into three levels:

 

Level 1

Quoted prices in active markets for identical assets or liabilities.

 

Level 2

Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

Because of their maturities and/or variable interest rates, certain financial instruments have fair values approximating their carrying values. These instruments include cash and cash equivalents and restricted cash, accounts receivable, trade payables, and long-term debt.  The fair value of the assets in our funded pension plan is discloseddiscussed in Note H, Employee Benefit Plans.

 

Leases

 

We determine if an arrangement is a lease at its inception. Operating and finance leases are included in the lease right-of-use (“ROU”) assets and in the current portion and long-term portion of lease liabilities on our condensed consolidated balance sheets. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date of each lease based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit interest rate, we use our incremental borrowing rate based on the information available at the commencement date of each lease to determine the present value of lease payments. The operating lease ROU assets also include any lease payments made and exclude lease incentives. Our lease terms may include options to extend or terminate the lease, which are included in the lease ROU assets when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. We have lease agreements with lease and non-lease components, which are generally accounted for separately. For certain real estate leases, we account for the lease and non-lease components as a single lease component.

 

10

 

 

Note B - Recent Accounting Pronouncements

 

Recently adopted accounting pronouncementsRecent Accounting Guidance Adopted

 

Income taxes

In December 2019,June 2016,the Financial Accounting Standards Board (“FASB”)FASB issued ASU 20192016-12,13, which enhancesFinancial InstrumentsCredit Losses. This ASU added a new impairment model (known as the current expected credit loss (“CECL”) model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes its estimate of expected credit losses as an allowance. The CECL model applies to most debt instruments, trade receivables, lease receivables, financial guarantee contracts, and simplifies various aspectsother loan commitments. The CECL model does not have a minimum threshold for recognition of impairment losses and entities will need to measure expected credit losses on assets that have a low risk of loss. As a smaller reporting company pursuant to Rule 12b-2 of the income tax accounting guidance, including requirements suchSecurities Exchange Act of 1934, as a tax basis step-up in goodwill obtained in a transaction that is not a business combination, ownershipamended, these changes in investments, and interim-period accounting for enacted changes in tax law. The standard became effective for us in the fiscal year 2021, although early adoption is permitted. We adopted this accounting standard update (“ASU”) as ofCompany on January 1, 2022. 1st,2021.The adoption of this new standard did not have a material impact on our condensed consolidatedthe Company's financial statements.

Defined Pension Plan

In August 2018, the FASB issued ASU 2018-14,CompensationRetirement BenefitsDefined Benefit PlansGeneral (Topic 715-20): Disclosure FrameworkChanges to the Disclosure Requirements for Defined Benefit Plans(ASU 2018-14), which modifies the disclosure requirements for defined benefit pension plans and other postretirement plans. ASU 2018-14 was effective for fiscal years ending after December 15, 2020, and early adoption was permitted. We adopted ASU 2018-14 as of December 31, 2020.  The adoption did not have a material impact on our consolidated financial statements.

Reference Rate Reform

 

In March 2020, the FASB issued ASU 2020-04,Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting Summary”.  This ASU provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. LIBOR and other inter-bank offered rates are widely used benchmarks or reference rates in the United States and globally.  With global capital markets expected to move away from LIBOR and other inter-bank offered rates and toward more observable or transaction-based rates that are less susceptible to manipulation, the FASB launched a project in late 2018 to address potential accounting challenges expected to arise from the transition.  The new guidance provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued.  This ASU is effective March 12, 2020 through December 31, 2022.  We adopted this ASU on March 12, 2020 and it did not have a material impact on our condensed consolidated financial statements.

 

11

 

 

Note C - Revenue from Contracts with Customers

 

In May 2014, the FASB issued ASUUnder  Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers. Under ("ASC 606,606")Revenue from Contracts with Customers,, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that are within the scope of the new standard, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. This standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. TheThis standard also includes criteria for the capitalization and amortization of certain contract acquisition and fulfillment costs.

 

Under ASC 606, revenue is recognized when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Our contracts with customers state the terms of sale, including the description, quantity, and price of the product sold or service purchased.provided. Payment terms can vary by contract, but the period between invoicing and when payment is due is not significant.  At September 30, 2021 and December 31, 2020, ourThe Company's contracts with its customers generally do not include anyrights of return or a significant financing components.component.

 

Consistent with legacy U.S. GAAP, we present sales taxes assessed on revenue-producing transactions on a net basis.

 

Disaggregation of Revenue

 

We disaggregate revenue by three key revenue streams which are aligned with our business segments.  The nature of the services offered by each key revenue stream is different.  The following table summarizes revenue from contracts with customers for the three and ninesix months ended SeptemberJune 30, 20212022 and 20202021 by our three business segments and the pattern of revenue recognition:

 

 

Three Months Ended September 30, 2021

  

Three Months Ended June 30, 2022

 

In thousands

 

Revenue for performance obligations recognized over time

  

Revenue for performance obligations recognized at a point in time

  

Total

  

Revenue for performance obligations recognized over time

  

Revenue for performance obligations recognized at a point in time

  

Total

 

Marketing Services

 $12,628 $2,101 $14,729  $10,610 $2,840 $13,450 

Customer Care

 19,768 0 19,768  15,382 0 15,382 

Fulfillment and Logistics Services

  13,362   1,738   15,100   17,203   2,518   19,721 

Total Revenues

 $45,758  $3,839  $49,597  $43,195  $5,358  $48,553 

 

 

Three Months Ended September 30, 2020

  

Three Months Ended June 30, 2021

 

In thousands

 

Revenue for performance obligations recognized over time

  

Revenue for performance obligations recognized at a point in time

  

Total

  

Revenue for performance obligations recognized over time

  

Revenue for performance obligations recognized at a point in time

  

Total

 

Marketing Services

 $13,177 $2,040 $15,217  $12,087 $2,121 $14,208 

Customer Care

 17,933 0 17,933  19,191 0 19,191 

Fulfillment and Logistics Services

  12,805   1,747   14,552   13,881   1,979   15,860 

Total Revenues

 $43,915  $3,787  $47,702  $45,159  $4,100  $49,259 

 

 

Nine Months Ended September 30, 2021

  

Six Months Ended June 30, 2022

 

In thousands

 

Revenue for performance obligations recognized over time

  

Revenue for performance obligations recognized at a point in time

  

Total

  

Revenue for performance obligations recognized over time

  

Revenue for performance obligations recognized at a point in time

  

Total

 

Marketing Services

 $36,163  $5,652  $41,815  $21,491  $4,883  $26,374 

Customer Care

 55,503  0  55,503  33,123  0  33,123 

Fulfillment and Logistics Services

  39,689   5,603   45,292   32,095   6,023   38,118 

Total Revenues

 $131,355  $11,255  $142,610  $86,709  $10,906  $97,615 

 

 

Nine Months Ended September 30, 2020

  

Six Months Ended June 30, 2021

 

In thousands

 

Revenue for performance obligations recognized over time

  

Revenue for performance obligations recognized at a point in time

  

Total

  

Revenue for performance obligations recognized over time

  

Revenue for performance obligations recognized at a point in time

  

Total

 

Marketing Services

 $38,103  $3,579  $41,682  $23,535  $3,551  $27,086 

Customer Care

 41,640  0  41,640  35,735  0  35,735 

Fulfillment and Logistics Services

  39,259   7,244   46,503   26,327   3,865   30,192 

Total Revenues

 $119,002  $10,823  $129,825  $85,597  $7,416  $93,013 

 

12

 

Our contracts with customers may consist of multiple performance obligations. If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price (“SSP”) basis unless the transaction price is variable and meets the criteria to be allocated entirely to a performance obligation or to a distinct good or service that forms part of a single performance obligation. For most performance obligations, we determine SSP based on the price at which the performance obligation is sold separately. Although uncommon, if the SSP is not observable through past transactions, we estimate the SSP taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations. Further discussion of other performance obligations in each of our major revenue streams follows:

 

Marketing Services

 

Our Marketing Services segment delivers strategic planning, data strategy, performance analytics, creative development and execution, technology enablement, marketing automation, and database management. We create relevancy by leveraging data, insight, and our extensive experience in leading clients as they engage their customers through digital, traditional, and emerging channels. We are known for helping clients build deep customer relationships, create connected customer experiences, and optimize each and every customer touch point in order to deliver desired business outcomes.

 

Most marketing services performance obligations are satisfied over time and often offered on a project basis. We have concluded that the best approach to measure the progress toward completion of the project-based performance obligations is the input method, which is based on either the costs or labor hours incurred to date depending upon whether costs or labor hours more accurately depict the transfer of value to the customer.

 

The variable consideration in these contracts primarily relates to time and material-based services and reimbursable out-of-pocket travel costs, both of which are estimated using the expected value method. For time and material-based contracts, we use the “as invoiced” practical expedient.

 

Our databases solutions are built around centralized marketing databases with services rendered to build custom database, database hosting services, customer or target marketing lists and data processing services.

 

These performance obligations, including services rendered to build a custom database, database hosting services, customer or target marketing lists and data processing services, may be satisfied over time or at a point in time. We provide SaaS solutions to host data for customers and have concluded that they are stand-ready obligations to be recognized over time on a monthly basis. Our promise to provide certain data related services meets the over-time recognition criteria because our services do not create an asset with an alternative use, and we have an enforceable right to payment. For performance obligations recognized over time, we choose either the input (i.e., labor hour) or output method (i.e., number of customer records) to measure the progress toward completion depending on the nature of the services provided. Some of our other data-related services do not meet the over-time criteria and are therefore, recognized at a point-in-time, typically upon the delivery of a specific deliverable.

 

Our contracts may include outsourced print production work for our clients. These contracts may include a promise to purchase postage on behalf of our clients.  In such cases, we have determined we are an agent, rather than principal and therefore recognize net consideration as revenue.

 

We charge our customers for certain data-related services at a fixed transaction-based rate, e.g., per thousand customer records processed. Because the quantity of transactions is unknown at the onset of a contract, our transaction price is variable, and we use the expected value method to estimate the transaction price. The uncertainty associated with the variable consideration generally resolves within a short period of time since the duration of these contracts is generally less than two months.

 

Customer Care

 

We operate tele-service workstations in the United States, Asia, and Europe to provide advanced contact center solutions such as: speech, voice and video chat, integrated voice response, analytics, social cloud monitoring, and web self-service.

 

Performance obligations are stand-ready obligations and are satisfied over time. With regard to account management and software as a service (“SaaS”), we use a time-elapsed output method to recognize revenue. For performance obligations where we charge customers a transaction-based fee, we use the output method based on transaction quantities. In most cases, our contracts provide us the right to invoice for services provided, therefore, we generally use the “as invoiced” practical expedient to recognize revenue associated with these performance obligations unless significant discounts are offered in a contract and prices for services do not represent their SSPs.

 

The variable consideration in our contracts results primarily from the transaction-based fee structure of some performance obligations with their total transaction quantities to be provided unknown at the onset of a contract, which are estimated using the expected value method.

 

Fulfillment & Logistics Services

 

Our services, delivered internally and with our partners, include:include printing, lettershop, advanced mail optimization (including commingling services), logistics and transportation optimization, monitoring and tracking, to support traditional and specialized mailings. Our print and fulfillment centers in Massachusetts and Kansas provide custom kitting services, print on demand, product recalls, trade marketing fulfillment, ecommerce product fulfillment, sampling programs, and freight optimization, thereby allowing our customers to distribute literature and other marketing materials.

 

13

 

Most performance obligations offered within this revenue stream are satisfied over time and utilize the input or output method, depending on the nature of the service, to measure progress toward satisfying the performance obligation. For performance obligations where we charge customers a transaction-based fee, we utilize the output method based on the quantities fulfilled. Services provided through our fulfillment centers are typically priced at a per transaction basis and our contracts provide us the right to invoice for services provided and reflects the value to the customer of the services transferred to date. In most cases, we use the “as invoiced” practical expedient to recognize revenue associated with these performance obligations unless significant discounts are offered in a contract and prices for services do not represent their standalone selling prices. Prior to the closure of our direct mail production facilities, our direct mail business contracts may have included a promise to purchase postage on behalf of our clients; in such cases, we have determined we are an agent, rather than principal and therefore recognize net consideration as revenue.

 

The variable consideration in our contracts results primarily from the transaction-based fee structure of some performance obligations with their total transaction quantities to be provided unknown at the onset of a contract, which is estimated using the expected value method.                                      

 

Upfront Non-Refundable Fees

 

We may receive non-refundable upfront fees from customers for implementation of our SaaS database solutions products or for providing training in connection with our contact center solutions. These activities are not deemed to transfer a separate promised service and therefore, represent advanced payments. As we do not deem these activities as transferring a separate promised service, the receipt of such fees represents advanced payments. Where customers have an option to renew a contract, the customer is not required to pay similar upfront fees upon renewal. As a result, we have determined that these renewal options provide for the purchase of future services at a reduced rate and therefore, provide a material right. These upfront non-refundable fees are recognized over the period of benefit which is generally consistent with estimated customer life (four to five years for database solutions contracts and six months to one year for contact center contracts).  The balance of upfront non-refundable fees collected from customers was immaterial as of SeptemberJune 30, 20212022 and December 31, 20202021.

 

Transaction Price Allocated to Future Performance Obligations 

 

We have elected to apply certain optional exemptions that limit the disclosure requirements over remaining performance obligations at period end to exclude: performance obligations that have an original expected duration of one year or less, transactions using the “as invoiced” practical expedient, or when a performance obligation is a series and we have allocated the variable consideration directly to the services performed. As of SeptemberJune 30, 20212022, we had 0 transaction prices allocated to unsatisfied or partially satisfied performance obligations.

