Harte Hanks(HHS) - 2019 Q3 - Quarterly Report

Part I. Financial Information This section provides the unaudited condensed consolidated financial statements and management's discussion and analysis for Harte Hanks, Inc. Item 1. Financial Statements (Unaudited) This section presents Harte Hanks, Inc.'s unaudited condensed consolidated financial statements, including balance sheets, income statements, changes in deficit, and cash flows, with detailed notes on accounting policies and financial components Condensed Consolidated Balance Sheets Total assets decreased to $112.15 million by September 30, 2019, from $125.18 million at December 31, 2018, while total liabilities increased, significantly raising the stockholders' deficit | Metric | Sep 30, 2019 ($k) | Dec 31, 2018 ($k) | | :-------------------------------- | :------------------ | :------------------ | | Total Assets | 112,150 | 125,175 | | Total Liabilities | 142,856 | 134,636 | | Total Stockholders' Deficit | (40,429) | (19,184) | | Cash and Cash Equivalents | 31,738 | 20,882 | | Right-of-use assets | 20,684 | — | Condensed Consolidated Statements of Comprehensive (Loss) Income (Three Months) The company reported a net loss of $6.0 million for Q3 2019, an improvement from a $10.0 million net loss in Q3 2018, due to reduced operating expenses despite lower revenues | Metric | Q3 2019 ($k) | Q3 2018 ($k) | % Change | | :-------------------------------- | :----------- | :----------- | :------- | | Operating Revenues | 51,414 | 63,588 | (19.1)% | | Operating Loss | (4,475) | (10,353) | (56.8)% | | Net Loss | (5,988) | (9,984) | (39.9)% | | Basic Loss per Common Share | (0.97) | (1.62) | (40.1)% | Condensed Consolidated Statements of Comprehensive (Loss) Income (Nine Months) The company reported a net loss of $23.3 million for the nine months ended September 30, 2019, a reversal from $15.9 million net income in 2018, due to decreased revenues and a smaller gain on sale | Metric | 9M 2019 ($k) | 9M 2018 ($k) | % Change | | :-------------------------------- | :----------- | :----------- | :------- | | Operating Revenues | 165,250 | 214,417 | (22.9)% | | Operating Loss | (22,028) | (21,697) | 1.5% | | Net (Loss) Income | (23,318) | 15,909 | (246.6)% | | Gain on sale from 3Q Digital | (5,000) | (30,954) | (83.8)% | | Basic (Loss) Earnings per Common Share | (3.77) | 2.19 | (272.6)% | Condensed Consolidated Statements of Changes in Deficit Total stockholders' deficit increased from $(19.2) million at December 31, 2018, to $(40.4) million at September 30, 2019, due to net loss and ASU 2018-02 adoption | Metric | Sep 30, 2019 ($k) | Dec 31, 2018 ($k) | | :-------------------------------- | :------------------ | :------------------ | | Total Stockholders' Deficit | (40,429) | (19,184) | | Net Loss (9M 2019) | (23,318) | N/A | | Cumulative effect of accounting change (ASU 2018-02) | 22 | N/A | Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities improved to $9.4 million for the nine months ended September 30, 2019, from $7.0 million used in 2018, primarily due to a tax refund | Metric | 9M 2019 ($k) | 9M 2018 ($k) | Change ($k) | | :-------------------------------- | :----------- | :----------- | :---------- | | Net Cash Provided by (Used in) Operating Activities | 9,375 | (7,013) | 16,388 | | Net Cash (Used in) Provided by Investing Activities | (1,640) | 1,320 | (2,960) | | Net Cash Provided by Financing Activities | 3,432 | 8,881 | (5,449) | | Net Increase in Cash and Cash Equivalents | 10,856 | 1,981 | 8,875 | | Cash and Cash Equivalents at End of Period | 31,738 | 10,378 | 21,360 | Notes to Condensed Consolidated Financial Statements This section provides detailed notes explaining the company's significant accounting policies, recent pronouncements, revenue recognition, leases, debt, and other financial components Note A - Overview and Significant Accounting Policies Harte Hanks provides data-driven marketing solutions as a single segment, with notes detailing its background, relationship with Wipro, and key accounting policies including revenue recognition - Harte Hanks provides data-driven, omni-channel marketing and customer relationship solutions and logistics globally, operating as one reportable segment[16][17] - Wipro, LLC became a related party in January 2018 after purchasing 9,926 shares of Series A Convertible