ARC Document Solutions(ARC) - 2020 Q1 - Quarterly Report

Forward-Looking Statements This section discusses forward-looking statements regarding financial results, cash flows, capital requirements, foreign exchange, and tax rates, highlighting inherent risks and uncertainties - The report contains forward-looking statements regarding the impact of the COVID-19 pandemic on financial results, future cash flows, capital requirements, foreign exchange rates, and the Company's anticipated effective tax rate[6] - These statements involve risks and uncertainties, particularly those amplified by the COVID-19 outbreak, which could cause actual results to differ materially from projections[6] - The Company disclaims any obligation to publicly update or revise forward-looking statements and advises consulting future SEC filings for further disclosures[7] Part I—Financial Information Item 1. Condensed Consolidated Financial Statements This section presents the unaudited condensed consolidated financial statements for ARC Document Solutions, Inc., including balance sheets, statements of operations, comprehensive (loss) income, equity, and cash flows, along with their accompanying notes, for the quarter ended March 31, 2020, and comparative periods Condensed Consolidated Balance Sheets | Metric (in thousands) | March 31, 2020 | December 31, 2019 | Change ($) | Change (%) | | :------------------------ | :------------- | :---------------- | :--------- | :--------- | | Total Assets | $368,709 | $363,157 | $5,552 | 1.53% | | Total Liabilities | $221,515 | $213,117 | $8,398 | 3.94% | | Total Equity | $147,194 | $150,040 | $(2,846) | -1.90% | | Cash & Cash Equivalents | $38,210 | $29,425 | $8,785 | 29.86% | | Total Current Assets | $114,533 | $106,383 | $8,150 | 7.66% | | Total Current Liabilities | $78,751 | $86,375 | $(7,624) | -8.83% | Condensed Consolidated Statements of Operations | Metric (in thousands) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | Change ($) | Change (%) | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Net Sales | $88,425 | $97,122 | $(8,697) | -8.95% | | Gross Profit | $27,597 | $30,675 | $(3,078) | -10.03% | | Income from Operations | $2,662 | $2,143 | $519 | 24.22% | | Net Income | $462 | $447 | $15 | 3.36% | | Net Income Attributable to ARC Shareholders | $683 | $592 | $91 | 15.37% | | Basic EPS | $0.02 | $0.01 | $0.01 | 100.00% | | Diluted EPS | $0.02 | $0.01 | $0.01 | 100.00% | Condensed Consolidated Statements of Comprehensive (Loss) Income | Metric (in thousands) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | Change ($) | Change (%) | | :------------------------------------------------------ | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Net Income | $462 | $447 | $15 | 3.36% | | Foreign Currency Translation Adjustments, net of tax | $(974) | $(774) | $(200) | 25.84% | | Comprehensive Loss | $(512) | $(327) | $(185) | 56.57% | | Comprehensive (Loss) Income Attributable to ARC Shareholders | $(158) | $24 | $(182) | -758.33% | Condensed Consolidated Statements of Equity | Metric (in thousands) | Balance at March 31, 2020 | Balance at December 31, 2019 | Change ($) | Change (%) | | :------------------------------------------------------ | :------------------------ | :--------------------------- | :--------- | :--------- | | Total ARC Document Solutions, Inc. Shareholders' Equity | $140,876 | $143,368 | $(2,492) | -1.74% | | Noncontrolling Interest | $6,318 | $6,672 | $(354) | -5.31% | | Total Equity | $147,194 | $150,040 | $(2,846) | -1.90% | - Treasury shares increased from $11,410 thousand at December 31, 2019, to $13,842 thousand at March 31, 2020, reflecting share repurchases[17] - Cash dividends of $0.01 per share, totaling $427 thousand, were paid during the three months ended March 31, 2020[17] Condensed Consolidated Statements of Cash Flows | Metric (in thousands) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | Change ($) | Change (%) | | :---------------------------------------------- | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Net Cash Provided by Operating Activities | $2,774 | $2,665 | $109 | 4.09% | | Net Cash Used in Investing Activities | $(1,048) | $(3,030) | $1,982 | -65.41% | | Net Cash Provided by (Used in) Financing Activities | $7,543 | $(9,644) | $17,187 | -178.21% | | Net Change in Cash and Cash Equivalents | $8,785 | $(10,663) | $19,448 | -182.39% | | Cash and Cash Equivalents at End of Period | $38,210 | $18,770 | $19,440 | 103.57% | Notes to Condensed Consolidated Financial Statements 1. Description of Business and Basis of Presentation - ARC Document Solutions is a leading provider of document solutions to architectural, engineering, construction, and