 

Contract Balances

 

We record a receivable when revenue is recognized prior to invoicing when we have an unconditional right to consideration (only the passage of time is required before payment of that consideration is due) and a contract asset when the right to payment is conditional upon our future performance such as delivery of an additional good or service (e.g. customer contract requires customer’s final acceptance of custom database solution or delivery of final marketing strategy presentation before customer payment is required). If invoicing occurs prior to revenue recognition, the unearned revenue is presented on our Condensed Consolidated Balance Sheet as a contract liability, referred to as deferred revenue. The following table summarizes our contract balances as of SeptemberJune 30, 20212022 and December 31, 20202021:

 

In thousands

 

September 30, 2021

  

December 31, 2020

  

June 30, 2022

  

December 31, 2021

 

Contract assets

 $333  $613  $337  $622 

Deferred revenue and customer advances

 4,977  4,661  6,164  3,942 

Deferred revenue, included in other long-term liabilities

 781  817  540  756 

 

Revenue recognized during the ninesix months ended SeptemberJune 30, 20212022 from amounts included in deferred revenue at December 31, 2020the beginning of the period was approximately $4.0$2.5 million. 

 

Costs to Obtain and Fulfill a Contract

 

We recognize an asset for the direct costs incurred to obtain and fulfill our contracts with customers to the extent that we expect to recover these costs and if the benefit is longer than one year. These costs are amortized to operating expense over the expected period of the benefit in a manner that is consistent with the transfer of the related goods or services to which the asset relates. We impair the asset when recoverability is not anticipated. We capitalized a portion of commission expense, implementation and other costs that represents the cost to obtain a contract. The remaining unamortized contract costs were $1.4$1.0 million and $1.5 million as of SeptemberJune 30, 2022 and 2021,. respectively.  For the period presented, 0 impairment was recognized.

 

14

 
 

Note D - Leases

 

We have operating and finance leases for corporate and business offices, service facilities, call centers and certain equipment. Leases with an initial term of 12 months or less are generally not recorded on the balance sheet, unless the arrangement includes an option to purchase the underlying asset, or an option to renew the arrangement, that we are reasonably certain to exercise (short-term leases).exercise. Our leases have remaining lease terms of one year to sixnine years, some of which include options to extend the leases for up to an additional five years, and some of which include options to terminate the leases within one year.years.

 

We sublease our Fullerton (CA), Jacksonville (FL) and Uxbridge (UK) facilities.  The leases and subleases for these three facilities expire at various dates, the latest being during fiscal year 2023.  

 

As of SeptemberJune 30, 2022, assets recorded under finance and operating leases were approximately $0.7 million and $18.3 million respectively, and accumulated depreciation associated with finance leases was $0.8 million. As of December 31,2021,, assets recorded under finance and operating leases were approximately $0.8 million and $19.6$21.4 million respectively, and accumulated depreciation associated with finance leases was $0.7 million. As of December 31,2020, assets recorded under finance and operating leases were approximately $1.0 million and $23.8 million respectively, and accumulated depreciation associated with finance leases was $0.5 million.  Operating lease right of use assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The discount rate used to determine the commencement date present value of lease payment is the interest rate implicit in the lease, or when that is not readily determinable, our incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term at an amount equal to the lease payments in a similar economic environment. Since none of our leases has a readily determinable implicit interest rates,rate, we use our incremental borrowing rate under our Texas Capital Bank Revolver Facility as the discount rate.  Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received.

 

During the nine months ended September 30, 2021, we impaired twoThere was 0 impairment of leases for the facilities we no longer occupied. The resulting impairment charges are included in our restructuring expenses forduring the three and ninesix months ended SeptemberJune 30, 20212022Please refer to Note N, Restructuring Charges for further details.

 

The following table presents supplemental balance sheet information related to our financing and operating leases:

 

In thousands

 

As of September 30, 2021

      

As of June 30, 2022

     
 

Operating Leases

  

Finance Leases

 

Total

  

Operating Leases

  

Finance Leases

 

Total

 

Right-of-use Assets

 $19,569 $810 $20,379  $18,309 $673 $18,982 
  

Liabilities

              

Short-term lease liabilities

 6,410 205 6,615 

Current portion of lease liabilities

 5,119 188 5,307 

Long-term lease liabilities

  17,289   257   17,546   16,477   117   16,594 

Total Lease Liabilities

 $23,699  $462  $24,161  $21,596  $305  $21,901 

 

 

In thousands

 

As of December 31, 2020

      

As of December 31, 2021

     
 

Operating Leases

  

Finance Leases

  

Total

  

Operating Leases

  

Finance Leases

  

Total

 

Right-of-use Assets

 $23,793  $957  $24,750  $21,382  $760  $22,142 
  

Liabilities

  

Short-term lease liabilities

 6,436  227  6,663  6,359  194  6,553 

Long-term lease liabilities

  20,892   403   21,295   19,004   211   19,215 

Total Lease Liabilities

 $27,328  $630  $27,958  $25,363  $405  $25,768 

 

For the three and ninesix months ended SeptemberJune 30, 20212022 and 20202021, the components of lease expense were as follows:

 

In thousands

 

Three Months Ended September 30, 2021

  

Three Months Ended September 30, 2020

  

Three Months Ended June 30, 2022

  

Three Months Ended June 30, 2021

 

Operating lease cost

 $1,853  $1,951  $1,419  $1,913 
  

Finance lease cost:

  

Amortization of right-of-use assets

 49  59  41  49 

Interest on lease liabilities

  6   10   4   8 

Total Finance lease cost

 55  69  45  57 

Variable lease cost

 577  604  447  634 

Sublease income

  (117)  (228)  (160)  (169)

Total lease cost, net

 $2,368  $2,396  $1,751  $2,435 

In thousands

 

Six Months Ended June 30, 2022

  

Six Months Ended June 30, 2021

 

Operating lease cost

 $3,000  $4,032 
         

Finance lease cost:

        

Amortization of right-of-use assets

  87   98 

Interest on lease liabilities

  9   15 

Total Finance lease cost

  96   113 

Variable lease cost

  986   1,554 

Sublease income

  (411)  (358)

Total lease cost, net

 $3,671  $5,341 

 

15

 

In thousands

 

Nine Months Ended September 30, 2021

  

Nine Months Ended September 30, 2020

 

Operating lease cost

 $5,885  $6,435 
         

Finance lease cost:

        

Amortization of right-of-use assets

  147   191 

Interest on lease liabilities

  21   37 

Total Finance lease cost

  168   228 

Variable lease cost

  2,131   2,246 

Sublease income

  (475)  (228)

Total lease cost, net

 $7,709  $8,681 

Other information related to leases was as follows:

 

In thousands

 

Nine Months Ended September 30, 2021

  

Nine Months Ended September 30, 2020

  

Six Months Ended June 30, 2022

  

Six Months Ended June 30, 2021

 

Supplemental Cash Flows Information

        
  

Cash paid for amounts included in the measurement of lease liabilities:

  

Operating cash flows from operating leases

 $11,179  $14,535  $7,097  $7,637 

Operating cash flows from finance leases

 19  32  8  13 

Financing cash flows from finance leases

 169  357  101  112 
  

Weighted Average Remaining Lease term

  

Operating leases

 5.8  3.0  6.2  5.8 

Finance leases

 2.3  3.2  1.8  2.5 
  

Weighted Average Discount Rate

  

Operating leases

 3.50% 4.67% 3.40% 3.53%

Finance leases

 5.36% 5.28% 5.53% 5.33%

 

The maturities of the Company’s finance and operating lease liabilities as of SeptemberJune 30, 20212022 are as follows: 

 

In thousands

 

Operating Leases (1)

  

Finance Leases

  

Operating Leases (1)

  

Finance Leases

 

Year Ending December 31,

            

Remainder of 2021

 $1,997  $63 

2022

 6,698  209 

Remainder of 2022

 $2,437  $100 

2023

 4,765  166  5,222  166 

2024

 3,327  48  3,820  48 

2025

 1,581  6  2,117  6 

2026

  7,505   0   2,014   0 

2027

  8,229  0 

Total future minimum lease payments

 25,873  492  23,839  320 

Less: imputed interest

  2,174   30   2,243   15 

Total lease liabilities

 $23,699  $462  $21,596  $305 

 

(1) Non-cancelable sublease proceeds for the remainder of the fiscal year ending December 31, 20212022 and the fiscal yearsyear ending December 31, 20222023 and 2023of $0.2 million, $0.6 million and $0.2 million, respectively, are not included in the table above.

 

16

 
 

Note E - Convertible Preferred Stock

 

Our Amended and Restated Certificate of Incorporation authorizes us to issue 1.0 million shares of preferred stock. On January 30, 2018, we issued 9,926 shares of our Series A Preferred Stock to Wipro at an issue price of $1,000 per share, for gross proceeds of $9.9 million pursuant to a Certificate of Designation filed with the State of Delaware on January 29, 2018. We incurred $0.2 million of transaction fees in connection with the issuance of the Series A Preferred Stock which were netted against the gross proceeds of $9.9 million on our Condensed Consolidated Financial Statements.

On June 30, 2022, the Company entered into a share repurchase agreement (the “Repurchase Agreement”) with Wipro, pursuant to which the Company will repurchase all 9,926 shares of the Company’s Series A Preferred Stock currently outstanding in exchange for (i) a cash payment equal to their liquidation value, or total cash payment of $9,926,000 and (ii) 100,000 shares of the Company’s common stock, par value $1.00 per share. Closing of the transaction is subject to customary closing conditions, including that the shares are no longer subject to escheatment.  On June 30, 2022, the Company deposited $9,926,000 into an Escrow Account pursuant to the Repurchase Agreement to be released to WIPRO when all conditions to the repurchase have been satisfied and included this escrow amount in other current assets on our Condensed Consolidated Balance Sheet as of June 30, 2022. The transaction is expected to be completed by the third quarter of 2022 and at that time all rights of the parties related to the Series A Preferred Stock will be terminated.

 

Series A Preferred Stock has the following rights and privileges:

 

Liquidation Rights

 

In the event of a liquidation, dissolution or winding down of the Company or a Fundamental Transaction (defined in the Certificate of Designation for the Series A Preferred Stock), whether voluntary or involuntary, the holders of the Series A Preferred Stock are entitled to receive, prior to and in preference to the holders of common stock, from the assets of the Company available for distribution, an amount equal to the greater of (i) the original issue price, plus any dividends accrued but unpaid thereon, and (ii) such amount per share as would have been payable to Wipro had all shares of Series A Preferred Stock been converted into common stock immediately before such liquidation.

 

Upon liquidation, after the payment of all preferential amounts required to be paid to the holders of Series A Preferred Stock, the remaining assets of the Company available for distribution to its stockholders shall be distributed among the holders of Common Stock.

 

Dividends

 

Upon liquidation, dissolution or winding down of the Company, or a Fundamental Transaction (collectively, a “Liquidation”), shares of Series A Preferred Stock which have not been otherwise converted to common stock shall be entitled to receive dividends that accrue at a rate of (i) 5.0% each year, or (ii) the rate that cash dividends are paid in respect of shares of common stock (with Series A Preferred Stock being paid on an as-converted basis in such case) for such year if such rate is greater than 5.0%. Dividends on the Series A Preferred Stock are cumulative and accrue to the holders thereof whether or not declared by the Board of Directors (the “Board”). Dividends are payable solely upon a Liquidation, and only if prior to such Liquidation such shares of Series A Preferred Stock have not been converted to common stock. As of SeptemberJune 30, 20212022, cumulative dividends payable to the holders of Series A Preferred Stock upon a Liquidation totaled $1.8$2.2 million or $183.42$220.82 per share of Series A Preferred Stock.

 

Conversion

 

At the option of the holders of Series A Preferred Stock, shares of Series A Preferred Stock may be converted into common stock at a rate of 100.91 shares of common stock for one share of Series A Preferred Stock, subject to certain future adjustments.

 

Voting and Other Rights

 

The Series A Preferred Stock does not have voting rights, except as otherwise required by law. Other rights afforded the holders of Series A Preferred Stock, under defined circumstances, include the election and removal of one member of the Board as a separate voting class, the ability to approve certain actions of the Company prior to execution, and preemptive rights to participate in any future issuance of new securities. In addition, under certain circumstances, the holder of the Series A Preferred Stock is entitled to appoint an observer to our Board. The holder of the Series A Preferred Stock has elected to exercise its observer appointment rights but has not exercised its right to appoint the board member.

 

We determined that the Series A Preferred Stock has contingent redemption provisions allowing redemption by the holder upon certain defined events.  As the events that may trigger the redemption of the Series A Preferred Stock are not solely within our control, the Series A Preferred Stock is classified as mezzanine equity (temporary equity) in the Condensed Consolidated Balance Sheet as of SeptemberJune 30, 20212022 and December 31, 20202021.

 

17

 

Note F — Long-Term Debt

 

As of SeptemberJune 30, 20212022 and December 31, 20202021, long-term debt was as follows: 

 

In thousands

 

September 30, 2021

  

December 31, 2020

 

Revolving credit facility

 $13,100  $17,100 

Paycheck Protection Program Term Note

  0   10,000 

Total debt

  13,100   27,100 

Less: current portion of long-term debt

  0   (4,926)

Long-term debt

 $13,100  $22,174 

In thousands

 

June 30, 2022

  

December 31, 2021

 

Revolving credit facility

 $10,000  $5,000 

 

Credit Facility

 

As of SeptemberJune 30, 20212022 and December 31, 20202021, we had $13.1 million and $17.1$10.0 million of borrowings outstanding under the Texas CapitalNew Credit Facility (as defined below), respectively..  As of SeptemberJune 30, 20212022, we had the ability to borrow an additional $0.8$14.0 million under the Texas CapitalNew Credit Facility.