Preferred Stock for $9.9 million, convertible into 1,001,614 shares (16%) of Common Stock[18][21] - A 1-for-10 reverse stock split was executed on January 31, 2018, reducing authorized common stock from 250 million to 25 million shares[25] - Revenue is recognized upon transfer of control of promised products or services, following a five-step model[28] Note B - Recent Accounting Pronouncements The company adopted ASU 2018-02, reclassifying $11.4 million of stranded tax effects, and ASU 2016-02 (Leases), materially impacting the balance sheet but not income or cash flows - ASU 2018-02 (Income Taxes) was adopted in Q1 2019, allowing reclassification of $11.4 million of stranded tax effects from accumulated other comprehensive income to retained earnings due to the Tax Reform Act[36][39][96] - ASU 2018-07 (Stock-based Compensation) was adopted on January 1, 2019, expanding the scope to non-employee share-based payments, with no material impact on financial statements[40] - ASU 2016-02 (Leases) was adopted on January 1, 2019, using a modified retrospective approach, materially impacting the balance sheet (recognition of ROU assets and lease liabilities) but not comprehensive (loss) income or cash flows[41][43] Note C - Revenue from Contracts with Customers Revenue is disaggregated by vertical market and stream, totaling $165.25 million for the nine months ended September 30, 2019, with most recognized over time and declines across all verticals except Healthcare | Vertical Market | 9M 2019 ($k) | 9M 2018 ($k) | % Change | | :---------------- | :----------- | :----------- | :------- | | B2B | 35,149 | 47,673 | (26.2)% | | Consumer Brands | 35,222 | 47,893 | (26.5)% | | Financial Services | 36,850 | 42,185 | (12.6)% | | Healthcare | 14,946 | 12,800 | 16.8% | | Retail | 31,752 | 46,884 | (32.2)% | | Transportation | 11,331 | 16,982 | (33.3)% | | Total Revenues | 165,250 | 214,417 | (22.9)% | | Revenue Stream | 9M 2019 Over Time ($k) | 9M 2019 At Point in Time ($k) | 9M 2019 Total ($k) | | :-------------------------------- | :----------------------- | :---------------------------- | :----------------- | | Agency & Digital Services | 18,793 | 407 | 19,200 | | Contact Centers | 46,688 | — | 46,688 | | Database Marketing Solutions | 16,745 | 2,537 | 19,282 | | Direct Mail, Logistics, and Fulfillment | 67,853 | 12,227 | 80,080 | | Total Revenues | 150,079 | 15,171 | 165,250 | | Contract Balances | Sep 30, 2019 ($k) | Dec 31, 2018 ($k) | | :-------------------------------- | :------------------ | :------------------ | | Contract assets | 986 | 2,362 | | Deferred revenue and customer advances | 4,286 | 6,034 | | Deferred revenue, included in other long-term liabilities | 904 | 578 | - Revenue recognized during the nine months ended September 30, 2019, from amounts included in deferred revenue at December 31, 2018, was approximately $4.1 million[63] Note D - Leases Upon adopting Topic 842, the company recognized $22.8 million in operating lease ROU assets and $23.9 million in liabilities, with total ROU assets at $20.7 million and lease liabilities at $22.6 million by September 30, 2019 - Upon adoption of Topic 842 on January 1, 2019, the Company recorded operating lease ROU assets of $22.8 million and operating lease liabilities of $23.9 million[67] | Lease Type | Right-of-use Assets (Sep 30, 2019, $k) | Short-term Lease Liabilities (Sep 30, 2019, $k) | Long-term Lease Liabilities (Sep 30, 2019, $k) | | :----------- | :------------------------------------ | :------------------------------------------ | :----------------------------------------- | | Operating | 19,647 | 7,625 | 14,105 | | Finance | 1,037 | 423 | 473 | | Total | 20,684 | 8,048 | 14,578 | | Lease Cost Component | Q3 2019 ($k) | 9M 2019 ($k) | | :------------------- | :----------- | :----------- | | Operating lease cost | 2,347 | 6,940 | | Finance lease cost | 91 | 279 | | Variable lease cost | 614 | 1,991 | | Total lease cost | 3,052 | 9,210 | - Weighted average remaining lease term for operating leases is 3.46 years, with a weighted average discount rate of 4.71%[71] Note E - Convertible Preferred Stock On January 30, 2018, 9,926 Series A Convertible Preferred Stock shares were issued to Wipro, LLC for $9.9 million, convertible into 1,001,614 common shares, with cumulative dividends and contingent redemption