Document
Table of Contents

 

U.S.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q
 
(Mark One)
 
ý QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2018
 
or

o 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
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12399973&doc=13

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)
9601 McAllister Freeway, Suite 610, San Antonio, Texas 78216
(Address of principal executive offices, including zipcode)
 
(210) 829-9000
(Registrant’s telephone number including area code)
 
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 ý   No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ý   No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See 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
o
Accelerated filer
ý
Non-accelerated filer
o (Do not check if a smaller reporting company)
Smaller reporting company
o
 
 
Emerging growth company
o

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. o
 
Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Act).
 
Yeso  No ý
 
The number of shares outstanding of each of the registrant’s classes of common stock as of July 15, 2018 was 6,241,230 shares of common stock, all of one class.
 


Table of Contents

HARTE HANKS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
FORM 10-Q REPORT
For the Quarterly Period Ended June 30, 2018

 
 
Page
 
 
 
 
 
 
 
 
 
 
 
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

Table of Contents

Item 1.  Financial Statements

Harte Hanks, Inc. and Subsidiaries Condensed Consolidated Balance Sheets
(Unaudited)
In thousands, except per share and share amounts
 
June 30,
2018
 
December 31,
2017
ASSETS
 
 

 
 

Current assets
 
 

 
 

Cash and cash equivalents
 
$
20,213

 
$
8,397

Accounts receivable (less allowance for doubtful accounts of $381 at June 30, 2018 and $697 at December 31, 2017)
 
52,141

 
81,397

Contract assets
 
2,648

 

Inventory
 
462

 
587

Prepaid expenses
 
4,342

 
5,039

Prepaid taxes and income tax receivable
 
12,655

 
3,886

Other current assets
 
4,037

 
3,900

Total current assets
 
96,498

 
103,206

Property, plant and equipment (less accumulated depreciation of $139,045 at June 30, 2018 and $136,753 at December 31, 2017)
 
18,762

 
21,787

Other intangible assets (less accumulated amortization of $2,184 at December 31, 2017)
 

 
2,589

Other assets
 
4,724

 
3,230

Total assets
 
$
119,984

 
$
130,812


 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 

 
 

Current liabilities
 
 

 
 

Accounts payable
 
$
32,796

 
$
36,130

Accrued payroll and related expenses
 
5,564

 
10,601

Deferred revenue and customer advances
 
6,749

 
5,342

Income taxes payable
 

 

Customer postage and program deposits
 
5,703

 
11,443

Other current liabilities
 
3,273

 
3,732

Total current liabilities
 
54,085

 
67,248

Pensions
 
58,816

 
59,338

Contingent consideration
 

 
33,887

Deferred tax liabilities, net
 
294

 
773

Other long-term liabilities
 
4,336

 
4,201

Total liabilities
 
117,531

 
165,447

 
 
 
 
 
Preferred stock, $1 par value, 1,000,000 shares authorized; 9,926 designated as Series A Convertible Preferred Stock; 9,926 shares of Series A Convertible Preferred Stock authorized, issued and outstanding at June 30, 2018
 
9,723

 

 
 
 
 
 
Stockholders’ (deficit) equity
 
 

 
 

Common stock, $1 par value, 25,000,000 shares authorized 12,105,474 shares issued at June 30, 2018 and 12,074,661 shares issued at December 31, 2017
 
12,108

 
12,075

Additional paid-in capital
 
457,206

 
457,186

Retained earnings
 
821,047

 
794,583

Less treasury stock, 5,864,244 shares at cost at June 30, 2018 and 5,864,641 shares at cost at December 31, 2017
 
(1,253,404
)
 
(1,254,176
)
Accumulated other comprehensive loss
 
(44,227
)
 
(44,303
)
Total stockholders’ (deficit) equity
 
(7,270
)
 
(34,635
)
Total liabilities, preferred stock and stockholders’ equity
 
$
119,984

 
$
130,812


See Accompanying Notes to Condensed Consolidated Financial Statements

3

Table of Contents

Harte Hanks, Inc. and Subsidiaries Condensed Consolidated Statements of Comprehensive Income/(Loss)
(Unaudited)
 
 
Three Months Ended June 30,
In thousands, except per share amounts
 
2018
 
2017
Operating revenues
 
$
69,633

 
$
94,722

Operating expenses
 
 

 
 

Labor
 
39,725

 
57,103

Production and distribution
 
26,358

 
26,521

Advertising, selling, general and administrative
 
7,955

 
10,226

Depreciation, software and intangible asset amortization
 
1,903

 
2,663

Total operating expenses
 
75,941

 
96,513

Operating loss
 
(6,308
)
 
(1,791
)
Other (income) and expenses
 
 

 
 

Interest expense, net
 
183

 
1,235

Other, net
 
827

 
1,826

Total other (income) and expenses
 
1,010

 
3,061

Income/(loss) before income taxes
 
(7,318
)
 
(4,852
)
Income tax benefit
 
(584
)
 
(2,199
)
Net income/(loss)
 
$
(6,734
)
 
$
(2,653
)
    Less: Earnings attributable to participating securities
 

 

    Less: Preferred stock dividends
 
124

 

Income/(loss) attributable to common stockholders
 
$
(6,858
)
 
$
(2,653
)
 
 
 
 
 
Earnings/(loss) per common share
 
 
 
 
Basic
 
$
(1.10
)
 
$
(0.43
)
Diluted
 
$
(1.10
)
 
$
(0.43
)

 
 
 
 
Weighted average shares used to compute earnings/(loss) per share attributable to common shares
 
 
 
 
Basic
 
6,226

 
6,190

Diluted
 
6,226

 
6,190

 
 
 
 
 
Other comprehensive income/(loss), net of tax
 
 

 
 

Net loss
 
$
(6,734
)
 