 

As of each of SeptemberJune 30, 20212022 and December 31, 20202021, we had letters of credit outstanding in the amount of $1.1$1.0 million.  NaN amounts were drawn against these letters of credit at SeptemberJune 30, 20212022.  These letters of credit exist to support insurance programs relating to worker‘s compensation, automobile, and general liability.

  

On April 17, 2017, we entered into a secured credit facility with Texas Capital Bank, N.A (“Texas Capital Bank”), that provided a $20.0 million revolving credit facility (the old “Texas Capital Credit Facility”) and for letters of credit issued by Texas Capital Bank up to $5.0 million. TheOver the term of the old Texas Capital Credit Facility, iswe entered into a number of amendments to extend the term and reduce the borrowing capacity.  The old Texas Capital Credit Facility was secured by substantially all of the Company’s and its material domestic subsidiaries’ assets. The old Texas Capital Credit Facility iswas guaranteed by HHS Guaranty, LLC, an entity formed to provide credit support for Harte Hanks by certain members of the Shelton family (descendants of one of our founders).  The old Texas Capital Credit Facility originally had an expiration date of April 17, 2019, at which point all outstanding amounts would have been due. On January 9, 2018, we entered into an amendment to the Texas Capital Credit Facility that increased the borrowing capacity to $22.0 million and extended the maturity by one year to April 17,2020. On May 7, 2019, we entered into a second amendment to the Texas Capital Credit Facility which further extended the maturity of the facility by one year to April 17, 2021. On May 11,2020, we entered into a third amendment to the Texas Capital Credit Facility which further extended the maturity of the facility by one year to April 17, 2022 and decreased the borrowing capacity to $19.0 million.  On May 5,2021, we entered into a fourth amendment to the Texas Capital Credit Facility which further extended the maturity of the facility by one year to April 17, 2023 and decreased the borrowing capacity to $15.0 million.  The Texas Capital Credit Facility remainswas secured by substantially all our assets and continues to be guaranteed by HHS Guaranty, LLC.  

The Texas Capital Credit Facility is subject to customary covenants requiring insurance, legal compliance, payment of taxes, prohibition of second liens, and secondary indebtedness, as well asLLC ("HHS").  Under the filing of quarterly and annual financial statements. The Company has been in compliance of all the requirements.

Under theold Texas Capital Credit Facility, we canwere permitted to elect to accrue interest on outstanding principal balances at either LIBOR plus 1.95% or prime plus 0.75%. Unused commitment balances accrueaccrued interest at 0.50%. We arewere required to pay a quarterly fee of 0.5% of the value of the collateral HHS Guaranty actually pledged to secure the facility as consideration for the guarantee, which for the three monthsyear ended September 30,December 31, 2021amounted to $0.1$0.4 million.

On December 21, 2021, the Company entered into a new three-year, $25.0 million asset-based revolving credit facility (the "New Credit Facility") with Texas Capital Bank.  The Company’s obligations under the New Credit Facility are guaranteed on a joint and several basis by the Company’s material subsidiaries (the “Guarantors”).   The New Credit Facility is secured by substantially all of the assets of the Company and the Guarantors pursuant to a Pledge and Security Agreement, dated as of December 21, 2021, among the Company, Texas Capital Bank and the other grantors party thereto (the "Security Agreement").

The New Credit Facility is subject to certain covenants restricting the Company's and its subsidiaries' ability to create, incur, assume or become liable for indebtedness; make certain investments; pay dividends or repurchase the Company's stock; create, incur or assume liens; consummate mergers or acquisitions; liquidate, dissolve, suspend or cease operations; or modify accounting or tax reporting methods (other than as required by U.S. GAAP).  The Company was in compliance with all of the requirements as of June 30, 2022.

The loans under the New Credit Facility accrue interest at a variable rate equal to the Bloomberg Short-Term Bank Yield Index Rate plus a margin of 2.25% per annum. The interest rate was 3.74% as of June 30, 2022. The outstanding amounts advanced under the New Credit Facility are due and payable in full on December 21, 2024.

In connection with entering into the New Credit Facility, the Company and Texas Capital Bank terminated the old Texas Capital Credit Facility. Prior to termination of the old Texas Capital Credit Facility, the Company used cash on hand to pay down $12.1 million outstanding under the old Texas Capital Credit Facility and the remaining $5.0 million of loans outstanding under the old Texas Capital Credit Facility were deemed to be outstanding under the New Credit Facility. Unlike the old Texas Capital Credit Facility, Texas Capital Bank did not require the New Credit Facility to be guaranteed by HHS.

 

Cash payments for interest were $63 thousand$0.1 million and $37 thousand$0.2 million and for the three months ended SeptemberJune 30, 20212022 and 20202021, respectively.  Cash payments for interest were $0.3$0.2 million and $0.4$0.3 million for the ninesix months ended SeptemberJune 30, 20212022 and 20202021, respectively.

 

Paycheck Protection Program Term Note
 

On April 14, 2020, the Company entered into a promissory note with Texas Capital Bank,  for an unsecured loan with a principal amount of $10.0 million made to the Company pursuant to the Paycheck Protection Program (“PPP Term Note”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The PPP Term Note is guaranteed by the United States Small Business Administration.

 

The proceeds were used to maintain payroll or make certain permitted interest payments, lease payments and utility payments. While the Company believes that it complied with all requirements related to the PPP Loan, the U.S. Department of the Treasury has announced that it will conduct audits for PPP loans that exceed $2.0 million. If the Company were to be audited and receive an adverse outcome in such an audit, it could be required to return the full amount of the PPP Loan and may potentially be subject to civil and criminal fines and penalties.

 

We applied for forgiveness of the entire $10.0 million PPP Term Note in the first quarter of 2021 because we used the proceeds from the loan as contemplated under the CARES Act.  On June 10, 2021, we received notice that the entire amount of our PPP Loan was forgiven by the SBA.  We recorded the $10.0 million of debt extinguishment as "Gain from extinguishment of debt" in the Condensed Consolidated Statements of Comprehensive Income (Loss) in the three and six months ended June 30, 2021.

 

 

Note G — Stock-Based Compensation

 

We maintain stock incentive plans for the benefit of certain officers, directors, and employees. Our stock incentive plans provide for the ability to issue stock options, cash stock appreciation rights, performance stock units, phantom stock units and cash performance stock units. Our cash stock appreciation rights, phantom stock units and cash performance stock units settle solely in cash and are treated as the current liability, which are adjusted each reporting period based on changes in our stock price.

 

Compensation expense for stock-based awards is based on the fair values of the awards on the date of grant and is recognized on a straight-line basis over the vesting period of the entire award in the “Labor” line of the Condensed Consolidated Statements of Comprehensive Income (Loss).Income. We recognized $0.3$0.6 million and $0.3$0.5 million of stock-based compensation expense during the three months ended SeptemberJune 30, 20212022 and 20202021, respectively.  We recognized $1.1$0.8 million and $0.6$0.8 million of stock-based compensation expense during the ninesix months ended SeptemberJune 30, 20212022 and 20202021, respectively.

 

18

 
 

Note H — Components of Net PeriodicEmployee Benefit CostPlans

 

Prior to January 1, 1999, we provided a defined benefit pension plan for which most of our employees were eligible to participate (the “Qualified Pension Plan”).  In conjunction with significant enhancements to our 401(k) plan, we elected to freeze benefits under the Qualified Pension Plan as of December 31, 1998.

 

In 1994, we adopted a non-qualified, unfunded, supplemental pension plan (the “Restoration Pension Plan”) covering certain employees, which provides for incremental pension payments so that total pension payments equal those amounts that would have been payable from the principal pension plan were it not for limitations imposed by income tax regulation. The benefits under the Restoration Pension Plan were intended to provide benefits equivalent to our Qualified Pension Plan as if such plan had not been frozen. We elected to freeze benefits under the Restoration Pension Plan as of April 1, 2014.

 

At the end of 2020, the Board of Directors of the Company approved the division of the Qualified Pension Plan into two distinct plans, “Qualified Pension Plan I” and “Qualified Pension Plan II.”  The assets and liabilities of the Qualified Pension Plan that were attributable to certain participants in Qualified Pension Plan II were spun off and transferred into Qualified Pension Plan II effective as of the end of December 31, 2020, in accordance with Internal Revenue Code section 414 (I) and ERISA Section 4044.

 

Net pension cost for both plans included the following components:

 

 

Three Months Ended September 30,

  

Nine Months Ended September 30,

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 

In thousands

 

2021

  

2020

  

2021

  

2020

  

2022

  

2021

  

2022

  

2021

 

Interest cost

 $1,168  $1,473  $3,504  $4,419  $1,260  $1,168  $2,520  $2,336 

Expected return on plan assets

 (1,688) (1,384) (5,064) (4,152) (1,468) (1,688) (2,936) (3,376)

Recognized actuarial loss

  860   812   2,580   2,436   719   860   1,438   1,720 

Net periodic benefit cost

 $340  $901  $1,020  $2,703  $511  $340  $1,022  $680 

 

Based on current estimates, we arewill be required to make a $0.3$1.3 million contribution to the combined qualified Pension Plan in 20212022.  We made a $0.3$0.5 million of such $1.3 million aggregate contribution in the ninesix months ended September June 30, 202230,2021..

 

We are not required to make, and do not intend to make, any contributions to our Restoration Pension Plan other than to the extent needed to cover benefit payments. We made benefit payments under this supplemental plan of $1.3$0.9 million and $1.3$0.9 million in the ninesix months ended SeptemberJune 30, 20212022 and 20202021, respectively.

 

 

Note I - Income Taxes

 

The income tax provision (benefit) was $172 thousand$0.7 million and ($53) thousand$0.3 million for the three months ended SeptemberJune 30, 20212022 and 20202021, respectively.  The provision (benefit) for income taxes resulted in an effective income tax rate of 3.8%13.1% for the three months ended SeptemberJune 30, 20212022 and 3.2%2.4% for the three months ended SeptemberJune 30, 2021.  30,2020.The effective tax rate differs from the federal statutory rate of 21.0%, primarily due to the change in valuation allowance, U.S. state income taxes and income earned in foreign jurisdictions.

 

The income tax provision (benefit) was $1.0$1.1 million and ($12.9)$0.8 million for the ninesix months ended SeptemberJune 30, 2022 30,and 2021 and 2020,, respectively.  The provision (benefit) for income taxes resulted in an effective income tax rate of 7.2%12.6% for the ninesix months ended September June 30,2021 2022 and 82.4%8.8% for the ninesix months ended SeptemberJune 30, 2021.  30,2020.The effective tax rate differs from the federal statutory rate of 21.0%, primarily due to the change in valuation allowance, U.S. state income taxes and income earned in foreign jurisdictions.

 

Coronavirus Aid, Relief and Economic Security Act

 

In response to the COVID-19 pandemic, the CARES Act was signed into law in March 2020. The CARES Act lifts certain deduction limitations originally imposed by the Tax Cuts and Jobs Act of 2017 (“2017 Tax Act”). Under the CARES Act, corporate taxpayers may carryback net operating losses (“ NOLs”) realized during 2018 through 2020 for up to five years, which was not previously allowed under the 2017 Tax Act. The CARES Act also eliminates the 80% of taxable income limitations by allowing corporate entities to fully utilize NOL carryforwards to offset taxable income in 2018, 2019 or 2020. Taxpayers may generally deduct interest up to the sum of 50% of adjusted taxable income plus business interest income (30% limit under the 2017 Tax Act) for tax years beginning January 1, 2019 and 2020. The CARES Act allows taxpayers with alternative minimum tax credits to claim a refund in 2020 for the entire amount of the credits instead of recovering the credits through refunds over a period of years, as originally enacted by the 2017 Tax Act. In addition, the CARES Act raises the corporate charitable deduction limit to 25% of taxable income and makes qualified improvement property generally eligible for 15-year cost-recovery and 100% bonus depreciation.  As of December 31, 2020, the Company has filed federal net operating loss carryback claims resulting in an income tax refund for $6.4 million and $3.2 million for tax years 2019 and 2018, respectively.  As of SeptemberJune 30, 20212022, the Company has received the tax refunds for the tax years 2019 and 2018 and expects to receive an$0.2 million of income tax refund of $7.6 million in 2021 as a result ofrefunds from the carryback of the loss generated in 2020.  The Company expects to receive an additional $7.6 million from the 2020 net operating loss carryback claim in 2022.

 

The Company determines its estimated annual effective tax rate at the end

19

Harte Hanks, or one of its subsidiaries, files income tax returns in the U.S. federal, U.S. state, and foreign jurisdictions. For U.S. state returns, we are no longer subject to tax examinations for tax years prior to 2014.2016. For U.S. federal and foreign returns, we are no longer subject to tax examinations for tax years prior to 2016.

 

We have elected to classify any interest expense and penalties related to income taxes within income tax expense in our Condensed Consolidated Statements of Comprehensive Income (Loss).Income. We did not have a significant amount of interest or penalties accrued at SeptemberJune 30, 20212022 or December 31, 20202021.