provisions - On January 30, 2018, 9,926 shares of Series A Convertible Preferred Stock were issued to Wipro, LLC for $9.9 million[73] - The Series A Preferred Stock is convertible into 100.90817 shares of Common Stock per preferred share and accrues cumulative dividends at 5% per year or a higher common stock dividend rate, payable only upon liquidation[76][78] - The Series A Preferred Stock is classified as mezzanine equity due to contingent redemption provisions not solely within the company's control[80] Note F - Long-Term Debt Borrowings under the Texas Capital Credit Facility increased to $18.7 million by September 30, 2019, from $14.2 million at December 31, 2018, with maturity extended to April 17, 2021 | Metric | Sep 30, 2019 ($k) | Dec 31, 2018 ($k) | | :-------------------------------- | :------------------ | :------------------ | | Borrowings Outstanding (Texas Capital Facility) | 18,700 | 14,200 | - The Texas Capital Credit Facility's maturity was extended to April 17, 2021, and it has an additional borrowing capacity of $0.5 million as of September 30, 2019[81][85] - Letters of credit outstanding amounted to $2.8 million at September 30, 2019, supporting insurance programs[86] Note G - Stock-Based Compensation Stock-based compensation expense for the nine months ended September 30, 2019, was $0.7 million, a shift from a $0.7 million benefit in the prior year due to forfeitures | Metric | 9M 2019 ($k) | 9M 2018 ($k) | | :-------------------------------- | :----------- | :----------- | | Stock-based Compensation Expense (Benefit) | 739 | (706) | - The 2018 stock-based compensation was a credit due to forfeitures from officer departures[88] Note H - Components of Net Periodic Benefit Cost Net periodic benefit cost for the frozen Qualified and Restoration Pension Plans was $4.3 million for the nine months ended September 30, 2019, up from $2.6 million in the prior year | Metric | 9M 2019 ($k) | 9M 2018 ($k) | | :-------------------------------- | :----------- | :----------- | | Net periodic benefit cost | 4,303 | 2,552 | - The Qualified Pension Plan was frozen as of December 31, 1998, and the Restoration Pension Plan was frozen as of April 1, 2014[89][90] - The company made a $2.2 million minimum contribution to its Qualified Pension Plan in 2019 and $1.3 million in benefit payments under the Restoration Pension Plan for the nine months ended September 30, 2019[91][92] Note I - Income Taxes Income tax expense was $0.8 million for the nine months ended September 30, 2019, a decrease in benefit from $10.8 million in 2018, with a negative effective tax rate due to valuation allowances | Metric | 9M 2019 ($k) | 9M 2018 ($k) | | :-------------------------------- | :----------- | :----------- | | Income tax expense (benefit) | 840 | (10,800) | | Effective income tax rate | (3.7)% | (211.4)% | - The effective income tax rate differs from the federal statutory rate of 21.0% primarily due to valuation allowances recorded on deferred tax assets for current period federal net operating losses[93][94] - Effective January 1, 2019, the company adopted ASU 2018-02, reclassifying $11.4 million of stranded tax effects from accumulated other comprehensive income to retained earnings[96] Note J - Earnings Per Share Basic and diluted loss per common share was $(3.77) for the nine months ended September 30, 2019, compared to earnings of $2.19 and $2.18 respectively in the prior year | Metric | 9M 2019 | 9M 2018 | | :-------------------------------- | :------ | :------ | | Basic (loss) earnings per common share | (3.77) | 2.19 | | Diluted (loss) earnings per common share | (3.77) | 2.18 | | Weighted-average common shares outstanding (Basic) | 6,277 | 6,230 | | Weighted-average common shares outstanding (Diluted) | 6,277 | 6,251 | - For periods with a net loss, basic loss per share is calculated using the treasury stock method because the two-class method would be anti-dilutive[100] - For the nine months ended September 30, 2019, 0.1 million anti-dilutive market price options, 0.2 million anti-dilutive unvested shares, and 1.0 million anti-dilutive preferred stock (as if converted) were excluded from diluted EPS calculation[103] Note K - Comprehensive (Loss) Income Total comprehensive loss for the nine months ended September 30, 2019, was $33.3 million, a significant increase from $16.3 