$
(2,653
)
 
 
 
 
 
Adjustment to pension liability
 
517

 
413

Foreign currency translation adjustment
 
(804
)
 
599

Total other comprehensive income/(loss), net of tax
 
(287
)
 
1,012

 
 
 
 
 
Comprehensive income/(loss)
 
$
(7,021
)
 
$
(1,641
)

See Accompanying Notes to Condensed Consolidated Financial Statements

4

Table of Contents

Harte Hanks, Inc. and Subsidiaries Condensed Consolidated Statements of Comprehensive Income/(Loss)
(Unaudited)
 
 
Six Months Ended June 30,
In thousands, except per share amounts
 
2018
 
2017
Operating revenues
 
$
150,829

 
$
189,616

Operating expenses
 
 

 
 

Labor
 
90,381

 
117,453

Production and distribution
 
50,506

 
53,399

Advertising, selling, general and administrative
 
17,232

 
21,286

Depreciation, software and intangible asset amortization
 
4,054

 
5,610

Total operating expenses
 
162,173

 
197,748

Operating loss
 
(11,344
)
 
(8,132
)
Other (income) and expenses
 
 

 
 

Interest expense, net
 
1,112

 
2,258

Gain on sale
 
(30,954
)
 

Other, net
 
1,969

 
3,324

Total other (income) and expenses
 
(27,873
)
 
5,582

Income/(loss) before income taxes
 
16,529

 
(13,714
)
Income tax benefit
 
(9,364
)
 
(3,675
)
Net income/(loss)
 
$
25,893

 
$
(10,039
)
    Less: Earnings attributable to participating securities
 
3,059

 

    Less: Preferred stock dividends
 
207

 

Income/(loss) attributable to common stockholders
 
$
22,627

 
$
(10,039
)
 
 
 
 
 
Earnings/(loss) per common share
 
 
 
 
Basic
 
$
3.64

 
$
(1.62
)
Diluted
 
$
3.62

 
$
(1.62
)
 
 
 
 
 
Weighted-average shares used to compute earnings/(loss) per share attributable to common shares
 
 
 
 
Basic
 
6,220

619

6,179

Diluted
 
6,250

 
6,179

 
 
 
 
 
Other comprehensive income/(loss), net of tax
 
 

 
 

Net Income/(loss)
 
$
25,893

 
$
(10,039
)
 
 
 
 
 
Adjustment to pension liability
 
1,035

 
751

Foreign currency translation adjustment
 
(959
)
 
644

Total other comprehensive income/(loss), net of tax
 
76

 
1,395

 
 
 
 
 
Comprehensive income/(loss)
 
$
25,969

 
$
(8,644
)

See Accompanying Notes to Condensed Consolidated Financial Statements


5

Table of Contents

Harte Hanks, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
 
Six Months Ended June 30,
In thousands
 
2018
 
2017
Cash flows from operating activities
 
 

 
 

Net income/(loss)
 
$
25,893

 
$
(10,039
)
Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities
 
 
 
 
Depreciation and software amortization
 
3,941

 
5,236

Intangible asset amortization
 
113

 
375

Stock-based compensation
 
1,274

 
968

Net pension cost (payments)
 
856

 
557

Interest accretion on contingent consideration
 
742

 
2,081

Deferred income taxes
 
(821
)
 
(1,160
)
Gain on sale
 
(32,760
)
 

Loss on disposal of assets
 

 
102

Other, net
 
614

 

Changes in assets and liabilities:
 
 
 
 

Decrease (increase) in accounts receivable, net and contract assets
 
8,871

 
7,377

Decrease (increase) in inventory
 
125

 
59

Decrease (increase) in prepaid expenses, income tax receivable and other assets
 
(9,725
)
 
(5,317
)
Increase (decrease) in accounts payable
 
11,138

 
(8,051
)
Increase (decrease) in other accrued expenses and liabilities
 
(7,760
)
 
(34,013
)
Net cash provided by/(used in) operating activities
 
2,501

 
(41,825
)
 
 
 
 
 
Cash flows from investing activities
 
0

 
 

Dispositions, net of cash transferred
 
3,929

 

Purchases of property, plant and equipment
 
(2,111
)
 
(3,026
)
Proceeds from sale of property, plant and equipment
 

 
18

Net cash provided by/(used in) investing activities
 
1,818

 
(3,008
)

 
 
 
 
Cash flows from financing activities
 
 

 
 

Borrowings
 
9,000

 
20,000

Repayment of borrowings
 
(9,000
)
 
(8,000
)
Debt financing costs
 
(980
)
 
(395
)
Issuance of preferred stock, net of transaction fees

9,723



Issuance of common stock
 
(70
)
 
(92
)
Issuance of treasury stock
 
37

 

Payment of capital leases
 
(254
)
 
(255
)
Net cash provided by financing activities
 
8,456

 
11,258


 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
 
(959
)
 
644

Net increase (decrease) in cash and cash equivalents
 
11,816

 
(32,931
)
Cash and cash equivalents at beginning of period
 
8,397

 
46,005

Cash and cash equivalents at end of period
 
$
20,213

 
$
13,074

 
 
 
 
 
Supplemental disclosures
 
 
 
 
Cash paid for interest
 
$
79

 
$
65

Cash received (paid) for income taxes
 
$
155

 
$
(34,248
)
Non-cash investing and financing activities
 
 
 
 
Purchases of property, plant and equipment included in accounts payable
 
$
78

 
$
395

New capital lease obligations
 
$

 
$
58

See Accompanying Notes to Condensed Consolidated Financial Statements

6

Table of Contents

Harte Hanks, Inc. and Subsidiaries Condensed Consolidated Statements of Changes in Equity
(Unaudited)
In thousands
 