 

19

 

Note J - Earnings Per Share

 

In periods in which the Company has net income, the Company is required to calculate earnings per share (“EPS”) using the two-class method. The two-class method is required because the Company’s Series A Preferred Stock is considered a participating security with objectively determinable and non-discretionary dividend participation rights. Series A Preferred stockholders have the right to participate in dividends above their 5five percent dividend rate should the Company declare dividends on its common stock at a dividend rate higher than the five percent (on an as-converted basis). Under the two-class method, undistributed and distributed earnings are allocated on a pro-rata basis to the common and the preferred stockholders. The weighted-average number of common and preferred stock outstanding during the period is then used to calculate EPS for each class of shares.

 

In periods in which the Company has a net loss, basic loss per share is calculated using the treasury stock method. The treasury stock method is calculated by dividing the net loss by the weighted-average number of common shares outstanding during the period. The two-class method is not used, because the calculation would be anti-dilutive.

 

Reconciliations of basic and diluted EPS were as follows:

 

 

Three Months Ended September 30,

  

Three Months Ended June 30,

 

In thousands, except per share amounts

 

2021

  

2020

  

2022

  

2021

 

Numerator:

          

Net income (loss)

 $4,404  $(1,621)

Net income

 $4,461 $10,569 

Less: Preferred stock dividends

 125  125  124  124 

Less: Earnings attributable to participating securities

  543   0   542   1,361 

Numerator for basic EPS: income (loss) attributable to common stockholders

  3,736  $(1,746)

Numerator for basic EPS: income attributable to common stockholders

  3,795  $9,084 
          

Effect of dilutive securities:

          

Add back: Allocation of earnings to participating securities

 543 0  542 1,361 

Less: Re-allocation of earnings to participating securities considering potentially dilutive securities

  (525)  0   (518)  (1,277)

Numerator for diluted EPS

 3,754 (1,746) 3,819 9,168 
          

Denominator:

            

Basic EPS denominator: weighted-average common shares outstanding

 6,889  6,523  7,017  6,686 

Diluted EPS denominator

 7,162 6,523  7,388 7,193 
          

Basic income (loss) per Common Share

 $0.54  $(0.27)

Diluted income (loss) per Common Share

 $0.52  $(0.27)

Basic income per Common Share

 $0.54  $1.36 

Diluted income per Common Share

 $0.52  $1.27 

 

For the three months ended SeptemberJune 30, 20212022 and 20202021, respectively, the following shares have been excluded from the calculation of shares used in the diluted EPS calculation: 43 thousand13,063 and 0.1 million50,653 shares of anti-dilutive market price options; 0 and 0.3 million3,846 of anti-dilutive unvested restricted shares; and 1.0 million1,001,614 and 1.0 million1,001,614 shares of anti-dilutive Series A Preferred Stock (as if converted).

  

Six Months Ended June 30,

 

In thousands, except per share amounts

 

2022

  

2021

 

Numerator:

        

Net Income

 $7,806  $8,811 

Less: Preferred stock dividend

  246   246 

Less: Earnings attributable to common stockholders

  946   1,118 

Numerator for basic EPS: income attributable to common stockholders

  6,614   7,447 
         

Effect of dilutive securities:

        

Add back: Allocation of earnings to participating securities

  946   1,118 

Less: Re-allocation of earnings to participating securities considering potentially dilutive securities

  (908)  (1,055)

Numerator for diluted EPS

 $6,652  $7,510 
         

Denominator:

        

Basic EPS denominator: weighted-average common shares outstanding

  7,004   6,669 

Diluted EPS denominator

  7,338   7,131 
         

Basic income per Common Share

 $0.94  $1.12 

Diluted income per Common Share

 $0.91  $1.05 

For the six months ended June 30, 2022 and 2021, respectively, the following shares have been excluded from the calculation of shares used in the diluted EPS calculation: 14,063 and 52,442 shares of anti-dilutive market price options; 11,138 and 1,934 of anti-dilutive unvested restricted shares; and 1,001,614 and 1,001,614 shares of anti-dilutive Series A Preferred Stock (as if converted).

 

20

 
  

Nine Months Ended September 30,

 

In thousands, except per share amounts

 

2021

  

2020

 

Numerator:

        

Net Income (loss)

 $13,215  $(2,738)

Less: Preferred stock dividend

  372   372 

Less: Earnings attributable to common stockholders

  1,661   0 

Numerator for basic EPS: income (loss) attributable to common stockholders

  11,182   (3,110)
         

Effect of dilutive securities:

        

Add back: Allocation of earnings to participating securities

  1,661   0 

Less: Re-allocation of earnings to participating securities considering potentially dilutive securities

  (1,578)  0 

Numerator for diluted EPS

 $11,265  $(3,110)
         

Denominator:

        

Basic EPS denominator: weighted-average common shares outstanding

  6,743   6,432 

Diluted EPS denominator

  7,153   6,432 
         

Basic income (loss) per Common Share

 $1.66  $(0.48)

Diluted income (loss) per Common Share

 $1.57  $(0.48)

For the nine months ended September 30, 2021 and 2020, respectively, the following shares have been excluded from the calculation of shares used in the diluted EPS calculation: 49 thousand and 0.1 million shares of anti-dilutive market price options; 63 thousand and 0.4 million of anti-dilutive unvested restricted shares; and 1.0 million and 1.0 million shares of anti-dilutive Series A Preferred Stock (as if converted).

 

Note K — Comprehensive Income (Loss) 

 

Comprehensive Income (Loss) for a period encompasses net income (loss) and all other changes in equity other than from transactions with our stockholders. 

 

21

Changes in accumulated other comprehensive income (loss) by component were as follows:

 

  

Defined Benefit

  

Foreign Currency

     

In thousands

 

Pension Items

  

Items

  

Total

 

Balance at December 31, 2020

 $(68,544) $2,933  $(65,611)

Other comprehensive income, net of tax, before reclassifications

  0   (1,713)  (1,713)

Amounts reclassified from accumulated other comprehensive income (loss), net of tax, to other, net, on the condensed consolidated statements of comprehensive loss

  2,457   0   2,457 

Net current period other comprehensive income, net of tax

  2,457   (1,713)  744 

Balance at September 30, 2021

 $(66,087) $1,220  $(64,867)
  

Defined Benefit

  

Foreign Currency

     

In thousands

 

Pension Items

  

Items

  

Total

 

Balance at December 31, 2021

 $(54,394) $1,066  $(53,328)

Other comprehensive loss, net of tax, before reclassifications

  0   (3,111)  (3,111)

Amounts reclassified from accumulated other comprehensive income, net of tax, to other, net, on the condensed consolidated statements of comprehensive income

  1,588   0   1,588 

Net current period other comprehensive income (loss), net of tax

  1,588   (3,111)  (1,523)

Balance at June 30, 2022

 $(52,806) $(2,045) $(54,851)

 

  

Defined Benefit

  

Foreign Currency

     

In thousands

 

Pension Items

  

Items

  

Total

 

Balance at December 31, 2019

 $(63,887) $753  $(63,134)

Other comprehensive loss, net of tax, before reclassifications

  0   1,067   1,067 

Amounts reclassified from accumulated other comprehensive income (loss), net of tax, to other, net, on the condensed consolidated statements of comprehensive loss

  1,827   0   1,827 

Net current period other comprehensive loss, net of tax

  1,827   1,067   2,894 

Balance at September 30, 2020

 $(62,060) $1,820  $(60,240)
  

Defined Benefit

  

Foreign Currency

     

In thousands

 

Pension Items

  

Items

  

Total

 

Balance at December 31, 2020

 $(68,544) $2,933  $(65,611)

Other comprehensive loss, net of tax, before reclassifications

  0   (462)  (462)

Amounts reclassified from accumulated other comprehensive income, net of tax, to other, net, on the condensed consolidated statements of comprehensive income

  1,596   0   1,596 

Net current period other comprehensive income (loss), net of tax

  1,596   (462)  1,134 

Balance at June 30, 2021

 $(66,948) $2,471  $(64,477)

 

Reclassification amounts related to the defined pension plans are included in the computation of net periodic pension benefit cost (see Note H, Components of Net PeriodicEmployee Benefit CostPlans).  

 

 

Note L — Litigation and Contingencies

 

In the normal course of our business, we are obligated under some agreements to indemnify our clients as a result of claims that we infringe on the proprietary rights of third parties. The terms and duration of these commitments vary and, in some cases, may be indefinite, and certain of these commitments do not limit the maximum amount of future payments we could become obligated to make thereunder; accordingly, our actual aggregate maximum exposure related to these types of commitments is not reasonably estimable. Historically, we have not been obligated to make significant payments for obligations of this nature, and 0 liabilities have been recorded for these obligations in our condensed consolidated financial statements.

 

We are also subject to various claims and legal proceedings in the ordinary course of conducting our businesses and, from time to time, we may become involved in additional claims and lawsuits incidental to our businesses. We routinely assess the likelihood of adverse judgments or outcomes to these matters, as well as ranges of probable losses; to the extent losses are reasonably estimable. Accruals are recorded for these matters to the extent that management concludes a loss is probable and the financial impact, should an adverse outcome occur, is reasonable estimable.

 

In the opinion of management, appropriate and adequate accruals for legal matters have been made, and management believes that the probability of a material loss beyond the amounts accrued is remote. Nevertheless, we cannot predict the impact of future developments affecting our pending or future claims and lawsuits. We expense legal costs as incurred, and all recorded legal liabilities are adjusted as required as better information becomes available to us. The factors we consider when recording an accrual for contingencies include, among others: (i) the opinions and views of our legal counsel; (ii) our previous experience; and (iii) the decision of our management as to how we intend to respond to the complaints.

 

2221

 
 

Note M — Certain Relationships and Related Party Transactions

 

As described in Note F, Long-Term Debt, the Company’sold Texas Capital Credit Facility iswas secured by HHS Guaranty, LLC, an entity formed to provide credit support for the Company by certain members of the Shelton family (descendants of one of our founders).  Pursuant toThe arrangement was terminated in connection with the Amended and Restated Fee, Reimbursement and Indemnity Agreement, datedentry into the New Credit Facility because Texas Capital Bank did January 9, 2018, notbetween HHS Guaranty, LLC and require third-party credit support for the Company, HHS Guaranty, LLC hasborrowings under the right to appoint one representative director to the Board and is paid a fee to provide the guarantee. Currently, David L. Copeland serves as the HHS Guaranty, LLC representative on the Board.New Credit Facility. 

 

23

Note N — Restructuring Activities

 

Our management team continuously reviews and adjusts our cost structure and operating footprint, optimize our operations, and invest in improved technology.  During 2020, in an effort to right-size our operating footprint, we terminated leases in Wilkes Barre (PA) and Grand Prairie (TX) and exited our last direct mail facility in Jacksonville (FL).  We completed the migration of our fulfillment business from the Grand Prairie (TX) operations into a new 300,000400,000 square foot facility in Kansas City (KS) in December 2020.  In the first quarter of 2021, we completed the migration of our Shawnee (KS) operations to Kansas City.City (KS).  The Shawnee (KS) facility lease expired on April 30, 2021.  The new Kansas City location is now our primary facility in the Midwest. In 2020, we successfully reduced the footprint of our Customer Care business by reducing our Austin (TX) office location by approximately 50,000 square feet in addition to exiting one of our two Manila offices since the business is operating effectively in a work-from-home environment. 

In connection with our cost-saving and restructuring initiatives, we incurred total restructuring charges of $27.6 million through the end of 2021.  We completed our restructuring in 2021, and expect 0 further restructuring expenses in 2022 related to our restructuring plan.

 

In the three months ended September June 30,2021,and 2020 we recorded restructuring charges of $0.9$1.7 million, and $1.4 million respectively.which  The charges for the three months ended September 30, 2021included $0.1$1.2 million of severance charges $0.4 million in lease impairment expense and $0.4$0.5 million of facility related and other expenses.  The charges forIn the threesix months ended September June 30, 2020 2021, we recorded restructuring charges of $3.9 million, which included $0.61.4 million of severance charges $0.6,$2.2 million of facility related and other expenses and $0.2 million in capital losses from the asset disposal associated with the Summit deal. 

In the nine months ended September 30, 2021 and 2020 we recorded restructuring charges of $4.9 million and $8.0 million respectively.  The charges for the nine months ended September 30, 2021 included $1.5 million of severance charges, $0.7$0.3 million in lease impairment expense and $2.6 million of facility related and other expenses.  The charges for the nine months ended September 30, 2020 included $3.0 million of lease impairment charges related to the exit from our direct mail facilities, $2.0 million of severance charges, $1.3 million in capital losses from the asset disposal associated with the sale of assets to Summit and $2.0 million of facility related and other expenses. expense.

 

The following table summarizes the restructuring charges which are recorded in “Restructuring Expense” in the Condensed Consolidated Statements of Comprehensive Income (Loss).Income.