million comprehensive income in 2018, driven by net loss and ASU 2018-02 adoption | Metric | 9M 2019 ($k) | 9M 2018 ($k) | | :-------------------------------- | :----------- | :----------- | | Net (loss) Income | (23,318) | 15,909 | | Total other comprehensive (loss) income, net of tax | (10,018) | 345 | | Total comprehensive (loss) income | (33,336) | 16,254 | - The adoption of ASU 2018-02 resulted in $(11,355)k in other comprehensive loss for the nine months ended September 30, 2019[104] | Component | Balance at Dec 31, 2018 ($k) | Net Current Period OCI (9M 2019, $k) | Balance at Sep 30, 2019 ($k) | | :-------------------------------- | :--------------------------- | :---------------------------------- | :--------------------------- | | Defined Benefit Pension Items | (46,584) | (9,707) | (56,291) | | Foreign Currency Items | 101 | (311) | (210) | | Total Accumulated Other Comprehensive Loss | (46,483) | (10,018) | (56,501) | Note L - Litigation and Contingencies The company faces various legal claims and provides client indemnifications, accruing for probable and estimable losses, with management deeming current accruals adequate and further material loss remote - The company is obligated to indemnify clients for third-party proprietary rights claims, with terms and maximum exposure often not reasonably estimable[106] - Accruals are recorded for legal matters where a loss is probable and estimable, and management believes current accruals are adequate, with a remote probability of material loss beyond these amounts[107][108] Note M - Disposition The company sold its 3Q Digital, Inc. subsidiary on February 28, 2018, recognizing a $31.0 million pre-tax gain, and received a $5.0 million contingent payment in May 2019 - The company sold its 3Q Digital, Inc. subsidiary on February 28, 2018, recognizing a pre-tax gain of $31.0 million in Q1 2018[109][110] - A $5.0 million contingent payment related to the Qualified Sale of 3Q Digital was received on May 7, 2019[110] Note N - Certain Relationships and Related Party Transactions Wipro, LLC, a related party, provides technology services to Harte Hanks, which terminated several agreements in Q1 2019, incurring a $2.1 million charge but achieving $3.3 million in annual savings - Wipro, LLC is a related party that provides technology services to Harte Hanks and receives agency/consulting services[111][112] - In Q1 2019, Harte Hanks terminated several technology service agreements with Wipro, incurring a $2.1 million termination charge but resulting in $3.3 million of annual savings[113] | Metric | Sep 30, 2019 ($k) | Dec 31, 2018 ($k) | | :-------------------------------- | :------------------ | :------------------ | | Trade Payables due to Wipro | 1,400 | 5,000 | Note O - Restructuring Activities The company recorded $10.9 million in restructuring charges for the nine months ended September 30, 2019, with total charges expected to reach $14.0 million through 2020, including facility closures | Restructuring Charge Component | 9M 2019 ($k) | | :-------------------------------- | :----------- | | Customer database build write off | 4,036 | | Contract termination fee | 2,767 | | Severance | 1,760 | | Facility, asset impairment and other expense | 2,304 | | Total Restructuring Charges | 10,867 | - Total restructuring charges are expected to be approximately $14.0 million through 2020[119] - One major initiative involves closing three production facilities by the end of 2019 and consolidating operations[119] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition and results, highlighting a challenging competitive environment, ongoing restructuring for cost reduction and liquidity, and detailed analysis of revenue, expenses, and cash flows Cautionary Note Regarding Forward-Looking Statements This section contains forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially, with no obligation to update except as required by law - Forward-looking statements are based on current information, expectations, and estimates, and involve risks, uncertainties, and assumptions that could cause actual results to vary materially[121] - The company undertakes no obligation to publicly update any forward-looking statement, except as required by law[121] Overview Harte Hanks provides integrated, data-driven marketing solutions globally, facing