Preferred Stock
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated Other
Comprehensive
Income/(Loss)
 
Total
Stockholders’
Equity/ (Deficit)
Balance at December 31, 2016
 
$

$
12,044

 
$
458,638

 
$
837,316

 
$
(1,259,164
)
 
$
(46,178
)
 
$
2,656

Cumulative effect of accounting change
 


 
709

 
(873
)
 

 

 
(164
)
Exercise of stock options and release of unvested shares
 

4

 
(4
)
 
 
 
(92
)
 

 
(92
)
Stock-based compensation
 


 
1,110

 

 

 

 
1,110

Treasury stock issued
 


 
(1,984
)
 

 
2,088

 

 
104

Net loss
 


 

 
(10,039
)
 

 

 
(10,039
)
Other comprehensive income
 


 

 

 

 
1,395

 
1,395

Balance at June 30, 2017
 
$

$
12,048

 
$
458,469

 
$
826,404

 
$
(1,257,168
)
 
$
(44,783
)
 
$
(5,030
)
In thousands
 
Preferred Stock
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated Other
Comprehensive
Income/(Loss)
 
Total
Stockholders’
Equity/ (Deficit)
Balance at December 31, 2017
 
$

$
12,075

 
$
457,186

 
$
794,583

 
$
(1,254,176
)
 
$
(44,303
)
 
$
(34,635
)
Cumulative effect of accounting change
 


 

 
571

 

 

 
571

Preferred stock issued
 
9,723


 

 

 

 

 

Exercise of stock options and release of unvested shares
 

71

 
(71
)
 

 
(70
)
 

 
(70
)
Payout of Reverse Stock Split shares eliminated due to rounding
 
 
(38
)
 
38

 

 

 

 

Stock-based compensation
 


 
858

 

 

 

 
858

Treasury stock issued
 


 
(805
)
 

 
842

 

 
37

Net income
 


 

 
25,893

 

 

 
25,893

Other comprehensive income
 


 

 

 

 
76

 
76

Balance at June 30, 2018
 
$
9,723

$
12,108

 
$
457,206

 
$
821,047

 
$
(1,253,404
)
 
$
(44,227
)
 
$
(7,270
)

See Accompanying Notes to Condensed Consolidated Financial Statements


7

Table of Contents

Harte Hanks, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note A - Basis of Presentation

Consolidation

The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of Harte Hanks, Inc. and 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.

Interim Financial Information

The financial statements have been prepared in accordance with United States Generally Accepted Accounting Principles ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.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. Operating results for the three and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. The information included in this Quartery Report on Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 (the "2017 10-K").
 
Reverse Stock Split

On January 31, 2018, we executed a 1-for-10 reverse stock split (the "Reverse Stock Split") which became effective for trading purposes on February 1, 2018. Pursuant to the Reverse Stock Split, every 10 pre-split shares of our common stock, par value $1.00 per share ("Common Stock") were exchanged for one post-split share of the Company's common stock. No fractional shares were issued in connection with the Reverse Stock Split. Stockholders who would otherwise have held a fractional share of the Common Stock received (or are entitled to receive) a cash payment in lieu thereof. In addition, our authorized Common Stock was reduced from 250 million to 25 million shares. The number of authorized shares of preferred stock remained unchanged at one million shares.

The Condensed Consolidated Financial Statements and Accompanying Notes to Unaudited Condensed Consolidated Financial Statements give retroactive effect to the Reverse Stock Split for all periods presented. The calculation of basic and diluted earnings/(loss) per share have been determined based on a retroactive adjustment of weighted average shares outstanding for all periods presented. To reflect the Reverse Stock Split on stockholders' equity, an amount equal to the par value of the reduced shares from the Common Stock par value account was reclassified to additional paid in capital resulting in no net impact to stockholders' equity on the Condensed Consolidated Balance Sheets.

Use of Estimates

The preparation of Condensed Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Actual results and outcomes could differ from those estimates and assumptions. Such estimates include, but are not limited to, estimates related to pension accounting; fair value for purposes of assessing long-lived assets for impairment; income taxes; stock-based compensation; and contingencies. On an ongoing basis, management reviews its estimates 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, including stock-based compensation, along with temporary labor costs. The “Production and distribution” and “Advertising, selling, general and administrative” lines do not include labor, depreciation, or amortization.

Securities Purchase Agreement

On January 23, 2018, we entered into a Securities Purchase Agreement with Wipro, LLC, pursuant to which on January 30, 2018 we issued 9,926 shares of Series A Convertible Preferred Stock, par value $1.00 per share (the “Series A Preferred Stock”), for aggregate consideration of $9.9 million. Dividends on the Series A Preferred Stock accrue at a rate of 5.0% per

8

Table of Contents

year or the rate that cash dividends were paid in respect to shares of Common Stock if such rate is greater than 5.0%. The aggregate shares issued under the Securities Purchase Agreement are convertible into 1,001,614 shares of our Common Stock.

Along with customary protective provisions, Wipro, LLC will be able to designate an observer or director to the Board of Directors. We are using the proceeds for general corporate purposes including for working capital purposes.

See Note E, Convertible Preferred Stock, for further information.

Related Party Transactions

Since 2016, Wipro, LLC has provided a variety of technology-related service to the Company, including database and software development, database support and analytics, IT infrastructure support, and digital campaign management. Transactions with Wipro, LLC have been classified and disclosed in the 2017 10-K and in this Quarterly Report on Form 10-Q as related party transactions in accordance with ASC 850, Related Party Disclosures, and in accordance with the SEC's Regulation S-X Rule 4-08(k), as applicable. See Note N, Certain Relationships and Related Party Transactions, for further information.