 

 

Three Months Ended September 30,

  

Nine Months Ended September 30,

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 

In thousands

 

2021

  

2020

  

2021

  

2020

  

2021

  

2021

 

Adjustment to Contract termination fee

 0 0 0 (306)

Severance

 $116  $641  $1,530  $2,053  1,209  1,413 

Facility, asset impairment and other expense

  

Lease impairment and termination expense

 425  0  718  2,974  0  294 

Fixed Asset disposal and impairment charges

 (8) 154  (2) 1,294  (4) 6 

Facility and other expenses

  404   624   2,634   1,990   539   2229 

Total facility, asset impairment and other expense

  821   778   3,350   6,258   535   2,529 
  

Total

 $937  $1,419  $4,880  $8,005  $1,744  $3,942 

 

The following table summarizes the changes in liabilities related to restructuring activities:

 

In thousands

 

Three Months Ended September 30, 2021

  

Three Months Ended June 30, 2022

 
 

Contract Termination Fee

  

Severance

  

Facility, asset impairment and other expense

  

Total

  

Contract Termination Fee

  

Severance

  

Facility, asset impairment and other expense

  

Total

 

Beginning Balance:

 $0  $937  $21  $958  $0  $405  $0  $405 

Additions

 0 113 (16) 97  0 0 0 0 

Payments and adjustments

  0   (421)  0   (421)  0   (320)  0   (320)

Ending Balance:

 $0  $629  $5  $634  $0  $85  $0  $85 

 

In thousands

 

Nine Months Ended September 30, 2021

 
  

Contract Termination Fee

  

Severance

  

Facility, asset impairment and other expense

  

Total

 

Beginning balance:

 $0  $549  $4  $553 

Additions

  0   1,527   1   1,528 

Payments and adjustments

  0   (1,447)  0   (1,447)

Ending balance:

 $0  $629  $5  $634 

In thousands

 

Six Months Ended June 30, 2022

 
  

Contract Termination Fee

  

Severance

  

Facility, asset impairment and other expense

  

Total

 

Beginning balance:

 $0  $738  $0  $738 

Additions

  0   0   0   0 

Payments and adjustments

  0   (653)  0   (653)

Ending balance:

 $0  $85  $0  $85 

 

2422

 

In thousands

 

Three Months Ended June 30, 2021

 
  

Contract Termination Fee

  

Severance

  

Facility, asset impairment and other expense

  

Total

 

Beginning Balance:

 $0  $350  $8  $358 

Additions

  0   1,209   13   1,222 

Payments

  0   (622)  0   (622)

Ending Balance:

 $0  $937  $21  $958 

 

In thousands

 

Three Months Ended September 30, 2020

 
  

Contract Termination Fee

  

Severance

  

Facility, asset impairment and other expense

  

Total

 

Beginning Balance:

 $695  $775  $2  $1,472 

Additions

  0   611   576   1,187 

Payments

  (695)  (608)  (570)  (1,873)

Ending Balance:

 $0  $778  $8  $786 

  

For the Nine Months Ended September 30, 2020

 
  

Contract Termination Fee

  

Severance

  

Facility, asset impairment and other expense

  

Total

 

Beginning Balance:

 $1,491  $360  $70  $1,921 

Additions

  0   2,022   3,145   5,167 

Payments

  (1,491)  (1,604)  (3,207)  (6,302)

Ending Balance:

 $0  $778  $8  $786 

We expect that in connection with our cost-saving and restructuring initiatives, we will incur total restructuring charges of approximately $27.1 million through the end of 2021. We have recognized $26.1 million of restructuring charges to date, and we expect to incur an additional $1.0 million of restructuring charges through the end of 2021.

25

  

For the Six Months Ended June 30, 2021

 
  

Contract Termination Fee

  

Severance

  

Facility, asset impairment and other expense

  

Total

 

Beginning Balance:

 $0  $549  $4  $553 

Additions

  0   1,413   17   1,430 

Payments

  0   (1,025)  0   (1,025)

Ending Balance:

 $0  $937  $21  $958 

 

 

Note O  Segment Reporting

 

Harte Hanks is a leading global customer experience company. We have organized our operations into 3 business segments based on the types of products and services we provide: Marketing Services, Customer Care, Fulfillment & Logistics Services.

 

Our Marketing Services segment leverages data, insight, and experience to support clients as they engage customers through digital, traditional, and emerging channels.  We partner with clients to develop strategies and tactics to identify and prioritize customer audiences in B2C and B2B transactions.  Our key service offerings include strategic business, brand, marketing and communications planning, data strategy, audience identification and prioritization, predictive modeling, creative development and execution across traditional and digital channels, website and app development, platform architecture, database build and management, marketing automation, and performance measurement, reporting and optimization.  

 

Our Customer Care segment offers intelligently responsive contact center solutions, which use real-time data to effectively interact with each customer.  Customer contacts are handled through phone, e-mail, social media, text messaging, chat and digital self-service support.  We provide these services utilizing our advanced technology infrastructure, human resource management skills and industry experience.

 

Our Fulfillment & Logistics Services segment consists of mail and product fulfillment and logistics services.  We offer a variety of product fulfillment solutions, including printing on demand, managing product recalls, and distributing literature and promotional products to support B2B trade, drive marketing campaigns, and improve customer experience.  We are also a provider of third-party logistics and freight optimization in the United States.  Prior to the sale of our direct mail equipment in 2020, this segment also included our direct mail operations.  Outsourced direct mail is now included in our Marketing Services segment.

 

There are three principal financial measures reported to our CEO (the chief operating decision maker) for use in assessing segment performance and allocating resources. Those measures are revenue, operating income (loss) and operating income (loss) plus depreciation and amortization (“EBITDA”). Operating income (loss) for segment reporting disclosed below, is revenues less operating costs and allocated corporate expenses. Segment operating expenses include allocations of certain centrally incurred costs such as employee benefits, occupancy, information systems, accounting services, internal legal staff, and human resources administration. These costs are allocated based on actual usage or other appropriate methods.  Unallocated corporate expenses are corporate overhead expenses not attributable to the operating groups. Interest income and expense are not allocated to the segments.  The Company does not allocate assets to our reportable segments for internal reporting purposes, nor does our CEO evaluate operating segments using discrete asset information.  The accounting policies of the segments are consistent with those described in the Note A, Overview and Significant Accounting Policies.

 

2623

 

The following table presents financial information by segment:

 

Three Months ended September 30, 2021

 

Marketing Services

  

Customer Care

  

Fulfillment and Logistics Services

  

Restructuring

  

Unallocated Corporate

  

Total

 

Three Months ended June 30, 2022

 

Marketing Services

  

Customer Care

  

Fulfillment and Logistics Services

  

Restructuring

  

Unallocated Corporate

  

Total

 
     

(In thousands)

            

(In thousands)

       

Revenues

 $14,729  $19,768  $15,100  $0  $0  $49,597  $13,450  $15,382  $19,721  $0  $0  $48,553 

Segment Operating Expense

 $10,937  $15,087  $12,695  $0  $5,108  $43,827  $10,584  $12,212  $15,770  $0  $5,390  $43,956 

Restructuring

 $0  $0  $0  $937  $0  $937 

Contribution margin

 $3,792  $4,681  $2,405  $(937) $(5,108) $4,833 

Overhead Allocation

 $1,020  $667  $712  $0  $(2,399) $0 

Contribution margin (loss)

 $2,866  $3,170  $3,951  $0  $(5,390) $4,597 

Shared Services

 $1,052  $677  $779  $0  $(2,508) $0 

EBITDA

 $2,772  $4,014  $1,693  $(937) $(2,709) $4,833  $1,814  $2,493  $3,172  $0  $(2,882) $4,597 

Depreciation

 $117  $195  $182  $0  $113  $607  $89  $201  $202  $0  $94  $586 

Operating income (loss)

 $2,655  $3,819  $1,511  $(937) $(2,822) $4,226  $1,725  $2,292  $2,970  $0  $(2,976) $4,011 

 

Three Months ended September 30, 2020

 

Marketing Services

  

Customer Care

  

Fulfillment and Logistics Services

  

Restructuring

  

Unallocated Corporate

  

Total

 

Three Months ended June 30, 2021

 

Marketing Services

  

Customer Care

  

Fulfillment and Logistics Services

  

Restructuring

  

Unallocated Corporate

  

Total

 
     

(In thousands)

            

(In thousands)

       

Revenues

 $15,217  $17,933  $14,552  $0  $0  $47,702  $14,208  $19,191  $15,860  $0  $0  $49,259 

Segment Operating Expense

 $12,835  $14,097  $13,392  $0  $4,433  $44,757  $11,377  $15,138  $13,426  $0  $5,476  $45,417 

Restructuring

 $0  $0  $0  $1,419  $0  $1,419  $0  $0  $0  $1,744  $0  $1,744 

Contribution margin

 $2,382  $3,836  $1,160  $(1,419) $(4,433) $1,526 

Overhead Allocation

 $1,173  $827  $886  $0  $(2,886) $0 

Contribution margin (loss)

 $2,831  $4,053  $2,434  $(1,744) $(5,476) $2,098 

Shared Services

 $1,105  $703  $779  $0  $(2,587) $0 

EBITDA

 $1,209  $3,009  $274  $(1,419) $(1,547) $1,526  $1,726  $3,350  $1,655  $(1,744) $(2,889) $2,098 

Depreciation

 $141  $323  $138  $0  $139  $741  $144  $203  $192  $0  $124  $663 

Operating income (loss)

 $1,068  $2,686  $136  $(1,419) $(1,686) $785  $1,582  $3,147  $1,463  $(1,744) $(3,013) $1,435 

 

Nine Months ended September 30, 2021

 

Marketing Services

  

Customer Care

  

Fulfillment and Logistics Services (1)

  

Restructuring

  

Unallocated corporate

  

Total

 

Six Months ended June 30, 2022

 

Marketing Services

  

Customer Care

  

Fulfillment and Logistics Services

  

Restructuring

  

Unallocated Corporate

  

Total

 
     

(In thousands)

            

(In thousands)

       

Revenues

 $41,815  $55,503  $45,292  $0  $0  $142,610  $26,374  $33,123  $38,118  $0  $0  $97,615 

Segment Operating Expense

 $33,355  $43,299  $38,295  $0  $16,037  $130,986  $20,934  $25,773  $30,929  $0  $10,889  $88,525 

Restructuring

 $0  $0  $0  $4,880  $0  $4,880 

Contribution margin

 $8,460  $12,204  $6,997  $(4,880) $(16,037) $6,744  $5,440  $7,350  $7,189  $0  $(10,889) $9,090 

Overhead Allocation

 $3,380  $2,240  $2,432  $0  $(8,052) $0 

Shared Services

 $2,165  $1,395  $1,630  $0  $(5,190) $0 

EBITDA

 $5,080  $9,964  $4,565  $(4,880) $(7,985) $6,744  $3,275  $5,955  $5,559  $0  $(5,699) $9,090 

Depreciation

 $412  $652  $541  $0  $363  $1,968  $191  $403  $404  $0  $186  $1,184 

Operating income (loss)

 $4,668  $9,312  $4,024  $(4,880) $(8,348) $4,776  $3,084  $5,552  $5,155  $0  $(5,885) $7,906 

 

Nine Months ended September 30, 2020

 

Marketing Services

  

Customer Care

  

Fulfillment and Logistics Services

  

Restructuring

  

Unallocated corporate

  

Total

 

Six Months ended June 30, 2021

 

Marketing Services

  

Customer Care

  

Fulfillment and Logistics Services (1)

  

Restructuring

  

Unallocated Corporate

  

Total

 
     

(In thousands)

            

(In thousands)

       

Revenues

 $41,682  $41,640  $46,503  $0  $0  $129,825  $27,086  $35,735  $30,192  $0  $0  $93,013 

Segment Operating Expense

 $34,406  $34,669  $44,984  $0  $15,064  $129,123  $22,418  $28,212  $25,600  $0  $10,929  $87,159 

Restructuring

 $0  $0  $0  $8,005  $0  $8,005  $0  $0  $0  $3,942  $0  $3,942 

Contribution margin

 $7,276  $6,971  $1,519  $(8,005) $(15,064) $(7,303) $4,668  $7,523  $4,592  $(3,942) $(10,929) $1,912 

Overhead Allocation

 $3,806  $2,629  $2,937  $0  $(9,372) $0 

Shared Services

 $2,360  $1,573  $1,720  $0  $(5,653) $0 

EBITDA

 $3,470  $4,342  $(1,418) $(8,005) $(5,692) $(7,303) $2,308  $5,950  $2,872  $(3,942) $(5,276) $1,912 

Depreciation

 $463  $780  $1,185  $0  $477  $2,905  $295  $457  $359  $0  $250  $1,361 

Operating income (loss)

 $3,007  $3,562  $(2,603) $(8,005) $(6,169) $(10,208) $2,013  $5,493  $2,513  $(3,942) $(5,526) $551 

 

(1) Operating expense in this segment includes $0.8 million favorable litigation settlement as well as the related legal expenses.

 

2724

 
 

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

 

Cautionary Note Regarding Forward-Looking Statements

 

This report, including the Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), contains “forward-looking statements” within the meaning of the federal securities laws. All such statements are qualified by this cautionary note, which is provided pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933 (the “1933 Act”) and Section 21E of the Exchange Act of 1934, as amended.Act. Forward-looking statements may also be included in our other public filings, press releases, our website, and oral and written presentations by management. Statements other than historical facts are forward-looking and may be identified by words such as “may,” “will,” “expects,” “believes,” “anticipates,” “plans,” “estimates,” “seeks,” “could,” “intends,” or words of similar meaning. Examples include statements regarding (1) our strategies and initiatives, including our ability to reduce costs pursuant to the Restructuring Activities, (2)and make other adjustments to our cost structure and other actions designed to respond to market conditions and improve our performance, and the anticipated effectiveness and expenses associated with these actions, (3)(2) our financial outlook for revenues, earnings (loss) per share, operating income (loss), expense related to equity-based compensation, capital resources and other financial items, if any, (4)(3) expectations for our businesses and for the industries in which we operate, including the impact of economic conditions of the markets we serve on the marketing expenditures and activities of our clients and prospects, (5)(4) competitive factors, (6)(5) acquisition and development plans, (7) our stock repurchase program, (8)(6) expectations regarding legal proceedings and other contingent liabilities, and (9)(7) other statements regarding future events, conditions, or outcomes.