a challenging competitive environment and actively restructuring to reduce costs, improve liquidity, and achieve profitability - Harte Hanks partners with clients to deliver relevant, connected, and quality customer interactions through integrated, multi-channel, data-driven solutions[123][124] - The company is affected by general economic conditions and discretionary marketing budgets of clients[126] - Ongoing restructuring efforts aim to decrease recurring expenses, prioritize investments, and focus on core business to enhance liquidity and financial flexibility and return to profitability[127] Recent Developments A project committee identified over $20 million in potential annual cost savings, with $10.9 million in restructuring charges recorded for the nine months ended September 30, 2019, and $14.0 million expected through 2020 - A project committee has identified over $20 million in potential annual cost savings through restructuring initiatives[128] - Restructuring charges of $3.1 million and $10.9 million were recorded for the three and nine months ended September 30, 2019, respectively[129] - Total restructuring charges are expected to be approximately $14.0 million through 2020, including the closing of three production facilities by the end of 2019[130] Results of Operations Q3 2019 revenues declined by 19.1%, but operating loss improved by 56.8%; 9M 2019 revenues declined by 22.9%, shifting from net income to a net loss due to the absence of a prior year gain on sale | Metric | Q3 2019 ($k) | Q3 2018 ($k) | % Change | | :-------------------------------- | :----------- | :----------- | :------- | | Revenues | 51,414 | 63,588 | (19.1)% | | Operating Loss | (4,475) | (10,353) | (56.8)% | | (Loss) income before taxes | (5,886) | (11,421) | (48.5)% | | Diluted (Loss) income per common share | (0.97) | (1.62) | (40.1)% | | Metric | 9M 2019 ($k) | 9M 2018 ($k) | % Change | | :-------------------------------- | :----------- | :----------- | :------- | | Revenues | 165,250 | 214,417 | (22.9)% | | Operating Loss | (22,028) | (21,697) | 1.5% | | (Loss) income before taxes | (22,478) | 5,109 | (540.0)% | | Diluted (Loss) income per common share | (3.77) | 2.18 | (272.9)% | Revenues Q3 2019 revenues declined by 19.1% ($12.2 million) due to client losses and lower volumes across most verticals, while 9M revenues decreased by 22.9% ($49.2 million), partly due to the 3Q Digital sale - Q3 2019 revenues declined by $12.2 million (19.1%) YoY, with significant decreases in retail, B2B, financial services, consumer, and transportation verticals[132] - 9M 2019 revenues declined by $49.2 million (22.9%) YoY, with $6.9 million of the reduction attributed to the sale of 3Q Digital in February 2018[133] - The Healthcare vertical showed slight increases in revenue for both the three and nine months ended September 30, 2019[132][133] Operating Expenses Q3 2019 operating expenses decreased by 24.4% ($18.1 million) due to lower labor, production, distribution, and SG&A costs, while 9M expenses decreased by 20.7% ($48.8 million), partly from the 3Q Digital sale | Operating Expense Component | Q3 2019 ($k) | Q3 2018 ($k) | % Change | | :-------------------------------- | :----------- | :----------- | :------- | | Labor | 28,589 | 35,619 | (19.7)% | | Production and distribution | 17,314 | 23,016 | (24.8)% | | Advertising, selling, general and administrative | 5,623 | 9,658 | (41.8)% | | Depreciation, software and intangible asset amortization | 1,283 | 1,826 | (29.7)% | | Total operating expenses | 55,889 | 73,941 | (24.4)% | | Operating Expense Component | 9M 2019 ($k) | 9M 2018 ($k) | % Change | | :-------------------------------- | :----------- | :----------- | :------- | | Labor | 94,034 | 125,999 | (25.4)% | | Production and distribution | 58,130 | 73,523 | (20.9)% | | Advertising, selling, general and administrative | 20,225 | 26,891 | (24.8)% | | Depreciation, software and intangible asset amortization | 4,022 | 5,879 | (31.6)% | | Total operating expenses | 187,278 | 236,114 | (20.7)% | - The sale of 3Q Digital contributed to a $5.8 million reduction in total operating expenses for the nine-month period[136] Operating Loss Q3 2019 operating loss improved by $5.9 million (56.8%) to $(4.5) million, driven by an $18.1 million decline in operating expenses partially offset by $12.2 