Note B - Recent Accounting Pronouncements

In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to nonemployee share-based payment accounting, which supersedes ASC 505-50, Accounting for Distributions to Shareholders with Components of Stock and Cash, and expands the scope of ASC 718 to include all share-based payment arrangements related to the acquisition of goods and services from both nonemployees and employees. As a result, most of the guidance in ASC 718 associated with employee share-based payments, including most of its requirements related to classification and measurement, applies to nonemployee share-based payment arrangements. The ASU is effective for annual periods beginning after December 15, 2018, and the interim periods within those fiscal years with early adoption permitted after the entity has adopted ASC 606. We are evaluating the effect that this will have on our consolidated financial statements and related disclosures.

In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740)—Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 ("SAB 118"). This ASU amends certain Securities and Exchange Commission (SEC) material in Topic 740 for the income tax accounting implications of the recently issued Tax Reform. This guidance clarifies the application of Topic 740 in situations where a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting under Topic 740 for certain income tax effects of Tax Reform for the reporting period in which Tax Reform was enacted. See Note I, Income Taxes, for a discussion of the impacts of SAB 118 and this ASU.

In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU allows for reclassification of stranded tax effects on items resulting from the change in the corporate tax rate as a result of H.R. 1, originally known as the Tax Cuts and Jobs Act of 2017, from accumulated other comprehensive income to retained earnings. Tax effects unrelated to H.R. 1 are permitted to be released from accumulated other comprehensive income using either the specific identification approach or the portfolio approach, based on the nature of the underlying item. ASU 2018-02 is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. We are evaluating the effect that this will have on our consolidated financial statements and related disclosures.

In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, which provides clarified guidance on applying modification accounting to changes in the terms or conditions of a share-based payment award. This ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. This change is required to be applied prospectively to an award modified on or after the adoption date. This standard was adopted as of January 1, 2018 and did not have a material impact on our consolidated financial statements and related disclosures.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which provides clarified guidance on the classification of certain cash receipts and payments in the statement of cash flows. This ASU is effective for annual periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. This change is required to be applied using a retrospective transition method to each period presented. Early adoption is permitted. This standard was adopted as of January 1, 2018 and did not have a material impact on our consolidated financial statements and related disclosures.


9

Table of Contents

In February 2016, the FASB issued ASU 2016-02, Leases, which requires all operating leases to be recorded on the balance sheet. The lessee will record a liability for its lease obligations (initially measured at the present value of the future lease payments not yet paid over the lease term, and an asset for its right to use the underlying asset equal to the lease liability, adjusted for lease payments made at or before lease commencement). This ASU is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. This change is required to be applied using a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. Full retrospective application is prohibited. We are evaluating the impact that adoption of ASU 2016-02 will have on our consolidated financial statements, but expect an increase in assets and liabilities on our consolidated balance sheets at adoption for the recording of right-of-use assets and corresponding lease liabilities.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). We adopted ASU 2014-09 and its related amendments (collectively known a “ASC 606”) effective on January 1, 2018 using the modified retrospective method. Please see Note C, Revenue from Contracts with Customers, for the required disclosures related to the impact of adopting this standard and a discussion of our updated policies related to revenue recognition and accounting for costs to obtain and fulfill a customer contract.


Note C - Revenue from Contracts with Customers

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, related to revenue recognition. Under ASC 606, 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. The new standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new standard also includes criteria for the capitalization and amortization of certain contract acquisition and fulfillment costs.

Effective January 1, 2018, we adopted ASC 606, Revenue from Contracts with Customers, using the modified retrospective method of adoption and have elected to apply the new standard only to contracts not completed at January 1, 2018. For contracts that were modified before the effective date, we applied the practical expedient method, which did not have a material effect on our adjustment to opening retained earnings. The reported results for 2018 reflect the application of ASC 606 guidance while the reported results for 2017 were prepared under the guidance of ASC 605, which is also referred to herein as “legacy GAAP.”

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 or service purchased. Payment terms can vary by contract, but the period between invoicing and when payment is due is not significant. At January 1, 2018 and June 30, 2018, our contracts do not include any significant financing components.

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

Disaggregation of Revenue

We disaggregate revenue by vertical market and key revenue stream. The following table summarizes revenue from contracts with customers for the three and six months ended June 30, 2018 by our key vertical markets:
In thousands
 
For the three months ended June 30, 2018
 
For the six months ended June 30, 2018
B2B
 
$
14,800

 
$
33,483

Consumer Brands
 
15,828

 
35,171

Financial Services
 
14,441

 
28,922

Healthcare
 
4,083

 
8,461

Retail
 
15,836

 
32,215

Transportation
 
4,645

 
12,577

    Total Revenues
 
$
69,633

 
$
150,829


10

Table of Contents


The nature of the services offered by each key revenue stream are different. The following tables summarize revenue from contracts with customers for the three and six months ended June 30, 2018 by our four major revenue streams and the pattern of revenue recognition:
 
 
Three Months Ended June 30, 2018
In thousands
 
Revenue for performance obligations recognized
over time
 
Revenue for performance obligations recognized at a point in time
 
Total
Agency & Digital Services
 
$
7,186

 
$
314

 
$
7,500

Database Marketing Solutions
 
8,365

 
539

 
8,904

Direct Mail, Logistics, and Fulfillment
 
32,553

 
2,403

 
34,956

Contact Centers
 
18,273

 

 
18,273

    Total Revenues
 
$
66,377

 
$
3,256

 
$
69,633

 
 
For the six months ended June 30, 2018
In thousands
 
Revenue for performance obligations recognized
over time
 
Revenue for performance obligations recognized at a point in time
 
Total
Agency & Digital Services
 
$
22,022

 
$
590

 
$
22,612

Database Marketing Solutions
 
16,653

 
1,821

 
18,474

Direct Mail, Logistics, and Fulfillment
 
62,665

 
4,540

 
67,205

Contact Centers
 
42,538

 

 
42,538

    Total Revenues
 
$
143,878

 
$
6,951

 
$
150,829


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 standalone selling price based on the price at which the performance obligation is sold separately. Although uncommon, if the standalone selling price is not observable through past transactions, we estimate the standalone selling price 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:

Agency & Digital Services

Our agency services are full-service, customer engagement agencies specializing in direct and digital communications for both consumer and business-to-business markets. Our digital solutions integrate online services within the marketing mix and include: search engine management, display, digital analytics, website development and design, digital strategy, social media, email, e-commerce, and interactive relationship management. Our contracts may include a promise to purchase media or acquire search engine marketing solutions on behalf of our clients; in such cases, we have determined we are an agent, rather than principal and therefore recognize the net consideration as revenue (consistent with legacy GAAP).