facilities management professionals, offering services like Construction Document Information Management (CDIM), Managed Print Services (MPS), Archive and Information Management (AIM), and Equipment and Supplies sales[22] - The interim financial statements are prepared in accordance with GAAP and SEC requirements, with certain footnotes condensed or omitted[23] Net Sales by Service/Product | Service/Product | March 31, 2020 | March 31, 2019 | Change ($) | Change (%) | | :------------------------- | :------------- | :------------- | :--------- | :--------- | | CDIM | $49,160 | $50,805 | $(1,645) | -3.24% | | MPS | $27,308 | $30,907 | $(3,599) | -11.64% | | AIM | $3,600 | $3,262 | $338 | 10.36% | | Equipment and Supplies Sales | $8,357 | $12,148 | $(3,791) | -31.21% | | Net Sales | $88,425 | $97,122 | $(8,697) | -8.95% | - The Company early adopted ASU 2019-12 (Income Taxes) on January 1, 2020, with no material impact on its consolidated financial statements[32] - The Company operates as a single reportable segment due to similar products, services, customers, production processes, distribution methods, and economic characteristics across its business activities[34] - The Company's operating results and financial condition are significantly affected by economic factors influencing the architectural, engineering, construction, and building owner/operator (AEC/O) industry, which have been amplified by the COVID-19 pandemic[35] 2. Earnings per Share Weighted Average Common Shares Outstanding | Metric | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :-------------------------------------- | :-------------------------------- | :-------------------------------- | | Weighted average common shares outstanding during the period—basic | 43,676 | 45,118 | | Effect of dilutive stock awards | 135 | 237 | | Weighted average common shares outstanding during the period—diluted | 43,811 | 45,355 | - For the three months ended March 31, 2020, 5.3 million common shares were excluded from the calculation of diluted net income attributable to ARC per common share because they were anti-dilutive, compared to 5.5 million in the prior year period[37] 3. Goodwill and Other Intangibles - An interim goodwill impairment analysis was triggered as of March 31, 2020, due to the COVID-19 pandemic's impact on the global economic environment, a revision of forecasted future earnings, and a decline in market capitalization[39] - The analysis concluded that the fair value of each reporting unit exceeded its carrying value, and goodwill was not impaired as of March 31, 2020[39] - The Company assessed its long-lived assets for possible impairment as of March 31, 2020, due to the effect of the COVID-19 pandemic on expected future operating cash flows, and concluded that its long-lived assets were not impaired[47] Intangible Assets | Asset | Gross Carrying Amount (Mar 31, 2020) | Accumulated Amortization (Mar 31, 2020) | Net Carrying Amount (Mar 31, 2020) | Gross Carrying Amount (Dec 31, 2019) | Accumulated Amortization (Dec 31, 2019) | Net Carrying Amount (Dec 31, 2019) | | :------------------------ | :----------------------------------- | :-------------------------------------- | :--------------------------------- | :----------------------------------- | :-------------------------------------- | :--------------------------------- | | Customer relationships | $98,952 | $97,875 | $1,077 | $99,127 | $97,430 | $1,697 | | Trade names and trademarks | $20,267 | $19,981 | $286 | $20,279 | $19,980 | $299 | | Total | $119,219 | $117,856 | $1,363 | $119,406 | $117,410 | $1,996 | Estimated Future Amortization Expense | Year | Estimated Future Amortization Expense (in thousands) | | :--------------------------------------- | :--------------------------------------------------- | | 2020 (excluding the three months ended March 31, 2020) | $901 | | 2021 | $166 | | 2022 | $94 | | 2023 | $41 | | 2024 | $39 | | Thereafter | $122 | | Total | $1,363 | 4. Income Taxes - The income tax provision for the three months ended March 31, 2020, was $1.1 million on pretax income of $1.6 million, resulting in an effective income tax rate of 70.6%, a significant increase from 38.8% in the prior year period[52] - The increase in the effective income tax rate was primarily due to shortfalls in stock-based compensation, changes in valuation allowances against certain deferred tax assets, non-deductible expenses, and the financial impact from COVID-19[52] - The Company has a $2.5 million valuation allowance against certain deferred tax assets as of March 31, 2020[56] 5. Long-Term Debt | Debt Type | March 31, 2020 | December 31, 2019 | Change ($) | Change (%) | | :------------------------ | :------------- | :---------------- | :--------- | :--------- | | Revolving Loans | $75,000 | $60,000 | $15,000 | 25.00% | | Various Finance Leases | $46,715 | $46,157 | $558 | 1.21% | | Total | $121,715 | $106,157 | $15,558 | 14.66% | | Less Current Portion | $(17,364) | $(17,075) | $(289) | 1.69% | | Long-Term Debt | $104,351 | $89,082 | $15,269 | 17.14% | - The Credit Agreement was amended on December 17, 2019, increasing the maximum aggregate principal amount of revolving loans from $65 million to $80 million and fully repaying a $49.5 million term loan[59][60] - As of March 31, 2020, the Company's borrowing availability of Revolving Loans was $2.8 million, after deducting outstanding letters of credit of $2.2 million and outstanding Revolving Loans of $75.0 million[61] - The Company was in compliance with its financial covenants (Total Leverage Ratio and Fixed Charge Coverage Ratio) as of March 31, 2020[66] - A new dividend program was supported by the amendment, with a quarterly cash dividend of $0.01 per share declared in February 2020[68] 6. Commitments and Contingencies - The Company leases machinery, equipment, and office and operational facilities under non-cancelable operating lease agreements[71] - Indemnification agreements are in place with each director and named executive officer, providing indemnification under certain circumstances[72] - The Company is involved in various legal proceedings in the normal course of business, but does not believe their outcome will have a material effect on its consolidated financial position, results of operations, or cash flows[73] 7. Stock-Based Compensation - As of March 31, 2020, 1.3 million shares remained available for issuance under the Company's stock plan[74] - During the three months ended March 31, 2020, the Company granted options to acquire 0.5 million shares and 0.3 million restricted stock awards to certain key employees[77] - Stock-based compensation expense decreased to $0.5 million for Q1 2020, compared to $0.6 million for Q1 2019[78] - Total unrecognized compensation cost related to unvested stock-based payments was $2.5 million as of March 31, 2020, expected to be recognized over a weighted-average period of approximately 2.0 years[78] 8. Fair Value Measurements - The Company categorizes its assets and liabilities measured at fair value into a three-level fair value hierarchy based on input observability[79] - As of March 31, 2020, the Company's assets and liabilities measured at fair value were not material[79] - The carrying amount of the Company's finance leases approximates fair value, and the fair value of borrowings under its Credit Agreement was $75.0 million as of March 31, 2020[81] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial condition and results of operations for the three months ended March 31, 2020, highlighting the significant impact of the COVID-19 pandemic on sales, profitability, and liquidity, along with the proactive measures taken in response Business Summary - ARC Document Solutions is a leading provider of document solutions to design, engineering, construction, and facilities management professionals, aiming to reduce costs and increase efficiency for customers by improving document access and control[83][84] - The Company's service and product offerings include Construction Document and Information Management (CDIM), Managed Print Services (MPS), Archiving and Information Management (AIM), and Equipment and Supplies sales[85] - Sales to the AEC/O industry accounted for approximately 75% of net sales for the three months ended March 31, 2020, with the remaining 25% from businesses outside this industry[87] Costs and Expenses - Cost of sales primarily consists of materials (paper, toner), labor, and indirect costs like equipment and service center facilities expenses; paper price increases are typically passed on to customers[88] - The Company maintains low inventory levels and has historically leased equipment due to attractive finance lease rates[89] - Research and development costs, mainly salaries and equipment for data storage and development centers, are primarily recorded to cost of sales[90] COVID-19 Pandemic - The COVID-19 pandemic negatively impacted the Company's sales and profitability for Q1 2020, with a material decline beginning in March due to stay-at-home orders, particularly in California (34% of total revenue)[91][99] - The Company expects Q2 2020 to be the most significantly impacted quarter, with a current belief for sequential improvement during the second half of 2020[91] - Proactive actions taken to improve liquidity include drawing on the revolving credit