million lower revenue - Operating loss for Q3 2019 improved by $5.9 million (56.8%) to $(4.5) million, driven by an $18.1 million decline in operating expenses partially offset by $12.2 million lower revenue[139] - Operating loss for 9M 2019 slightly increased by $0.3 million to $(22.0) million, as a $49.2 million revenue decline was largely offset by a $48.8 million decline in operating expenses[140] Interest Expense Q3 2019 net interest expense increased by $0.2 million due to higher borrowings, while 9M net interest expense decreased by $0.4 million primarily from eliminating 3Q Digital contingent consideration interest accretion - Net interest expense increased by $0.2 million in Q3 2019 due to higher borrowings under the Texas Capital Facility[141] - Net interest expense decreased by $0.4 million in 9M 2019, primarily due to the elimination of interest accretion expense related to the 3Q Digital contingent consideration liability[142] Gain on sale A $5.0 million gain on sale was recognized for the nine months ended September 30, 2019, from a 3Q Digital contingent payment, contrasting with a $31.0 million gain in the prior year from the actual disposition - A $5.0 million gain on sale was recognized for 9M 2019, resulting from a contingent payment related to the 3Q Digital sale[143] - A $31.0 million gain on sale was recognized for 9M 2018 from the disposition of 3Q Digital[143] Other Income and Expense Other expense, net, increased by $0.2 million in Q3 2019 and $1.7 million in the nine months ended September 30, 2019, mainly due to increased pension expenses and foreign currency revaluation - Other expense, net, increased by $0.2 million in Q3 2019 and $1.7 million in 9M 2019, mainly due to increased pension expenses and foreign currency revaluation[144][145] Income Taxes Q3 2019 income tax expense was $0.1 million, a $1.5 million decrease in benefit, with a negative 1.7% effective tax rate, primarily due to valuation allowances on deferred tax assets | Metric | Q3 2019 ($k) | Q3 2018 ($k) | % Change in Benefit | | :-------------------------------- | :----------- | :----------- | :------------------ | | Income tax expense (benefit) | 102 | (1,437) | (1,539) | | Effective income tax rate | (1.7)% | 12.6% | N/A | | Metric | 9M 2019 ($k) | 9M 2018 ($k) | % Change in Benefit | | :-------------------------------- | :----------- | :----------- | :------------------ | | Income tax expense (benefit) | 840 | (10,800) | (11,640) | | Effective income tax rate | (3.7)% | (211.4)% | N/A | - The effective income tax rates differ from the federal statutory rate of 21.0% primarily due to valuation allowances recorded on deferred tax assets for current period federal net operating losses[147][148] Liquidity and Capital Resources Cash and cash equivalents increased to $31.7 million by September 30, 2019, with liquidity from cash, operations, and credit facilities, and management believes it can meet requirements for the next twelve months | Metric | Sep 30, 2019 ($k) | Dec 31, 2018 ($k) | | :-------------------------------- | :------------------ | :------------------ | | Cash and cash equivalents | 31,738 | 20,882 | - Principal sources of liquidity are cash on hand, cash provided by operating activities, and borrowings under the Texas Capital Credit Facility[150] - The company received $15.9 million in federal income tax refunds on June 26, 2019, and a $5 million contingent payment related to the 3Q Digital sale on May 7, 2019[151] - Management believes the company can meet its liquidity requirements and fund fixed obligations for at least the next twelve months[152] Sources and Uses of Cash Cash and cash equivalents increased to $31.7 million by September 30, 2019, from $20.9 million at December 31, 2018, with liquidity from cash, operations, and borrowings for corporate purposes - Cash and cash equivalents increased from $20.9 million at December 31, 2018, to $31.7 million at September 30, 2019[150] - Principal liquidity sources include cash on hand, cash provided by operating activities, and borrowings, used for general corporate purposes, working capital, and capital expenditures[150] Operating Activities Net cash provided by operating activities for the nine months ended September 30, 2019, was $9.4 million, a $16.4 million improvement from $7.0 million used in 2018, primarily