Agency and digital services performance obligations are satisfied over time and often offered on a project basis. We have concluded that the best approach of measuring the progress toward completion of the project based performance obligations is the input method based on costs or labor hours incurred to date dependent 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.

11

Table of Contents


Database Marketing Solutions

Our 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, professional services, customer or target marketing lists and data processing services, may be satisfied over time or at a point in time. We provide software as a service ("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.

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.

Direct Mail, Logistics, and Fulfillment

Our services include: digital printing, print on demand, advanced mail optimization, logistics and transportation optimization, tracking, commingling, shrink wrapping, and specialized mailings. We also maintain fulfillment centers where we provide custom kitting services, print on demand, product recalls, and freight optimization allowing our customers to distribute literature and other marketing materials.

The majority of 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. For our direct mail revenue stream, our 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 (consistent with legacy GAAP).

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.
    



Contact Centers

We operate tele-service workstations in the U.S., 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 satisfied over time. With regard to account management and SaaS, we use a time-elapsed output method. 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 standalone selling prices.


12

Table of Contents

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. 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 and five years for database solutions contracts and six months to one year for contact center contracts). The upfront non-refundable fees collected from customers were immaterial as of June 30, 2018.

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. After considering the above exemptions, the transaction prices allocated to unsatisfied or partially satisfied performance obligations as of June 30, 2018 totaled $1.1 million, which is expected to be recognized over the following 3 years as follows: $0.4 million for the remaining 6 months of 2018, $0.6 million in 2019 and $0.1 million in 2020.

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 delivery 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 January 1, 2018 and June 30, 2018:
In thousands
 
June 30, 2018
 
January 1, 2018
Contract assets
 
$
2,648

 
$
7,120

Deferred revenue and customer advances
 
6,749

 
5,906

Deferred revenue, included in other long-term liabilities
 
454

 
341

 
Revenue recognized during the six months ended June 30, 2018 from amounts included in deferred revenue at the beginning of the period was approximately $2.8 million. We recognized no revenues during the six months ended June 30, 2018 from performance obligations satisfied or partially satisfied in previous periods. During the six months ended June 30, 2018, we reclassified $7.1 million of contract assets to receivables as a result of the right to the transaction consideration becoming unconditional.


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 expense over the expected period of benefit in a manner that is consistent with the transfer of the related goods or services to which the asset relates. The remaining unamortized contract costs were $1.2 million as of June 30, 2018. For the periods presented, no impairment was recognized.

Financial Statement Impact of Adopting ASC 606


13

Table of Contents

Upon the adoption of ASC 606 on January 1, 2018, we recorded a cumulative adjustment of $0.6 million, a net increase to opening retained earnings as of January 1, 2018. The following table shows the cumulative effect of the changes made to the accounts on the Condensed Consolidated Balance Sheet as of January 1, 2018 (in thousands):

 
As Reported
 
 
 
Adjusted
 
December 31, 2017
 
Cumulative Adjustments
 
January 1,
2018
ASSETS
 

 

 

Accounts receivable, net
 
$
81,397

 
$
(6,710
)
 
$
74,687

Contract assets
 

 
7,120

 
7,120

Other current assets
 
3,900

 
373

 
4,273

Other assets
 
3,230

 
1,018

 
4,248


 

 

 

LIABILITIES
 

 


 


Deferred revenue and related expenses
 
5,342

 
564

 
5,906

Deferred income taxes
 
773

 
119

 
892

Other current liabilities
 
3,732

 
245

 
3,977

Other long-term liabilities
 
4,201

 
302

 
4,503


 

 

 

STOCKHOLDERS’ EQUITY
 

 

 

Retained earnings
 
794,583

 
571

 
795,154


The cumulative effect adjustments to the opening retained earnings relate to a few key differences between legacy GAAP and ASC 606 which include capitalizing costs to obtain and fulfill a contract (increase to retained earnings), changes in the timing of revenue recognition for non-refundable upfront fees (decrease to retained earnings), and changes in the timing of revenue recognition for Database Marketing Solutions and Logistics services (increase to retained earnings).
  
Impact of New Revenue Guidance on Financial Statement Line Items

We identified the financial statement line items impacted by ASC 606 as compared to the pro-forma amounts had the legacy GAAP been in effect, as of and for the three and six months ended June 30, 2018, and these are summarized as follows:

Balance Sheet Financial Statement Line Items
The impact of adopting ASC 606 had the following impact on the Condensed Consolidated Balance Sheet as of June 30, 2018: an increase of $1.4 million and $1.0 million to reported total assets and reported retained earnings, respectively, and an increase in total reported liabilities of $0.5 million as compared to the pro-forma balance sheet which assumes legacy GAAP remained in effect as of June 30, 2018. The reported total assets increase was largely due to capitalized costs to obtain and fulfill contracts and contract assets recognized for performance obligations in our Database Marketing Solutions and Logistics businesses, of which revenues are recognized over time. The reported total liabilities increase was largely due to deferred revenue recognized for upfront non-refundable fee and accrued expenses associated with performance obligations in our Database Marketing Solutions and Logistics businesses.