facility, reducing working capital, suspending share repurchases and future dividend payouts, postponing capital expenditures, and reducing operating costs and workforce[94] - As an essential business, almost all of the Company's 170 service centers remained open, albeit at reduced volumes, to fulfill customer needs[95] Results of Operations Net Sales Net Sales by Service/Product | Service/Product | Three Months Ended March 31, 2020 (in millions) | Three Months Ended March 31, 2019 (in millions) | Change ($) | Change (%) | | :------------------------- | :---------------------------------------------- | :---------------------------------------------- | :--------- | :--------- | | CDIM | $49.2 | $50.8 | $(1.6) | -3.2% | | MPS | $27.3 | $30.9 | $(3.6) | -11.6% | | AIM | $3.6 | $3.3 | $0.3 | 10.4% | | Equipment and Supplies Sales | $8.4 | $12.1 | $(3.8) | -31.2% | | Total Net Sales | $88.4 | $97.1 | $(8.7) | -9.0% | - Total net sales decreased by 9.0% year-over-year due to the negative impact of the COVID-19 pandemic on all service offerings, with the exception of AIM revenues[99] - The number of MPS locations grew to approximately 10,950 as of March 31, 2020, representing a net increase of approximately 370 locations compared to March 31, 2019[102] - The decline in Equipment and Supplies sales was primarily driven by the COVID-19 slowdown in China, with sales from the Chinese joint venture (UDS) decreasing from $6.9 million in Q1 2019 to $3.4 million in Q1 2020[104] Gross Profit Gross Profit and Margin | Metric | Three Months Ended March 31, 2020 (in millions) | Three Months Ended March 31, 2019 (in millions) | Change ($) | Change (%) | | :----------- | :---------------------------------------------- | :---------------------------------------------- | :--------- | :--------- | | Gross Profit | $27.6 | $30.7 | $(3.1) | -10.0% | | Gross Margin | 31.2% | 31.6% | -0.4 pp | -1.27% | - Despite a significant drop in net sales due to the COVID-19 pandemic, gross margin decreased by only 0.4%, remaining essentially flat, aided by a drop in low-margin Equipment and Supplies sales from UDS and cost-saving activities[106] Selling, General and Administrative Expenses SG&A Expenses | Metric | Three Months Ended March 31, 2020 (in millions) | Three Months Ended March 31, 2019 (in millions) | Change ($) | Change (%) | | :----- | :---------------------------------------------- | :---------------------------------------------- | :--------- | :--------- | | SG&A | $24.3 | $27.6 | $(3.3) | -11.9% | - The reduction in SG&A expenses was due to cost-saving activities from a Q3 2019 restructuring plan and new measures in response to the COVID-19 pandemic, including headcount and salary reductions, travel suspension, and reduced discretionary spending[107] Amortization of Intangibles Amortization of Intangibles | Metric | Three Months Ended March 31, 2020 (in millions) | Three Months Ended March 31, 2019 (in millions) | Change ($) | Change (%) | | :-------------------------- | :---------------------------------------------- | :---------------------------------------------- | :--------- | :--------- | | Amortization of Intangibles | $0.6 | $0.9 | $(0.3) | -33.3% | - The decrease in amortization of intangibles was due to the completed amortization of certain customer relationship intangibles related to historical acquisitions[108] Interest Expense, Net Interest Expense, Net | Metric | Three Months Ended March 31, 2020 (in millions) | Three Months Ended March 31, 2019 (in millions) | Change ($) | Change (%) | | :------------------ | :---------------------------------------------- | :---------------------------------------------- | :--------- | :--------- | | Interest Expense, Net | $1.1 | $1.4 | $(0.3) | -22.4% | - The decrease in net interest expense was due to the pay down of long-term debt[109] Income Taxes Income Tax Provision and Rate | Metric | Three Months Ended March 31, 2020 (in millions) | Three Months Ended March 31, 2019 (in millions) | Change ($) | Change (%) | | :------------------------ | :---------------------------------------------- | :---------------------------------------------- | :--------- | :--------- | | Income Tax Provision | $1.1 | $0.3 | $0.8 | 289.8% | | Pretax Income | $1.6 | $0.7 | $0.9 | 128.57% | | Effective Income Tax Rate | 70.6% | 38.8% | 31.8 pp | 81.96% | - The significant increase in the effective income tax rate was primarily due to shortfalls in stock-based compensation, valuation allowances against deferred tax assets, non-deductible expenses, and the financial impact from the COVID-19 pandemic[109] - Excluding certain discrete items, the effective income tax rate would have been 33.4% for Q1 2020 and 31.1% for