 

These forward-looking statements are based on current information, expectations, and estimates and involve risks, uncertainties, assumptions, and other factors that are difficult to predict and that could cause actual results to vary materially from what is expressed in or indicated by the forward-looking statements. In that event, our business, financial condition, results of operations, or liquidity could be materially adversely affected and investors in our securities could lose part or all of their investments. Some of these risks, uncertainties, assumptions, and other factors can be found in our filings with the SEC, including the factors discussed under “Item 1A. Risk Factors” in the 20202021 10-K, Part II, and in our other reports filed or furnished with the SEC. The forward-looking statements included in this report and those included in our other public filings, press releases, our website, and oral and written presentations by management are made only as of the respective dates thereof, and we undertake no obligation to update publicly any forward-looking statement in this report or in other documents, our website, or oral statements for any reason, even if new information becomes available or other events occur in the future, except as required by law.

 

Overview

 

The following MD&A is intended to help the reader understand the results of operations and financial condition of Harte Hanks. This section is provided as a supplement to, and should be read in conjunction with, our Condensed Consolidated Financial Statements and the accompanying notes included herein as well as our 20202021 10-K. Our 20202021 10-K contains a discussion of other matters not included herein, such as disclosures regarding critical accounting policies and estimates, and contractual obligations. See Note A, Overview and Significant Accounting Policies, in the Notes to Condensed Consolidated Financial Statements for further information.

 

Harte Hanks, Inc. is a leading global customer experience company operating in three business segments: Marketing Services, Customer Care, and Fulfillment & Logistics Services. Our mission is to partner with clients to provide them with a robust customer-experience, or CX, strategy, data-driven analytics and actionable insights combined with seamless program execution to better understand, attract, and engage their customers.  Our services include strategic planning, data strategy, performance analytics, creative development and execution; technology enablement; marketing automation; B2B and B2C e-commerce; cross-channel customer care; and product, print, and mail fulfillment. 

 

2825

 

We are affected by the general, national, and international economic and business conditions in the markets where we and our customers operate. Marketing budgets are largely discretionary in nature, and as a consequence are easier for our clients to reduce in the short-term than all other expenses. Our revenues are also affected by the economic fundamentals of each industry that we serve, various market factors, including the demand for services by our clients, and the financial condition of and budgets available to our clients, among other factors. Due to the COVID-19 pandemic, recent increases in inflation and interest rates throughout the globe, and other geopolitical uncertainties, including but not limited to the ongoing war between Russia and Ukraine, there is continued uncertainty and significant disruption in the global economy and financial markets. We remain committed to making the investments necessary to execute our multichannel strategy while also continuing to adjust our cost structure to reduce costs.

 

We continue to face a challenging competitive environment. TheOur restructuring activities over the last two years have led to a permanent decrease in client budgets/investments in customer experience activities due to the global pandemic naturally increased competition.   The sale of our direct mail assets and equipment to Summit in April 2020, together with our restructuring activities, have and will continue to result in a decrease of recurring expenses. TheseThese are all part of our efforts to prioritize our investments and focus on our core business of partnering with our clients to seamlessly manage experiences with their customers. We expectbelieve these actions will continueefforts are paying-off as we experienced our first year-over-year revenue increase in over five years.  Absent any significant shocks to enhancethe regional and global economic environment, we anticipate continued positive momentum. Together our revenue increase and cost rationalization have enhanced our liquidity and financial flexibility, butand we believe this trend will continue, although no assurance can be given that wethis will sufficiently offsetbe the loss of revenue we have suffered over the past number of years.  case.  For additional information, see “Liquidity and Capital Resources” section.

 

Management is closely monitoring inflation and wage pressure in the market, and the potential impact to our business.  While inflation has not had a material impact to our business, it is possible a material increase in inflation could have an impact on our clients, and in turn, in our business.

Share Repurchase

On June 30, 2022, the Company entered into a share repurchase agreement with Wipro, pursuant to which the Company will repurchase all 9,926 shares of the Company’s Series A Preferred Stock currently outstanding in exchange for (i) a cash payment equal to their liquidation value, or total cash payment of $9,926,000 and (ii) 100,000 shares of the Company’s common stock, par value $1.00 per share. Closing of the transaction is subject to customary closing conditions, including that the shares are no longer subject to escheatment.  On June 30, 2022, the Company deposited $9,926,000 into an Escrow Account pursuant to the Repurchase Agreement to be released to WIPRO when all conditions to the repurchase have been satisfied and included this escrow amount in other current assets on our Condensed Consolidated Balance Sheet as of June 30, 2022. The transaction is expected to be completed by the third quarter of 2022 and at that time all rights of the parties related to the Series A Preferred Stock will be terminated.

COVID-19

 

In the first quarter of 2020, we took a number of precautionary measures designed to help minimize the risk of the spread of the virus among our employees, including suspending all non-essential employee travel worldwide, temporarily closing the majority of our domestic and foreign offices, extensively and frequently disinfecting our offices that remained open, enforcing social distancing to the extent possible and requiring the majority of our employees to work remotely. These measures will remain in effect until we can safely re-open our offices.

We continue to closely monitor the impact of the pandemic on all aspects of our business, including the impact on our customers, employees, suppliers, supply-chain, freight costs, vendors and business partners, as well as how it has impacted our liquidity and ability to comply with covenants in our credit agreement. The emergence of variants of the virus has created increased uncertainties surrounding the impact of the virus.

In connection with the pandemic, some of our customers have reduced the amount of work we provide to them while other customers have requested accommodations including extensions of payment or restructuring of agreements.  In addition, some of our customers have declared bankruptcy and it is possible that additional customers will file for bankruptcy in the coming months.  However, due to pandemic-related changes, including an increased need for contact center services, our Customer Care solutions services secured new contracts as well as increased volume for existing customers.  While the pandemic has not had a material effect on our business, liquidity or ability to comply with covenants to date, given the dynamic nature of the pandemic, we may experience material impacts in the future.  We recommend that you review  “Item 1A. Risk Factors” in our 20202021 Annual Report on Form 10-K for a further discussion on COVID-19 and the risks the Company currently faces.  

Recent DevelopmentsCOVID-19.  

 

On May 5, 2021, we entered into a fourth amendment to the Texas Capital Credit Facility which further extended the maturity of the facility by one year to April 17, 2023 and decreased the borrowing capacity to $15.0 million.

Restructuring Activities

Our management team continuously reviews and adjusts our cost structure and operating footprint, optimize our operations, and invest in improved technology.  

In the three months ended September 30, 2021 and 2020 we recorded restructuring charges of $0.9 million and $1.4 million, respectively. In the nine months ended September 30, 2021 and 2020 we recorded restructuring charges of $4.9 million and $8.0 million, respectively.

We expect that in connection with our cost-saving and restructuring initiatives, we will incur total restructuring charges of approximately $27.1 million through the end of 2021. We have recognized $26.1 million of restructuring charges to date, and we expect to incur an additional $1.0 million of restructuring charges through the end of 2021.

Please refer to Note N, Restructuring Activities, in the Notes to Condensed Consolidated Financial Statements for further discussion on restructuring activities.

 

2926

 

Results of Operations

 

Operating results were as follows:

 

 

Three Months Ended September 30,

    

Nine Months Ended September 30,

     

Three Months Ended June 30,

    

Six Months Ended June 30,

    

In thousands, except percentages

 

2021

  

2020

  

% Change

  

2021

  

2020

  

% Change

  

2022

  

2021

  

% Change

  

2022

  

2021

  

% Change

 

Revenues

 $49,597  $47,702  4.0% $142,610  $129,825  9.8% $48,553  $49,259  (1.4)% $97,615  $93,013  4.9%

Operating expenses

  45,371   46,917  (3.3)%  137,834   140,033  (1.6)%  44,542   47,824  (6.9)%  89,709   92,462  (3.0)%

Operating income (loss)

 $4,226  $785  438.3% $4,776  $(10,208) 146.8%

Operating income

 $4,011  $1,435  179.5% $7,906  $551  1334.8%
     

Operating margin

 8.5% 1.6%    3.3%  (7.9)%    8.3% 2.9%    8.1% 0.6%   
     

Income (loss) before income taxes

 $4,576  $(1,674) 373.3% $14,233  $(15,601) 191.2%

Income before income taxes

 $5,132  $10,824  (52.6)% $8,931  $9,657  (7.5)%
     

Diluted earnings (loss) per common share from operations

 $0.52  $(0.27) 294.1% $1.57  $(0.48) 428.1%

Diluted earnings per common share from operations

 $0.52  $1.27  (59.1)% $0.91  $1.05  (13.3)%

 

Consolidated Results

 

Revenues

 

Three months ended SeptemberJune 30, 20212022 vs. Three months ended SeptemberJune 30, 20202021

 

Revenues increased $1.9decreased $0.7 million, or 4.0%1.4%, in the three months ended SeptemberJune 30, 2021,2022, compared to the three months ended SeptemberJune 30, 2020.  Revenue in our Customer Care segment increased $1.8 million, or 10.2%, to $19.8 million.2021.  Revenue in our Fulfillment & Logistics Services segment increased $0.5$3.9 million, or 3.8%24.3%, to $15.1$19.7 million. Revenue in our Customer Care segment decreased $3.8 million, or 19.8%, to $15.4 million, and revenue in our Marketing Services segment decreased $0.5$0.8 million, or 3.2%5.3%, to $14.7$13.5 million.  

 

NineSix months ended SeptemberJune 30, 20212022 vs. NineSix months ended SeptemberJune 30, 20202021

 

Revenues increased $12.8$4.6 million, or 9.8%4.9%, in the ninesix months ended SeptemberJune 30, 2021,2022, compared to the ninesix months ended SeptemberJune 30, 2020. The largest increase was2021.  Revenue in our Fulfillment & Logistics Services segment increased $7.9 million, or 26.3%, to $38.1 million. Revenue in our Customer Care segment which increased by $13.9decreased $2.6 million, or 33.3%7.3%, to $55.5 million.  This increase was driven by strong project-based$33.1 million, and revenue for new clients and increases in demand by existing clients.  Ourour Marketing Services segment revenue increased by $0.1decreased $0.7 million, or 0.3%2.6%, to $41.8$26.4 million.  These increases were partially offset by $1.2 million, or 2.6% decrease in Fulfillment and Logistics Services.

 

Among other factors, our revenue performance depends on general economic conditions in the markets we serve and how successful we are at maintaining and growing business with existing clients and acquiring new clients. We believe that, in the long-term, an increasing portion of overall marketing and advertising expenditures will be shifted from other advertising media to targeted media advertising resulting inFor a benefit to our business. Targeted media advertising results can be more effectively tracked, enabling measurementdiscussion of the return on marketing investment.drivers of our revenues, see "Segment Results" below.

 

Operating Expenses

 

Three months ended SeptemberJune 30, 20212022 vs. Three months ended SeptemberJune 30, 20202021

 

Operating expenses were $45.4$44.5 million in the three months ended SeptemberJune 30, 2021,2022, a decrease of $1.5$3.3 million, or 3.3%6.9%, compared to $46.9$47.8 million in the three months ended SeptemberJune 30, 2020.2021.

 

Production and distribution expenses decreased $1.0increased $2.3 million, or 7.8%18.3%, compared to the three months ended SeptemberJune 30, 20202021, primarily due to lower printhigher transportation costs to support additional logistics revenue as a result ofcompared to the prior year quarter and higher brokered, or outsourced costs due to higher brokered revenue.  Advertising, Selling, General and Administrative expenses decreased $0.6 million, or 13.7%, compared to three months ended June 30, 2021 primarily due to lower print revenue.   Restructuringlegal and professional fees.  Labor expense decreased $0.5 million,$3.1M, or 34.0%11.0%, compared to the three months ended SeptemberJune 30, 20202021 primarily due to higher severance costlower labor expense in 2020 resulting from the closure of mail facilities,Customer Care associated with lower revenue.

Restructuring expenses were $0.0 million and other headcount reduction in Fulfillment$1.7 million for the three months ended June 30, 2022 and Marketing Services.2021, respectively. See Note N, Restructuring Activities, in the Notes to Condensed Consolidated Financial Statements for further discussion of restructuring activities.  Labor expense increased $0.1 million and Advertising, Selling, General and Administrative expense was consistent with the prior year period.

 

The largest components of our operating expenses are labor, transportation expenses and outsourced costs. Each of these costs is, at least in part, variable and tend to fluctuate in line with revenues and the demand for our services. 

Postage costs for mailings are borne by our clients and are not directly reflected in our revenues or expenses.

Nine months ended September 30, 2021 vs. Nine months ended September 30, 2020

Operating expenses were $137.8 million in the nine months ended September 30, 2021, a decrease of $2.2 million, or 1.6%, compared to $140.0 million in the nine months ended September 30, 2020.

30

Labor costs increased $5.3 million, or 6.9%, compared to the nine months ended September 30, 2020, primarily due to higher labor expenses in our Customer Care segment driven by the increased volume of work.  Advertising, Selling, General and Administrative expense decreased $2.4 million, or 15.1%, compared to the nine months ended September 30, 2020, primarily due to cost reduction initiatives as well as a favorable $0.8 million litigation settlement recognized in the three months ended March 31, 2021.  Production and distribution expense decreased $1.1 million, or 2.9%, compared to the nine months ended September 30, 2020, primarily due to lower print cost from lower print revenue and our cost reduction efforts.  Depreciation expense declined $0.9 million, or 32.3%, compared to the prior year period, primarily due to the disposal of production equipment from our Jacksonville facility which we exited in 2020.