Income Statement Financial Statement Line Items (three and six months ended June 30, 2018)
The impact of adopting ASC 606 did not have a significant impact on our Condensed Consolidated Statements of Comprehensive Income/(Loss) for the three and six months ended June 30, 2018.

The adoption of ASC 606 had no significant impact on our cash flows from operations for the six months ended June 30, 2018. The aforementioned impacts resulted in offsetting shifts in cash flows throughout net income and various changes in working capital balances.



14

Table of Contents

Note D - Fair Value of Financial Instruments
 
FASB ASC 820, Fair Value Measurements and Disclosures, 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. The guidance 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, accounts receivable, and trade payables. Our calculation of the acquisition related contingent consideration accounted for at fair value on a recurring basis is disclosed in Note M, Disposition.

Note E - Convertible Preferred Stock

Under our Amended and Restated Certificate of Incorporation, as amended, we have authorized 1.0 million shares of preferred stock (“Preferred Stock”). On January 30, 2018, we issued 9,926 shares of our Series A Preferred Stock to Wipro, LLC (as further described in Note A above under the heading "Securities Purchase Agreement") at an issue price of $1,000 per share, for gross proceeds of $9.9 million. We incurred $0.2 million of transactions fees on the issuance of the Preferred Stock which are netted against the gross proceeds of $9.9 million on our Condensed Consolidated Financial Statements.

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 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, 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% each year, or (ii) the rate that cash dividends were paid in respect 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%. Dividends on the Series A Preferred Stock are cumulative and accrue to the holders thereof whether or not declared by the Board of Directors. Dividends are payable solely upon a Liquidation (as defined in the Certificate of Designation), but only if prior to such Liquidation such shares of Series A Preferred Stock have not been converted to Common Stock. As of June 30, 2018, cumulative dividends payable to the holders of Series A Preferred Stock upon a Liquidation totaled $0.2 million, or $20.83 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 100.90817 shares of Common Stock for one share of Series A Preferred Stock, subject to certain future adjustments.

Voting and Other Rights

15

Table of Contents


The Series A Preferred Stock shall have no 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 of Directors 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 issuances of new securities.

We determined that the Series A Preferred Stock has contingent redemption provisions allowing redemption by the holder upon certain defined events. As the event that may trigger the redemption of the Series A Preferred Stock is 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 June 30, 2018.

Note F — Long-Term Debt
 
As of June 30, 2018 and December 31, 2017, we did not have any debt outstanding.

Credit Facilities

On April 17, 2017, we entered into a secured credit facility with Texas Capital Bank, N.A., that provided a $20 million revolving credit facility (the "Texas Capital Credit Facility") and letters of credit issued by Texas Capital Bank up to $5.0 million. The Texas Capital Credit Facility will be used for general corporate purposes. The Texas Capital Credit Facility is secured by substantially all of the company's assets and its material domestic subsidiaries. The Texas Capital Credit Facility is secured 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 Texas Capital Credit Facility had an expiration date of April 17, 2019, at which point all outstanding principal amounts will be due. We can elect to accrue interest on outstanding principal balances at either LIBOR plus 1.95% or prime plus 0.75%. Unused credit balances will accrue interest at 0.50%. We are required to pay a quarterly fee of $0.1 million as consideration for the collateral balances provided 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 as the filing of quarterly and annual financial statements.

On January 9, 2018, we entered into an amendment to the Texas Capital Credit Facility that increased the borrowing capacity to $22 million and extended the maturity by one year to April 17, 2020. The Texas Capital Credit Facility remains secured by substantially all of our assets and continues to be guaranteed by HHS Guaranty.

At June 30, 2018, we had letters of credit in the amount of $2.8 millionNo amounts were drawn against these letters of credit at June 30, 2018. These letters of credit exist to support insurance programs relating to workers’ compensation, automobile, and general liability.



Note G — Stock-Based Compensation
 
We maintain stock incentive plans for the benefit of certain officers, directors, and employees, including the 2013 Omnibus Incentive Plan. Our stock incentive plans include 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 a 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). We recognized $1.3 million and $1.0 million of stock-based compensation expense during the six months ended June 30, 2018 and 2017, respectively.




16

Table of Contents

Note H — Components of Net Periodic Benefit Cost
 
Prior to January 1, 1999, we maintained a defined benefit pension plan for which most of our employees were eligible (the "Qualified Pension 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 our Qualified Pension Plan were it not for limitations imposed by income tax regulation. The Restoration Pension Plan was 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.

Net pension cost for both plans included the following components:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
In thousands
 
2018
 
2017
 
2018
 
2017
Interest cost
 
$
1,685

 
$
1,837

 
$
3,370

 
$
3,674

Expected return on plan assets
 
(1,524
)
 
(1,832
)
 
(3,047
)
 
(3,664
)
Recognized actuarial loss
 
689

 
688

 
1,377

 
1,377

Net periodic benefit cost
 
$
850

 
$
693

 
$
1,700

 
$
1,387


We are not required to make, and do not intend to make, any contributions to our Qualified Pension Plan in 2018. Based on current estimates we will not be required to make any contributions to our Qualified Pension Plan until the 2019 plan year.

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 $0.4 million and $0.8 million in the three and six months ended June 30, 2018, respectively.