Q1 2019[109][110] Noncontrolling Interest - Net loss attributable to noncontrolling interest represents 35% of the income of UNIS Document Solutions Co Ltd (UDS) and its subsidiaries, which comprise the Company's Chinese joint venture operations[111] Net Income Attributable to ARC Net Income Attributable to ARC | Metric | Three Months Ended March 31, 2020 (in millions) | Three Months Ended March 31, 2019 (in millions) | Change ($) | Change (%) | | :-------------------------------------- | :---------------------------------------------- | :---------------------------------------------- | :--------- | :--------- | | Net Income Attributable to ARC | $0.7 | $0.6 | $0.1 | 15.4% | - The increase in net income attributable to ARC was driven by a decline in selling, general and administrative expenses, which more than offset the decline in gross profit[112] EBITDA EBITDA and Adjusted EBITDA | Metric | Three Months Ended March 31, 2020 (in millions) | Three Months Ended March 31, 2019 (in millions) | Change ($) | Change (%) | | :-------------- | :---------------------------------------------- | :---------------------------------------------- | :--------- | :--------- | | EBITDA | $10.9 | $10.6 | $0.3 | 2.6% | | EBITDA Margin | 12.3% | 10.9% | 1.4 pp | 12.84% | | Adjusted EBITDA | $11.4 | $11.2 | $0.2 | 1.6% | | Adjusted EBITDA Margin | 12.9% | 11.6% | 1.3 pp | 11.21% | - The increase in adjusted EBITDA margin for Q1 2020 was primarily due to the significant decline in Selling, General and Administrative expenses[113] Impact of Inflation - Inflation has not had a significant effect on the Company's operations, as price increases for raw materials like paper and fuel charges are typically passed on to customers[114] Non-GAAP Financial Measures - EBITDA and related ratios are supplemental non-GAAP measures used by management to assess operating segment performance, evaluate acquisitions, and determine consolidated-level compensation[115][118] - Adjusted net income and adjusted EBITDA are presented to provide meaningful comparisons by excluding items such as deferred tax valuation allowances, other discrete tax items, and stock-based compensation expense[121][122][123] Adjusted Net Income and EPS | Metric | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | Change ($) | Change (%) | | :---------------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | :--------- | :--------- | | Net income attributable to ARC Document Solutions, Inc. | $683 | $592 | $91 | 15.37% | | Deferred tax valuation allowance and other discrete tax items | $499 | $26 | $473 | 1819.23% | | Adjusted net income attributable to ARC Document Solutions, Inc. | $1,182 | $618 | $564 | 91.26% | | Basic EPS (Actual) | $0.02 | $0.01 | $0.01 | 100.00% | | Diluted EPS (Actual) | $0.02 | $0.01 | $0.01 | 100.00% | | Basic EPS (Adjusted) | $0.03 | $0.01 | $0.02 | 200.00% | | Diluted EPS (Adjusted) | $0.03 | $0.01 | $0.02 | 200.00% | Liquidity and Capital Resources Overview - The Company's principal sources of cash are cash flows from operations and borrowings under debt and lease agreements, while historical uses include ongoing operations, debt payments, capital expenditures, and stock repurchases[130] Cash and Cash Equivalents | Metric | March 31, 2020 | December 31, 2019 | Change ($) | Change (%) | | :---------------------- | :------------- | :---------------- | :--------- | :--------- | | Cash and Cash Equivalents | $38,210 | $29,425 | $8,785 | 29.86% | - As of March 31, 2020, $15.0 million of cash was held in foreign countries, with $13.1 million in China, which could be subject to repatriation delays or adverse tax consequences[131] Operating Activities Net Cash Provided by Operating Activities | Metric | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | Change ($) | Change (%) | | :-------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | :--------- | :--------- | | Net Cash Provided by Operating Activities | $2,774 | $2,665 | $109 | 4.09% | - The slight increase in cash flows from operations was due to an increase in net income and improved management of operating assets and liabilities[136] - Days Sales Outstanding (DSO) improved to 54 days as of March 31, 2020, from 56 days as of March 31, 2019[136] Investing Activities Net Cash Used in Investing Activities and Capital Expenditures | Metric | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | Change ($) | Change (%) | | :----------------------------------- | :----------------------------------------------- | :----------------------------------------------- | :--------- | :--------- | | Net Cash Used in Investing Activities | $(1,048) | $(3,030) | $1,982 | -65.41% | | Capital Expenditures | $(1,121) | $(3,196) | $2,075 | -64.93% | - The change in capital expenditures was primarily driven by the timing of equipment purchases and whether such equipment was leased or purchased with available cash[137] Financing Activities Net Cash Provided by (Used in) Financing Activities | Metric | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | Change ($) | Change (%) | | :-------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | :--------- | :--------- | | Net Cash Provided by (Used in) Financing Activities | $7,543 | $(9,644) | $17,187 | -178.21% | - Net cash provided by financing activities was primarily due to a $15.0 million net borrowing under the revolving credit facility, partially offset by payments on finance leases and share repurchases[138] Debt Obligations Total Debt Obligations | Metric | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | Change ($) | Change (%) | | :------------------------- | :---------------------------- | :------------------------------- | :--------- | :--------- | | Borrowings from revolving credit facility | $75,000 | $60,000 | $15,000 | 25.00% | | Other debt obligations | $46,715 | $46,157 | $558 | 1.21% | | Total Debt Obligations | $121,715 | $106,157 | $15,558 | 14.66% | - The 2019 Amendment to the Credit Agreement increased the maximum aggregate principal amount of Revolving Loans from $65 million to $80 million and was used to fully repay a $49.5 million term loan[144][145] - As of March 31, 2020, the Company's borrowing availability under the Revolving Loan commitment was $2.8 million[147] - The Company was in compliance with its financial covenants (Total Leverage Ratio and Fixed Charge Coverage Ratio) as of March 31, 2020, and currently believes it will remain compliant, despite high uncertainty due to the COVID-19 pandemic[150] - As of March 31, 2020, the Company had $46.7 million of finance lease obligations outstanding, with a weighted average interest rate of 4.8%[155] Off-Balance Sheet Arrangements - As of March 31, 2020, the Company did not have any off-balance-sheet arrangements[156] Contractual Obligations and Other Commitments - The Company has entered into various non-cancelable operating leases primarily related to facilities, equipment, and vehicles[157] - The Company expects changes to the timing of lease payments due to ongoing deferment negotiations with landlords and lessors[157] - Legal proceedings are not believed to have a material effect on the Company's consolidated financial position, results of operations, or cash flows[158] Critical Accounting Policies Goodwill Impairment - An interim goodwill impairment analysis was triggered as of March 31, 2020, due to the COVID-19 pandemic's impact on the global economic environment, revised future earnings forecasts, and a decline in market capitalization[161] - The analysis concluded that the fair value of each reporting unit exceeded its carrying value, and goodwill was not impaired as of March 31, 2020[161] - A sensitivity analysis indicated that a 50-basis point reduction in projected 2020 EBITDA or a 50-basis point increase to the weighted average cost of capital would not result in goodwill impairment[165][166] - Significant judgment and estimates are involved in determining the fair value of reporting units, especially given the uncertainty created by the COVID-19 pandemic, and future impairment charges are possible if assumptions change[164][167] Income Taxes - Deferred tax assets and liabilities reflect temporary differences, adjusted for expected tax rate changes, with a valuation allowance recorded if realization of deferred tax assets is not more likely than not[168][169] - The Company has a $2.5 million valuation allowance against certain deferred tax assets as of March 31, 2020[169] - The evaluation of deferred tax assets requires judgment, and changes in current estimates due to unanticipated events, such as the ultimate financial impact and recovery due to COVID-19, could materially affect financial condition and results of operations[55][169] Recent Accounting Pronouncements - Refer to Note 1, 'Description of Business and Basis of Presentation' within the interim Condensed Consolidated Financial Statements for disclosures on recent accounting pronouncements not yet adopted[174] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states that there are no applicable quantitative and qualitative disclosures about market risk for the Company - This item is not applicable to the Company[175] Item 4. Controls and Procedures This section details the Company's disclosure controls and procedures, confirming their effectiveness as of March 31, 2020, and reporting no material changes to internal