The largest components of our operating expenses are labor, mail transportation expenses and outsourced costs. Each of these costs is, at least in part, variable and tends to fluctuate in line with revenues and the demand for our services. Mail transportationTransportation rates have increased over the last few years due to demand and supply fluctuations within the transportation industry. Future changes in mail transportation expenses will continue to impact our total production costs and total operating expenses, and in turn our margins, and may have an impact on future demand for our supply chain management services.

 

Postage costs for mailings are borne by our clients and are not directly reflected in our revenues or expenses.

 

In the nineSix months ended SeptemberJune 30, 2022 vs. Six months ended June 30, 2021

Operating expenses were $89.7 million in the six months ended June 30, 2022, a decrease of $2.8 million, or 3.0%, compared to $92.5 million in the six months ended June 30, 2021.

Production and distribution expenses increased $5.0 million, or 21.1%, compared to the six months ended June 30, 2021, primarily due to higher transportation costs to support additional logistics revenue as compared to the prior year period and 2020, we recorded restructuring charges of $4.9higher brokered, or outsourced costs due to higher brokered revenue.  Labor expense decreased $3.5M, or 6.4%, compared to the six months ended June 30, 2021 primarily due to lower labor expense in the Customer Care associated with lower revenue.  Advertising, Selling, General and Administrative expenses decreased $0.1 million, or 1.4%, compared to six months ended June 30, 2021 primarily due to lower facility expense driven by fewer leased locations in 2022 as compared to 2021. 

Restructuring expenses were $0.0 million and $8.0$3.9 million for the six months ended June 30, 2022 and 2021, respectively. See Note N, Restructuring Activities, in the Notes to Condensed Consolidated Financial Statements for further discussion onof restructuring activities.

 

The largest components of our operating expenses are labor, transportation expenses and outsourced costs. Each of these costs is, at least in part, variable and tends to fluctuate in line with revenues and the demand for our services. Transportation rates have increased over the last few years due to demand and supply fluctuations within the transportation industry. Future changes in transportation expenses will continue to impact our total production costs and total operating expenses, and in turn our margins, and may have an impact on future demand for our supply chain management services.

Postage costs for mailings are borne by our clients and are not directly reflected in our revenues or expenses.

27

Interest Expense, net

 

Three months ended SeptemberJune 30, 20212022 vs. Three months ended SeptemberJune 30, 20202021

 

Interest expense, net, in the three months ended SeptemberJune 30, 20212022 decreased $52$60 thousand compared to the three months ended SeptemberJune 30, 20202021 due to the lower interest expense associated with lower debt balancesbalance as compared to the prior year quarter.   

 

NineSix months ended SeptemberJune 30, 20212022 vs. NineSix months ended SeptemberJune 30, 20202021

 

Interest expense, net, in the ninesix months ended SeptemberJune 30, 20212022 decreased $237$193 thousand compared to the ninesix months ended SeptemberJune 30, 2020 2021 due to the write off of interest expense related to our PPP loan, as well as the lower interest expense associated with lower debt balancesbalance as compared to the same period last year.prior year quarter.   

 

Other (income) Expenseexpense, net

 

Three months ended SeptemberJune 30, 20212022 vs. Three months ended SeptemberJune 30, 20202021

 

Other income,(income) expense, net, for the three months ended SeptemberJune 30, 20212022 was $0.6$1.2 million income compared to $2.2$0.5 million net expense forin the three months ended September 30, 2020.  The $2.8 million increase in other income wasprior year quarter mainly due to a $0.6 million decrease in pension expenses and a $2.2 million decrease in foreign currency revaluation expense.the 

Nine months ended September 30, 2021 vs. Nine months ended September 30, 2020

Other income, net, for the nine months ended September 30, 2021 was $0.1 million, compared to $4.5 million net expense for the nine months ended September 30, 2020.  The $4.6 million increase in other income was mainly due to a $1.7 million decrease in pension expense and a $2.7 million decrease in foreign currency revaluation.

Six months ended June 30, 2022 vs. Six months ended June 30, 2021

 

31

Other (income) expense, net, for the six months ended June 30, 2022 was $1.2 million income compared to $0.5 million expense in prior year period mainly due to the decrease in foreign currency revaluation. 

 

Income Taxes

 

Three months ended SeptemberJune 30, 2021vs.2022vs. Three months ended SeptemberJune 30, 20202021

 

The income tax provision of $0.2$0.7 million in the thirdsecond quarter of 20212022 represents an increase in income tax provision of $0.2$0.4 million when compared to the thirdsecond quarter of 20202021.  Our effective tax rate was 3.8%13.1% for the thirdsecond quarter of 2022, an increase from 10.7% for the second quarter of 2021, an increase of 0.6% when compared to the third quarter of 2020. The effective income tax rate for the three months ended September 30, 2021 differs from the federal statutory rate of 21.0%, primarily due to the change in valuation allowance, U.S. state income taxes and income earned in foreign jurisdictions.

 

NineSix months ended SeptemberJune 30, 2021vs. Nine2022 vs. Six months ended SeptemberJune 30, 20202021

 

The income tax provision of $1.0$1.1 million in the ninesix months ended SeptemberJune 30, 20212022 represents an increase in income tax provision of $13.9$0.3 million when compared to the ninesix months ended SeptemberJune 30, 2020. This is a result of the benefit recorded in the first quarter of 2020 on the carryback of federal net operating losses to prior periods under the CARES Act.2021.  Our effective tax rate was 7.2%12.6% for the ninesix months ended SeptemberJune 30, 2021, a decrease of 75.2%2022, an increase from 3.8% when compared to the effective tax rate of 82.4%8.8% for the ninesix months ended SeptemberJune 30, 2020.2021. The effective income tax rate for the nine months ended September 30, 2021 differs from the federal statutory rate of 21.0%, primarily due to the change in valuation allowance, U.S. state income taxes and income earned in foreign jurisdictions.

 

Segment Results

 

The following is a discussion and analysis of the results of our reporting segments for the three and six months ended SeptemberJune 30, 20212022 and 2020.2021. There are three principal financial measures reported to our CEO (the chief operating decision maker) for use in assessing segment performance and allocating resources. Those measures are revenue, operating income (loss) and operating income (loss) plus depreciation and amortization (“EBITDA”).  For additional information, see Note O, Segment Reporting, in the Notes to Condensed Consolidated Financial Statements.  See Note O, Segment Results, in the Notes to Condensed Consolidated Financial Statements for further discussion.

 

Marketing Services:

 

 

Three Months Ended September 30,

  

Nine Months Ended September 30,

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 

In thousands

 

2021

  

% Change

  

2020

  

2021

  

% Change

  

2020

  

2022

  

% Change

  

2021

  

2022

  

% Change

  

2021

 

Revenues

 $14,729  -3.2% $15,217  $41,815  0.3% $41,682  $13,450  -5.3% $14,208  $26,374  -2.6% $27,086 

EBITDA

 2,772 129.3% 1,209 5,080 46.4% 3,470  1,814  5.1% 1,726  3,275  41.9% 2,308 

Operating Income

  2,655  148.6%  1,068   4,668  55.2%  3,007   1,725  9.0%  1,582   3,084  53.2%  2,013 

Operating Income % of Revenue

  18.0%     7.0%  11.2%     7.2%  12.8%     11.1%  11.7%     7.4%

 

3228

 

 

Three months ended SeptemberJune 30, 2021vs.2022vs. Three months ended SeptemberJune 30, 20202021

 

Marketing Services segment revenue decreased $0.5$0.8 million, or 3.2%5.3%, due to the lowerdecreased volume from the existing customers.  Operating income for the three months ended SeptemberJune 30, 20212022 increased $1.6$0.1 million from the prior year quarter due to our cost reduction efforts.  

 

NineSix months ended SeptemberJune 30, 20212022 vs. NineSix months ended SeptemberJune 30, 20202021

 

Marketing Services segment revenue increased $0.1decreased $0.7 million, or 0.3%2.6%, driven by the $3.0 million of mail and data services revenue that was transferred into Marketing Services segment starting from July 2020 following the sale of the bulk of our direct mail operations and the decline of $2.9 million in other marketing service revenue as a result of the reduction of client budgets due to the COVID-19 pandemic.decreased volume from the existing customers.  Operating income in for the ninesix months ended SeptemberJune 30, 20212022 increased $1.7$1.1 million or 55.2% driven byfrom the prior year quarter due to our cost reduction efforts.

 

Customer Care:

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 

In thousands

 

2021

  

% Change

  

2020

  

2021

  

% Change

  

2020

 

Revenues

 $19,768   10.2% $17,933  $55,503   33.3% $41,640 

EBITDA

  4,014   33.4%  3,009   9,964   129.5%  4,342 

Operating Income

  3,819   42.2%  2,686   9,312   161.4%  3,562 

Operating Income % of Revenue

  19.3%      15.0%  16.8%      8.6%

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 

In thousands

 

2022

  

% Change

  

2021

  

2022

  

% Change

  

2021

 

Revenues

 $15,382   -19.8% $19,191  $33,123   -7.3% $35,735 

EBITDA

  2,493   -25.6%  3,350   5,955   0.1%  5,950 

Operating Income

  2,292   -27.2%  3,147   5,552   1.1%  5,493 

Operating Income % of Revenue

  14.9%      16.4%  16.8%      15.4%

 

Three months ended SeptemberJune 30, 2021vs.2022vs. Three months ended SeptemberJune 30, 20202021

 

Customer Care segment revenue increased $1.8decreased $3.8 million, or 10.2%19.8%, primarily due to additional project work and an increasea decrease in volumes with existing clients.customers.  Operating Income was $3.8$2.3 million for the three months ended SeptemberJune 30, 20212022, compared to operating income of $2.7$3.1 million for the three months ended SeptemberJune 30, 20202021. The $1.1$0.8 million improvementdecrease was driven by higher revenue from extension of Covid related project work and increaseddue to the decrease in volume from other clients.  existing clients which was partially offset by our cost reduction efforts.

 

NineSix months ended SeptemberJune 30, 2021vs. Nine2022 vs. Six months ended SeptemberJune 30, 20202021

 

Customer Care segment revenue increased $13.9decreased $2.6 million, or 33.3%7.3%, primarilyprimarily due to additional project work and an increasea decrease in volumes with existing clients.customers.  Operating Income was $9.3of $5.6 million for the ninesix months ended SeptemberJune 30, 2021, compared to operating income of $3.6 million for the nine months ended September 30, 2020. 2022This $5.7 million improvement was driven by higher revenue from extension of Covid related project work and increased volume from other clients. The contribution margin improved by 8.2% in the nine months ended September 30, 2021 due, which is comparable to the increase in revenue as well as our restructuring efforts.prior year period.    

 

Fulfillment & Logistics Services:

 

 

Three Months Ended September 30,

  

Nine Months Ended September 30,

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 

In thousands

 

2021

  

% Change

  

2020

  

2021

  

% Change

  

2020

  

2022

  

% Change

  

2021

  

2022

  

% Change

  

2021

 

Revenues

 $15,100  3.8% $14,552  $45,292  -2.6% $46,503  $19,721  24.3% $15,860  $38,118  26.3% $30,192 

EBITDA

 1,693 517.9% 274 4,565 -421.9% (1,418) 3,172  91.7% 1,655  5,559  93.6% 2,872 

Operating Income (loss)

  1,511  1011.0%  136   4,024  -254.6%  (2,603)

Operating Income

  2,970  103.0%  1,463   5,155  105.1%  2,513 

Operating Income % of Revenue

  10.0%     0.9%  8.9%     -5.6%  15.1%     9.2%  13.5%     8.3%

 

Three months ended SeptemberJune 30, 2021vs.2022vs. Three months ended SeptemberJune 30, 20202021

 

Fulfillment & Logistics Services segment revenue increased $0.5$3.9 million, or 3.8%24.3%, primarily driven by therevenue from new customers and an increase ofin work from existing customers. We are starting to see volumes for existing customers return to pre-COVID levels.  Operating income was $3.0 million for the three months ended June 30, 2022 compared to $1.5 million for the three months ended SeptemberJune 30, 2021 compared to $0.1 million for the three months ended September 30, 2020.2021. The $1.4$1.5 million improvement in operating income was primarily driven by the higher revenue and our cost reduction efforts.  

 

NineSix months ended SeptemberJune 30, 2021vs. Nine2022 vs. Six months ended SeptemberJune 30, 20202021

 

Fulfillment & Logistics Services segment revenue decreased $1.2increased $7.9 million, or 2.6%26.3%compared to the prior year period. The elimination of direct mail operations resulted in a $4.7 million revenue decline as outsourced direct mail is now included in our Marketing Services segment.  This decline was partially offset by the $3.5 million revenue increaseprimarily driven by the increased demandrevenue from new customers and an increase in work from existing customers. Operating income was $4.0$5.1 million for the ninesix months ended SeptemberJune 30, 20212022 compared to operating loss of $2.6$2.5 million for the ninesix months ended SeptemberJune 30, 2020.2021. The $6.6$2.6 million improvement in operating income was primarily driven by the higher revenue and our cost reduction efforts.  Operating income for the nine months ended September 30, 2021 alsoprior year period included a favorable $0.8 million$750 thousand litigation settlement.