due to a $20.5 million tax refund | Metric | 9M 2019 ($k) | 9M 2018 ($k) | | :-------------------------------- | :----------- | :----------- | | Net cash provided by (used in) operating activities | 9,375 | (7,013) | - The $16.4 million year-over-year increase in cash from operating activities was primarily due to a $20.5 million tax refund received[153] Investing Activities Net cash used in investing activities for the nine months ended September 30, 2019, was $1.6 million, a shift from $1.3 million provided in 2018, mainly due to the 3Q Digital sale | Metric | 9M 2019 ($k) | 9M 2018 ($k) | | :-------------------------------- | :----------- | :----------- | | Net cash (used in) provided by investing activities | (1,640) | 1,320 | - The change in investing activities was mainly due to the sale of 3Q Digital in late February 2018[154] Financing Activities Net cash provided by financing activities decreased to $3.4 million from $8.9 million in 2018, primarily due to Series A Preferred Stock issuance in Q1 2018, partially offset by $4.5 million in borrowings | Metric | 9M 2019 ($k) | 9M 2018 ($k) | | :-------------------------------- | :----------- | :----------- | | Net cash provided by financing activities | 3,432 | 8,881 | - The $5.4 million decrease was primarily due to the issuance of Series A Preferred Stock in Q1 2018, partially offset by $4.5 million of borrowings under the Texas Capital Credit Facility in Q1 2019[155] Foreign Holdings of Cash Consolidated foreign cash holdings increased to $3.2 million at September 30, 2019, from $2.3 million in the prior year | Metric | Sep 30, 2019 ($k) | Sep 30, 2018 ($k) | | :-------------------------------- | :------------------ | :------------------ | | Consolidated foreign holdings of cash | 3,200 | 2,300 | Credit Facilities The Texas Capital Credit Facility's maturity was extended to April 17, 2021, with $18.7 million outstanding and $0.5 million available for borrowing as of September 30, 2019 - The Texas Capital Credit Facility's maturity was extended to April 17, 2021, in May 2019[157] - As of September 30, 2019, $18.7 million was outstanding under the facility, with an additional $0.5 million available for borrowing[159] - Letters of credit outstanding amounted to $2.8 million at September 30, 2019[158] Outlook Management assesses liquidity based on cash, assets, liabilities, debt, revenues, operating income, and cash flows, believing there is no substantial doubt about the company's ability to continue as a going concern for the next 12 months - Management believes there are no conditions or events that raise substantial doubt about the company's ability to continue as a going concern for the next 12 months[160] - The company's liquidity assessment considers total cash, current assets, current liabilities, total debt, revenues, operating income, and cash flows[160] Critical Accounting Policies The company refers to its 2018 10-K for critical accounting policies, noting changes including the adoption of ASC 842 (Leases) and the removal of Goodwill and intangible assets - Refer to the 2018 10-K for a discussion of critical accounting policies[161] - Changes include the adoption of ASC 842, Leases, and the removal of Goodwill and intangible assets as critical accounting policies due to their absence from the condensed consolidated balance sheet[161] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from interest rate and foreign exchange fluctuations, with variable interest borrowings and exposure to Euro, British Pound, and Philippine Peso, but no material impact or hedging derivatives are expected - The company faces market risks related to interest rate variations and foreign exchange rate variations[162] - Borrowings under the Texas Capital Credit Facility bear variable interest, but a one percentage point change in average interest rates is not expected to have a material impact on interest expense[164] - Primary foreign exchange rate exposure is to the Euro, British Pound, and Philippine Peso, with no significant impact on overall annual earnings. The company does not use derivative instruments for hedging[165][166] Item 4. Controls and Procedures Disclosure controls and procedures were not effective as of September 30, 2019, due to material weaknesses in internal control over financial reporting, though