control over financial reporting during the quarter Disclosure Controls and Procedures - The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in its reports under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported timely[176] - As of March 31, 2020, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective[177] Changes in Internal Control over Financial Reporting - There were no changes to internal control over financial reporting during the three months ended March 31, 2020, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting[178] Part II—Other Information Item 1. Legal Proceedings The Company is involved in various legal proceedings in the normal course of business but does not anticipate any material adverse effects on its financial position, results of operations, or cash flows from these matters - The Company is involved in various legal proceedings and other legal matters from time to time in the normal course of business[180] - The Company does not believe that the outcome of any of these matters will have a material effect on its consolidated financial position, results of operations, or cash flows[180] Item 1A. Risk Factors This section outlines significant risks, primarily focusing on the adverse impact of the COVID-19 pandemic on the Company's financial condition, operations, and stock price, as well as risks related to NYSE listing compliance, dividend policy, credit agreement covenants, and goodwill impairment - The Company's financial condition and results of operations for fiscal 2020 and beyond have been and are expected to continue to be adversely affected by the COVID-19 pandemic[182] - Potential impacts of COVID-19 include decreased business spending, reduced demand for products and services, increased customer losses, collectability risks, reduced productivity from remote work, and potential impairment charges[183] - The market price of the Company's common stock is volatile and has been significantly impacted by factors such as the COVID-19 pandemic and general market fluctuations[185] - The Company received a notice from the NYSE on April 7, 2020, regarding non-compliance with listing standards due to its common stock price falling below $1.00 per share for 30 consecutive trading days[186][188] - The Company does not currently intend to declare additional quarterly dividends or make additional share repurchases due to the effects of the COVID-19 pandemic on its business[191] - A substantial and sustained downturn in operations due to the COVID-19 pandemic could lead to a breach of financial covenants (Total Leverage Ratio and Fixed Charge Coverage Ratio) under the Credit Agreement, potentially causing acceleration of outstanding debt[192] - While an interim goodwill impairment analysis as of March 31, 2020, resulted in no impairment, future impairment charges are possible if assumptions regarding future revenue or profitability are not achieved, especially given the ongoing impact of COVID-19[193] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the Company's stock repurchase activities during March 2020, indicating purchases made under a publicly announced program Stock Repurchase Activity | Period | Total Number of Shares Purchased (1) | Average Price Paid per Share ($) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares That May Yet Be Purchased Under The Plans or Programs (1) | | :---------------------- | :----------------------------------- | :------------------------------- | :------------------------------------------------------------------------------- | :------------------------------------------------------------------------------------------- | | March 1, 2020 - March 31, 2020 | 2,011 | $1.17 | 2,011 | 10,704 | | Total | 2,011 | | 2,011 | | - On May 1, 2019, the Company's Board of Directors approved a stock repurchase program authorizing the purchase of up to $15.0 million of outstanding common stock through March 31, 2021[195] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications from executive officers and XBRL documents - The exhibits include certifications from the Principal Executive Officer (31.1, 32.1) and Principal Financial Officer (31.2, 32.2) pursuant to the Securities Exchange Act and Sarbanes-Oxley Act, along with various XBRL taxonomy documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE)[196][199] Signatures This section contains the signatures of the Chairman, President, Chief Executive Officer, and Chief Financial Officer, certifying the filing of the report - The report was signed on May 6, 2020, by Kumarakulasingam Suriyakumar (Chairman, President and Chief Executive Officer) and Jorge Avalos (Chief Financial Officer)[198]