Harte Hanks(HHS) - 2020 Q2 - Quarterly Report

Part I. Financial Information Item 1. Financial Statements This section presents Harte Hanks' unaudited condensed consolidated financial statements, reporting a $6.2 million net loss in Q2 2020 and increased total assets to $119.2 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Current Assets | $93,508 | $79,301 | | Total Assets | $119,182 | $110,202 | | Total Current Liabilities | $52,722 | $45,531 | | Total Liabilities | $158,799 | $150,162 | | Total Stockholders' Deficit | $(49,340) | $(49,683) | Condensed Consolidated Statements of Comprehensive Loss (in thousands) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :--- | :--- | :--- | | Operating Revenues | $41,601 | $54,686 | | Operating Loss | $(5,885) | $(6,613) | | Net Loss | $(6,235) | $(3,803) | | Loss per Common Share (Basic & Diluted) | $(0.99) | $(0.63) | Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(7,445) | $15,327 | | Net cash provided by (used in) investing activities | $1,788 | $(1,291) | | Net cash provided by financing activities | $8,034 | $3,733 | | Net increase in cash and cash equivalents | $2,315 | $18,118 | Notes to Condensed Consolidated Financial Statements This section details accounting policies, COVID-19 impact, revenue recognition, debt, restructuring, and CARES Act tax benefits - The company monitors COVID-19 impact, noting customer reductions and bankruptcies, but also new wins and increased contact center volume[15] Revenue by Vertical Market (in thousands) | Vertical | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :--- | :--- | :--- | | B2B | $14,200 | $11,074 | | Consumer Brands | $12,586 | $11,888 | | Financial Services | $6,877 | $12,250 | | Healthcare | $3,964 | $5,061 | | Retail | $3,361 | $10,639 | | Transportation | $613 | $3,774 | | Total Revenues | $41,601 | $54,686 | - The company received a $10.0 million unsecured PPP loan on April 14, 2020, expected to be fully forgiven[83][86] - Restructuring charges of $5.2 million were recorded in Q2 2020, mainly for lease impairments, asset disposal losses, and severance[122] - The CARES Act enabled a $12.8 million income tax benefit in H1 2020 by allowing net operating loss carryback to a 35% federal tax rate[94][95] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q2 2020 financial performance, noting a 23.9% revenue decline but improved operating loss due to cost reductions and strategic actions COVID-19 and Recent Developments The company details COVID-19 impacts, including remote work, mixed customer demand, ongoing restructuring, equipment sale, and a $10 million PPP loan - COVID-19 had mixed impacts, with some customer spending reductions offset by increased demand for contact center solutions[139] - The company sold most Jacksonville production equipment to Summit Direct Mail for $1.5 million, forming a strategic partnership[143] - Total restructuring charges are projected at $20.9 million by year-end 2020, with $6.6 million recognized in H1 2020[142] - The Texas Capital Bank credit facility was extended to April 17, 2022, with a reduced borrowing capacity of $19.0 million[149] Results of Operations Q2 2020 revenues decreased 23.9% to $41.6 million due to vertical declines, while operating expenses fell 22.5%, improving operating loss to $5.9 million Operating Results Comparison (in thousands) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | % Change | | :--- | :--- | :--- | :--- | | Revenues | $41,601 | $54,686 | (23.9)% | | Operating Expenses | $47,486 | $61,299 | (22.5)% | | Operating Loss | $(5,885) | $(6,613) | 11.0% | - Q2 2020 revenue declines were significant in retail (-68.4%), transportation (-83.8%), and financial services (-43.9%), partially offset by B2B growth (+28.2%)[151] - Operating loss improved due to a $13.8 million decline in operating expenses, exceeding the $13.1 million revenue drop[159] Liquidity and Capital Resources Cash and equivalents increased to $36.4 million by June 30, 2020, bolstered by a $10 million PPP loan, with management deeming liquidity sufficient - Cash, cash equivalents, and restricted cash increased to $36.4 million at June 30, 2020, from $34.1 million at December 31, 2019[171] - The company received $10 million in PPP loan proceeds in April 2020 and anticipates $5.7 million and $3.6 million in CARES Act tax refunds in 2020 and 2021, respectively[171] - Net cash used in operating activities was $7.4 million in H1 2020, a $22.7 million decrease from prior year, mainly due to a $15.9 million tax refund and $5.0 million earn-out payment in 2019[174] - As of June 30, 2020, $17.2 million was outstanding under the Texas Capital Credit Facility, with an additional $0.1 million borrowing capacity[180] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from interest rate and foreign exchange fluctuations but deems current exposures immaterial, not using derivatives for hedging - Primary market risks include interest rate changes on the Texas Capital Credit Facility and foreign currency fluctuations[186][187] - A 100-basis point interest rate increase would have an immaterial impact on interest expense, with no interest rate swaps or derivatives currently used[187] - Foreign currency transaction gains totaled $0.5 million in H1 2020, with no foreign currency forward exchange contracts utilized[188] Item 4. Controls and Procedures Management concluded disclosure controls and procedures were effective as of June 30, 2020, with no material changes to internal controls during the quarter - The CEO and CFO affirmed the effectiveness of disclosure controls and procedures at a 'reasonable assurance' level as of June 30, 2020[191] - No material changes to internal control over financial reporting occurred during the quarter[193] Part II. Other Information Item 1. Legal Proceedings Legal proceedings information is referenced from Note L, with management believing accruals are adequate and material loss is remote - Legal proceedings information is incorporated by reference from Note L of the financial statements[194] Item 1A. Risk Factors No material changes to 2019 10-K risk factors, but COVID-19 poses significant and evolving risks to sales, customer stability, and operations - No material changes to risk factors previously disclosed in the 2019 10-K[195] - COVID-19 is a significant risk, potentially reducing sales and profitability, decreasing receivable collectability, and challenging remote work and IT security[197][198] - The full impact of COVID-19 on the business cannot be reasonably estimated due to its uncertain and unpredictable nature[200] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section is not applicable - Not applicable[201] Item 3. Defaults Upon Senior Securities This section is not applicable - Not applicable[202] Item 4. Mine Safety Disclosures This section is not applicable - Not applicable[203] Item 5. Other Information No other information is reported in this section - None[204] Item 6. Exhibits This section lists filed exhibits, including CEO and CFO certifications under Sarbanes-Oxley and the XBRL Instance Document - The report includes CEO and CFO certifications under Sections 302 and 906 of the Sarbanes-Oxley Act[206]