financial statements are fairly presented, with remediation efforts ongoing and expected by year-end 2019 Evaluation of Disclosure Controls and Procedures Disclosure controls and procedures were not effective as of September 30, 2019, due to material weaknesses in internal control over financial reporting, though condensed consolidated financial statements are fairly presented - Disclosure controls and procedures were not effective as of September 30, 2019, solely due to material weaknesses in internal control over financial reporting[168] - Notwithstanding the material weaknesses, the condensed consolidated financial statements are believed to be fairly presented in all material respects, in conformity with GAAP[169] Material Weakness in Internal Control over Financial Reporting Material weaknesses were identified in the effectiveness of information and communication, control activities, and internal controls over revenue recognition - Material weaknesses were identified in the effectiveness of information and communication, control activities, and internal controls over revenue recognition[170] - Despite these weaknesses, the condensed consolidated financial statements are presented fairly in all material respects, in conformity with U.S. GAAP[171] Changes in Internal Control over Financial Reporting Several previously disclosed material weaknesses related to monitoring, control environment, and risk assessment have been successfully remediated, with no other material changes in internal controls during Q3 2019 - Several previously disclosed material weaknesses related to monitoring, control environment, and risk assessment have been successfully remediated[172] - No other material changes in internal controls over financial reporting occurred during the quarter ended September 30, 2019[172] Remediation Plan for Material Weaknesses in Internal Control over Financial Reporting Management is actively remediating identified material weaknesses, including documenting systems and redesigning revenue recognition controls, with significant progress made and full remediation expected by year-end 2019 - Management is actively engaged in remediation efforts, including preparing a comprehensive listing of applications and assessing their impact on financial reporting[173] - Significant progress has been made in addressing the weakness in revenue recognition by performing walk-throughs, documenting processes, assessing controls, and implementing new controls[174] - All material weaknesses are expected to be remediated by the end of 2019, though no assurance can be provided regarding the success or timing of these efforts[175][176] Part II. Other Information This section provides additional information including legal proceedings, risk factors, equity sales, defaults, mine safety, and exhibits Item 1. Legal Proceedings Legal proceedings information is incorporated by reference from Note L, Litigation and Contingencies, in the Notes to Condensed Consolidated Financial Statements - Information regarding legal proceedings is set forth in Note L, Litigation and Contingencies, in the Notes to Condensed Consolidated Financial Statements[178] Item 1A. Risk Factors Risk factors are referenced from the 2018 10-K, with no material changes during the three months ended September 30, 2019 - Refer to Part I, "Item 1A. Risk Factors" in the 2018 10-K for a discussion of risk factors[179] - There have been no material changes to the risk factors previously disclosed in the 2018 10-K during the three months ended September 30, 2019[179] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This item is not applicable to the current report - Not applicable[180] Item 3. Defaults Upon Senior Securities This item is not applicable to the current report - Not applicable[181] Item 4. Mine Safety Disclosure This item is not applicable to the current report - Not applicable[182] Item 5. Other Information No other information is reported under this item - None[183] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including credit agreement amendments, a separation agreement, CEO/CFO certifications, and XBRL documents - Exhibits include the Second Amendment to Credit Agreement, Separation Agreement with Timothy E. Breen, CEO/CFO certifications (pursuant to Sarbanes-Oxley Act), and XBRL Instance Document[184]