Harte Hanks(HHS) - 2018 Q4 - Annual Report

Client Dependence and Revenue - The company's ten largest clients represented 44% of revenues in 2018, with traditional consumer retail accounting for 23% of total revenues[40]. - The company has experienced reduced demand for its products and services due to clients' financial conditions and marketing budget constraints, which are discretionary and easier to cut in the short term[58]. - The company’s financial performance may be adversely affected by fluctuations in client marketing expenditures due to economic downturns[39]. Financial Obligations and Performance - The company continues to experience net operating losses, impacting its ability to operate as a going concern without additional funding[51]. - The company’s pension benefit plans represent significant financial obligations, with uncertainties in estimating future payments[47]. - Employee morale and compensation have declined due to financial constraints, making it difficult for the company to attract and retain skilled professionals[61]. - The company is unlikely to declare cash dividends or repurchase shares in the near term, which could affect the market price of its common stock[93]. Debt and Credit Facilities - The company has a $22.0 million revolving credit facility, which was amended to extend the term to April 17, 2020[44]. - As of December 31, 2018, the company had $14.2 million of debt outstanding under the Texas Capital Credit Facility, with interest rates affected by market fluctuations[163]. - The company may incur additional indebtedness in the future, with limitations based on the terms of its Series A Convertible Preferred Stock[45]. Compliance and Regulatory Risks - The company received notices from the NYSE regarding non-compliance with listing requirements, including maintaining an average market capitalization of over $50 million[64][65]. - The company is at risk of delisting if it fails to maintain compliance with NYSE requirements, which could adversely affect its market price and liquidity[69]. - The company faces challenges in complying with privacy and data protection regulations, which could increase compliance costs and restrict its marketing activities[71][72]. Competition and Market Conditions - The company faces significant competition for marketing services, which may pressure pricing and margins[52]. - The company must maintain technological competitiveness and continually improve processes to meet client needs[54]. - Increased paper prices could lead to reduced customer spending on marketing programs, materially affecting revenues and profits[92]. - The company may be adversely affected by increases in postal rates and disruptions in postal services, which influence client marketing spending[90]. Operational Risks - The reliance on subcontractors and third parties for service delivery poses risks to client engagement execution[57]. - The company is vulnerable to cyber-attacks and security breaches, which could harm its reputation and result in significant costs[78]. - Security breaches could severely harm the company's business and reputation, particularly in e-commerce operations[86]. - Recent leadership changes may impact the company's operational results if new leaders are unsuccessful in their roles[82]. Intellectual Property and Legal Risks - The company faces risks related to the protection of its intellectual property rights, which could lead to increased litigation costs and operational restrictions[83]. - The company has identified material weaknesses in its internal control over financial reporting, which could result in misstatements in financial statements if not remediated[98]. International Operations and Currency Risks - Approximately 14.5% of the company's revenues were derived from operations outside the U.S. in 2018, primarily from Europe and Asia[95]. - The company is primarily exposed to fluctuations in foreign currency exchange rates, particularly the Euro, British Pound Sterling, and Philippine Peso[164]. - The company has not entered into any foreign currency forward exchange contracts to hedge against adverse fluctuations in foreign currency exchange rates, exposing it to additional risks[97]. - In 2018, the company reported a pre-tax currency transaction gain of $0.5 million, while in 2017, it experienced a pre-tax currency transaction loss of $0.4 million[164]. - The majority of transactions are conducted in local currencies, minimizing the impact of foreign currency fluctuations on overall annual earnings[164]. - The company does not engage in derivative instruments for speculation or hedging purposes[165]. Asset Management - The company sold its 3Q Digital business for $5 million in cash, significantly lower than the $30 million purchase price in 2015, indicating challenges in asset dispositions[88].