Note I - Income Taxes

Our three months ended June 30, 2018 income tax benefit of $0.6 million resulted in an effective income tax rate of 8.0%. Our six months ended June 30, 2018 income tax benefit of $9.4 million resulted in an effective income tax rate of (56.7)%. The effective income tax benefit for the three months ended June 30, 2018 differs from the federal statutory rate of 21.0%, primarily due to valuation allowances recorded on our deferred tax assets for current period federal net operating losses incurred, as we have concluded that it is more likely than not that these deferred tax assets will not be realized. The effective income tax benefit for the six months ended June 30, 2018 differs from the federal statutory rate of 21.0%, primarily due to the capital loss generated from the sale of 3Q Digital which will be available for carryback. We have historically, including for 2017, calculated the provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate for the full calendar year to ordinary income or loss for the reporting period. However, we have used a discrete effective tax rate method to calculate income taxes for the three and six months ended June 30, 2018 because we determined that our ordinary income or loss cannot be reliably estimated and small changes in estimated ordinary income would result in significant changes in the estimated annual effective tax rate.

Our three months ended June 30, 2017 income tax benefit of $2.2 million resulted in an effective income tax rate of 45.3%. Our six months ended June 30, 2017 income tax benefit of $3.7 million resulted in an effective income tax rate of 26.8%. The effective income tax rate for the three and six months ended June 30, 2017 differs from the federal statutory rate of 35.0%, primarily due to the nondeductible interest associated with the 3Q Digital contingent consideration and foreign tax credit limitations on dividends paid from foreign subsidiaries. As noted above, we calculated the provision for income taxes for the three and six months ended June 30, 2017 by applying an estimate of the annual effective tax rate for the full calendar year to ordinary income or loss for the reporting period.

The U.S. Tax Cuts and Jobs Act (the "Tax Reform Act”) was enacted on December 22, 2017. The legislation significantly changed U.S. tax law by, among other things, lowering the corporate income tax rate from 35% to 21%, implementing a territorial tax system and imposing a one-time repatriation tax on deemed repatriated earnings of foreign subsidiaries. Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Reform Act, we made reasonable estimates of the effects and recorded provisional amounts in our financial statements as of December 31, 2017 in accordance with the SEC Staff Accounting Bulletin (“SAB”) 118. We did not record any adjustments to our provisional amounts in the first or second quarter of 2018. The provisional amounts are subject to revisions as we continue to complete our analysis of the Tax Reform Act, collect and prepare necessary data, and interpret any additional guidance issued by the U.S. Treasury Department, Internal Revenue Service ("IRS"), the Financial Accounting Standards Board ("FASB"), and other

17

Table of Contents

standard-setting and regulatory bodies. Any such revisions will be treated in accordance with the one-year measurement period guidance outlined in SAB 118.

Harte Hanks, or one of our 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 2013. For U.S. federal and foreign returns, we are no longer subject to tax examinations for tax years prior to 2014.

We have elected to classify any interest expense and penalties related to income taxes within income tax expense in our Consolidated Statements of Comprehensive Income/(Loss). We did not have a significant amount of interest or penalties accrued at June 30, 2018 or December 31, 2017.


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 preferred stock is considered a participating security with objectively determinable and non-discretionary dividend participation rights. Preferred stockholders have the right to participate in dividends above their five 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 June 30,
In thousands, except per share amounts
 
2018
 
2017
Net Loss
 
$
(6,734
)
 
$
(2,653
)
Less: Preferred stock dividends
 
124

 

Income/(loss) attributable to common stockholders
 
$
(6,858
)
 
$
(2,653
)
 
 
 
 
 
Basic Earnings/(Loss) per Common Share
 
 
 
 
Weighted-average common shares outstanding
 
6,226

 
6,190

Basic earnings/(loss) per common share
 
$
(1.10
)
 
$
(0.43
)
 
 
 
 
 
Diluted Earnings/(Loss) per Common Share
 
 

 
 

Weighted-average shares used to compute earnings/(loss) per share attributable to common shares
 
6,226

 
6,190

Diluted earnings/(loss) per common share
 
$
(1.10
)
 
$
(0.43
)
 
 
 
 
 
Computation of Shares Used in Diluted Earnings/(Loss) Per Common Share
 
 

 
 

Weighted-average common shares outstanding
 
6,226

 
6,190

Shares used in diluted earnings/(loss) per common share computations
 
6,226

 
6,190


0.3 million and 0.3 million of anti-dilutive market price options have been excluded from the calculation of shares used in the diluted EPS calculation for the three months ended June 30, 2018 and 2017, respectively. 0.2 million and 0.1 million anti-dilutive unvested shares were excluded from the calculation of shares used in the diluted EPS calculation for the three months ended June 30, 2018 and 2017, respectively. 1.0 million of anti-dilutive preferred stock (as if converted) have been excluded from the calculation of shares used in the diluted EPS calculation for the three months ended June 30, 2018.


18

Table of Contents

 
 
Six Months Ended June 30,
In thousands, except per share amounts
 
2018
 
2017
Numerator:






   Net income/(loss)

$
25,893


$
(10,039
)
   Less: Preferred stock dividend

207



   Less: Earnings attributable to participating securities

3,059



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

$
22,627


$
(10,039
)







Effect of dilutive securities:






   Add back: Allocation of earnings to participating securities

3,059



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

(3,046
)


Numerator for diluted EPS

$
22,640


$
(10,039
)







Denominator:






Basic EPS denominator: weighted-average common shares outstanding

6,220


6,179








Effect of dilutive securities:






   Unvested shares

30



Diluted EPS denominator

6,250


6,179








Basic earnings/(loss) per common share

$
3.64


$
(1.62
)
Diluted earnings/(loss) per common share

$
3.62


$
(1.62
)

0.3 million and 0.3 million of anti-dilutive market price options have been excluded from the calculation of shares used in the diluted EPS calculation for the six months ended June 30, 2018 and 2017, respectively. $32.0 thousand and 0.1 million anti-dilutive unvested shares were excluded from the calculation of shares used in the diluted EPS calculation for the six months ended June 30, 2018 and 2017, respectively.