 

3329

 

Liquidity and Capital Resources

 

Sources and Uses of Cash

 

Our cash and cash equivalent balances were $16.0$10.6 million and $29.4$11.9 million at SeptemberJune 30, 20212022 and December 31, 2020,2021, respectively. Our cash and cash equivalent and restricted cash balances were $18.7$12.9 million and $33.6$15.1 million at SeptemberJune 30, 20212022 and December 31, 2020,2021, respectively.

 

During 2020, we received an aggregate of $9.6 million in tax refunds related to our NOLnet operating loss ("NOL") and capital loss carryback for the 2013-2018 tax years. We also expect to receive additional tax refunds of $7.6 million in 2021,2022, as a result of the change to the tax NOL carryback provisions included in the CARES Act. 

On April 20, 2020, the Company received PPP Term Note proceeds in the amount of $10.0 million.  We applied for forgiveness of the entire $10 million PPP Term Note in the first quarter of 2021.  On June 10, 2021, we received notice that the entire amount of our PPP Loan was forgiven by the SBA.  We recorded the $10.0 million of debt extinguishment as "Gain from extinguishment of debt (Paycheck Protection Program Term Note)" in the Condensed Consolidated Statements of Comprehensive Income (Loss).

 

Our principal sources of liquidity are cash on hand, cash provided by operating activities, and borrowings. Our cash is primarily used for general corporate purposes, working capital requirements, and capital expenditures.

 

We expect to incur approximately $5 million to $6 million of capital expenditures in 2022 mainly to fund our new ERP system and Kansas City facility expansion.

At this time, we believe that we will be able to continue to meet our liquidity requirements and fund our fixed obligations (such as debt services, finance and operating leases and unfunded pension plan benefit payments) and other cash needs for our operations for at leastin both the next twelve monthsshort and medium term through a combination of cash on hand, cash flow from operations, and borrowings under the Texas CapitalNew Credit Facility. Although the Company believes that it will be able to meet its cash needs for the foreseeable future,short and medium term, if unforeseen circumstances arise the company may need to seek alternative sources of liquidity. To date, the COVID-19 pandemic has not had a material impact on the Company’s liquidity or on the Company’s ability to meet its obligations under the Texas CapitalNew Credit Facility, including its ability to comply with all covenants. We will continue to closely monitor the impact the COVID-19 pandemic has on the Company’s liquidity and assess whether any additional cost saving measures, including capital expenditure deferral or human capital decisions, are needed. Facility. 

 

Operating Activities

 

Net cash used inprovided by the operating activities for the ninesix months ended SeptemberJune 30, 20212022 was $5.9$9.9 million, compared to net cash used in operating activities of $11.4$4.7 million for the ninesix months ended SeptemberJune 30, 2020.2021. The $5.5$14.6 million year-over-year decreaseincrease in cash used inprovided by operating activities was primarily due to $16.0the $9.0 million higherincrease in net income, which was partially offset byexcluding the $10 million non-cash gain in 2021 from extinguishment of the PPP loan, and $5.4 million decrease in accounts receivable and contract assets in the ninesix months ended SeptemberJune 30, 2021 and $2.4 million lower non-cash restructuring expense in the nine months ended September 30, 20212022 as compared to 2020.the same period in 2021. 

 

Investing Activities

 

Net cash used in investing activities was $2.4$3.6 million for the ninesix months ended SeptemberJune 30, 2021,2022, compared to net cash provided by investing activities of $0.5$0.9 million for the ninesix months ended SeptemberJune 30, 20202021.  The $2.9$2.7 million year-over-year decreaseincrease in cash used in investing activities was mainlyprimarily due to the $1.9$2.6 million of proceeds from sale ofadditional cash used to purchase property, receivedplant and equipment (mainly for our new ERP system) in the ninesix months ended SeptemberJune 30, 2020 and the $1.1 million increase in capital expenditure in the nine months ended September 30, 20212022 as compared to 2020.2021.

 

Financing Activities

 

Net cash used inprovided by the financing activities was $4.8$4.5 million for the ninesix months ended SeptemberJune 30, 2021,2022, as compared to $7.5$4.5 million of net cash used by financing activities for the six months ended June 30, 2021.  The $9.0 million year-over-year increase in net cash provided by financing activities for the nine months ended September 30, 2020.  The $12.3 million year-over-year decrease was primarily due to the $10$5 million cash proceeds from the PPP loan we receivedadditional borrowing under our New Credit Facility in the second quarter of 2020, and the $4six months ended June 30, 2022 as compared to $4.0 million paydown of the Texas Capital Credit Facility in the second quarter of 2021 as compared to the $1.6 million paydown of the Texas Capital Credit Facility in the nine months ended September 30, 2020.2021.

 

Foreign Holdings of Cash

 

Consolidated foreign holdings of cash as of SeptemberJune 30, 2022 and 2021 and 2020 were $2.4$1.7 million and $3.4$3.2 million, respectively.

 

Long Term Debt

 

On April 17, 2017, weDecember 21, 2021, the Company entered into a new three-year, $25.0 million asset-based revolving credit facility (the "New Credit Facility") with Texas Capital Bank.  The Company’s obligations under the New Credit Facility are guaranteed on a joint and several basis by the Company’s material subsidiaries (the “Guarantors”).   The New Credit Facility is secured by substantially all of the assets of the Company and the Guarantors pursuant to a Pledge and Security Agreement, dated as of December 21, 2021, among the Company, TCB and the other grantors party thereto (the "Security Agreement").

The New Credit Facility provides for loans up to the lesser of (a) $25.0 million, and (b) the amount available under a "borrowing base" calculated primarily by reference to the Company's cash and cash equivalents and accounts receivables. The New Credit Facility allows the Company to use up to $3.0 million of its borrowing capacity to issue letters of credit.

The loans under the New Credit Facility accrue interest at a variable rate equal to the Bloomberg Short-Term Bank Yield Index Rate plus a margin of 2.25% per annum. The outstanding amounts advanced under the New Credit Facility are due and payable in full on December 21, 2024.

The Company may voluntarily prepay all or any portion of the loans advanced under the New Credit Facility at any time, without premium or penalty. The New Credit Facility is subject to mandatory prepayments (i) from the net proceeds of asset dispositions not otherwise permitted under the New Credit Facility; (ii) if the unpaid principal balance under the New Credit Facility plus the aggregate face amount of all outstanding letters of credit exceeds the borrowing base; (iii) in an amount equal to 50% of the net proceeds of issuances of capital stock (subject to customary exceptions); or (iv) in an amount equal to the net proceeds from any issuance of debt not otherwise permitted under the New Credit Facility.

The New Credit Facility contains certain covenants restricting the Company's and its subsidiaries' ability to create, incur, assume or become liable for indebtedness; make certain investments; pay dividends or repurchase the Company's stock; create, incur or assume liens; consummate mergers or acquisitions; liquidate, dissolve, suspend or cease operations; or modify accounting or tax reporting methods (other than as required by U.S. GAAP).

In connection with entering into the New Credit Facility, the Company and Texas Capital Bank terminated the old Texas Capital Credit Facility. Prior to termination of the old Texas Capital Credit Facility, that provided us with a $20.0the Company used cash on hand to pay down $8.1 million revolving credit facilityoutstanding and for lettersthe remaining $5.0 million of credit issued byloans outstanding were deemed to be outstanding under the New Credit Facility. Texas Capital Bank up to $5.0 million. On May 5, 2021, we entered into a fourth amendment todid not require the Texas CapitalNew Credit Facility which further extendedto be guaranteed by HHS Guaranty, LLC, an entity formed to provide credit support for the maturityCompany by certain members of the facility byShelton family (descendants of one year to April 17, 2023 and decreasedof the borrowing capacity to $15.0 million. 

Company's founders) or any other third-party credit support.

 

3430

 

As of June 30, 2022 and December 31, 2021, we had $10.0 million and $5.0 million of borrowings outstanding under the New Credit Facility, respectively.  At each of SeptemberJune 30, 20212022 and December 31, 2020,2021, we had letters of credit in the amount of $1.11.0 million outstanding. No amounts were drawn against these letters of credit at SeptemberJune 30, 20212022 and December 31, 2020.2021. These letters of credit exist to support insurance programs relating to workers’ compensation, automobile, and general liability.  We had no other off-balance sheet financing activities at SeptemberJune 30, 20212022 and December 31, 2020.2021.

 

As of SeptemberJune 30, 2021 and December 31, 2020, we had $13.1 million and $17.1 million of borrowings outstanding under the Texas Capital Facility, respectively.  As of September 30, 2021,2022, we had the ability to borrow an additional $0.8$14.0 million under the facility.New Credit Facility. 

 

On April 20, 2020, the Company received loan proceeds in the amount of $10.0 million under the Small Business Administration ("SBA") PPP Term Note.  The PPP Term Note, established as part of the CARES Act, provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. 

 

On June 10, 2021, we received notice that the entire amount of our PPP Loan was forgiven by the SBA because we used the proceeds from the loan as contemplated under the CARES Act.  We recorded the $10.0 million of debt extinguishment as "Gain from extinguishment of debt (Paycheck Protection Program Term Note)" in the Condensed Consolidated Statements of Comprehensive Income (Loss).

 

Dividends

We did not pay any dividends in three months ended June 30, 2022 and 2021. We currently intend to retain any future earnings and do not expect to pay cash dividends on our common stock in the foreseeable future. Any future dividend declaration can be made only upon, and subject to, approval of our Board, based on its business judgment.

Share Repurchase

During the three-month period which ended June 30, 2022 and 2021, respectively, we did not repurchase any shares of our common stock under our stock repurchase program. This program was publicly announced in August 2014. Under this program we were authorized to spend up to $20.0 million to repurchase shares of our outstanding common stock. Currently, up to June 30, 2022 , we had authorization to repurchase up to $11.4 million of shares, but this  authorization and program have since been terminated. From 1997 through December 31, 2015, while the program was active, we repurchased 6.8 million shares for an aggregate of $1.2 billion under this program (and previously announced programs).  We have not made any repurchases under the program since 2015.

Outlook

 

We consider such factors as total cash and cash equivalents and restricted cash, current assets, current liabilities, total debt, revenues, operating income (loss), cash flows from operations, investing activities, and financing activities when assessing our liquidity. Our management of cash is designed to optimize returns on cash balances and to ensure that it is readily available to meet our operating, investing, and financing requirements as they arise. We believe that there are no conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern for the twelve months following the issuance of the Condensed Consolidated Financial Statements.

 

Critical and Recent Accounting Policies

 

Critical accounting policiesestimates are defined as those that, in our judgment, are most important to the portrayal of our Company’s financial condition and results of operations and which require complex or subjective judgments or estimates.  Actual results could differ materially from those estimates under different assumptions and conditions.  Refer to the 20202021 10-K for a discussion of our critical accounting policies.estimates.

 

Our Significant Accounting policies are described in Note A, Overview and Significant Accounting Policies, in the Notes to Condensed Consolidated Financial Statements.

 

See Recent Accounting Pronouncements under Note B of the Notes to Condensed Consolidated Financial Statements for a discussion of certain accounting standards that have been recently issued.

 

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable.

 

Item 4.  Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our CEOChief Executive Officer ("CEO") and Chief Financial Officer (“CFO”), as appropriate to allow timely decisions regarding required disclosure.

 

Our management, including our CEO and CFO, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of SeptemberJune 30, 2021,2022, the end of the period covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, our CEO and CFO concluded that the design and operation of these disclosure controls and procedures were effective, at the “reasonable assurance” level, to ensure information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal controls over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  We have not experienced any material impact to our internal controls over financial reporting despite the fact that most of our employees are working remotely due to the COVID-19 pandemic.  We are continually monitoring and assessing the impact of COVID-19 on our internal controls to minimize the impact on their design and operating effectiveness.

 

3531

 

 

PART II.    OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

Information regarding legal proceedings is set forth in Note L, Litigation and Contingencies, in the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q, which information is incorporated herein by reference.

 

Item 1a.  Risk Factors

 

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our 20202021 10-K, which could materially affect our business, financial condition, or future results. The risks described in our 20202021 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and operating results. There have been no material changes during the three months ended SeptemberJune 30, 20212022 to the risk factors previously disclosed in the 20202021 10-K.

 

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

 

Not applicable.We did not sell any unregistered equity securities during the quarter ended June 30, 2022.

 

Item 3.  Defaults Upon Senior Securities

 

Not applicable.

 

Item 4.  Mine Safety Disclosures

 

Not applicable.

 

Item 5.  Other Information

 

None.

 

3632

 

Item 6.  Exhibits

 

Exhibit

No.

 

Description of Exhibit

*31.1

 

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

*31.2

 

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

*32.1

 

Furnished 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

 

Furnished 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 Inline XBRL Instance Document - the instance document does not appear in the Interactive Data Files because its XBRL tags are embedded within the Inline XBRL Document.
*101.SCH Inline XBRL Taxonomy Extension Schema Document
*101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document
*101.LAB Inline XBRL Taxonomy Extension Labels Linkbase Document
*101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document
*101.DEF Inline XBRL Definition Linkbase Document
   
*104 Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101)

 


*Filed or furnished herewith, as applicable.

 

**Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.

 

3733

 

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

 

 

 

HARTE HANKS, INC.

 

 

 

NovemberAugust 12, 20212022

 

/s/ Brian Linscott

Date

 

Brian Linscott

 

 

Chief Executive Officer

 

 

 

 

 

 

NovemberAugust 12, 20212022

 

/s/ Laurilee Kearnes

Date

 

Laurilee Kearnes

 

 

Vice President, and Chief Financial Officer

 

 

 

 

3834