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. Our comprehensive income/(loss) was as follows:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
In thousands
 
2018
 
2017
 
2018
 
2017
Net income/(loss)
 
$
(6,734
)
 
$
(2,653
)
 
25,893

 
(10,039
)

 
 
 
 
 
 
 
 
Other comprehensive income/(loss):
 
 

 
 

 
 

 
 

Adjustment to pension liability
 
686

 
688

 
1,377

 
1,252

Tax expense
 
(169
)
 
(275
)
 
(342
)
 
(501
)
Adjustment to pension liability, net of tax
 
517

 
413

 
1,035

 
751

Foreign currency translation adjustment, net of tax
 
(804
)
 
599

 
(959
)
 
644

Total other comprehensive income/(loss), net of tax
 
(287
)
 
1,012

 
76

 
1,395


 
 
 
 
 
 
 
 
Total comprehensive income/(loss)
 
$
(7,021
)
 
$
(1,641
)
 
$
25,969

 
$
(8,644
)

19

Table of Contents


Changes in accumulated other comprehensive income/(loss) by component were as follows:
In thousands
 
Defined Benefit
Pension Items
 
Foreign Currency Items
 
Total
Balance at December 31, 2017
 
$
(45,418
)
 
$
1,115

 
$
(44,303
)
Other comprehensive income/(loss), net of tax, before reclassifications
 

 
(959
)
 
(959
)
Amounts reclassified from accumulated other comprehensive income/(loss), net of tax, to other, net, on the condensed consolidated statements of comprehensive income/(loss)
 
1,035

 

 
1,035

Net current period other comprehensive income/(loss), net of tax
 
1,035

 
(959
)
 
76

Balance at June 30, 2018
 
$
(44,383
)
 
$
156

 
$
(44,227
)
In thousands
 
Defined Benefit
Pension Items
 
Foreign Currency Items
 
Total
Balance at December 31, 2016
 
$
(46,977
)
 
$
799

 
$
(46,178
)
Other comprehensive income/(loss), net of tax, before reclassifications
 

 
644

 
644

Amounts reclassified from accumulated other comprehensive income/(loss), net of tax, to other, net, on the condensed consolidated statements of comprehensive income/(loss)
 
751

 

 
751

Net current period other comprehensive income/(loss), net of tax
 
751

 
644

 
1,395

Balance at June 30, 2017
 
$
(46,226
)
 
$
1,443

 
$
(44,783
)

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 Periodic Pension Benefit Cost).

Note L — Litigation 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 no liabilities have been recorded for these obligations in our consolidated financial statements.

We are also subject to various claims and legal proceedings in the 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.


20

Table of Contents

Note M — Disposition
 
On February 28, 2018, we sold our 3Q Digital, Inc. subsidiary ("3Q Digital") to an entity owned by certain former owners of the 3Q Digital business. Consideration for the sale included $5.0 million in cash proceeds, subject to certain working capital adjustments, and up to $5.0 million in additional consideration if the 3Q Digital business is sold again (provided certain value thresholds are met). The $35.0 million contingent consideration obligation of the company that related to our acquisition of 3Q Digital in 2015 was assigned to the buyer, thereby relieving us of the obligation. In addition, the identified intangible assets with definite lives for client relationships and non-compete agreements were written-off as a component of the gain on sale.

The 3Q Digital business represented less than 10% of our total 2017 revenues. As a result of the sale, the company recognized a pre-tax gain of $31.0 million in the first quarter of 2018. The assets included net intangible assets and the liabilities (including contingent consideration).

The purchase agreement and subsequent amendment to the purchase agreement for the 2015 acquisition of 3Q Digital included a contingent consideration arrangement that would have required us to pay the former owners of 3Q Digital an additional cash payment depending on achievement of certain revenue growth goals. The potential undiscounted amount of all future payments that would have been required to be paid under the contingent consideration arrangement was $35.0 million in cash payable in 2019.

A reconciliation of accrued balances of the contingent consideration using significant unobservable inputs (Level 3) is as follows:
(in thousands)
 
Fair Value
Accrued contingent consideration liability as of December 31, 2017
 
$
33,887

Accretion of interest
 
742

Disposition
 
(34,629
)
Accrued contingent consideration liability as of June 30, 2018
 
$


Note N — Certain Relationships and Related Party Transactions

Since 2016, we have conducted (and we continue to conduct) business with Wipro, LLC (“Wipro”), whereby Wipro provides us with a variety of technology-related services, including database and software development, database support and analytics, IT infrastructure support, leased facilities and digital campaign management. Additionally, we also provide Wipro with agency services.

Effective January 30, 2018, Wipro became a related party when it purchased 9,926 shares of our Series A Preferred Stock, for aggregate consideration of $9.9 million. For information pertaining to the Company’s preferred stock, See Note E, Convertible Preferred Stock.

During the three and six months ended June 30, 2018, we recorded no revenue from services provided to Wipro. During the three and six months ended June 30, 2017, we recorded $15 thousand and $0.1 million of revenue for agency-related services we provided Wipro, respectively.

During the three months ended June 30, 2018 and 2017, we recorded $3.3 million and $2.5 million of expense, respectively, in technology-related services and leased facilities Wipro provided to us. During the six months ended June 30, 2018 and 2017, we recorded $6.1 million and $2.9 million of expense, respectively, in technology-related services Wipro provided to us.

During the three and six months ended June 30, 2018, we capitalized $0.4 million and $1.5 million of costs, respectively, for internally developed software services received from Wipro. These capitalized costs are included in Property, Plant and Equipment on the Condensed Consolidated Balance Sheet as of June 30, 2018.

As of June 30, 2018 and December 31, 2017, we had a trade payable due to Wipro of $2.9 million and $2.2 million, respectively. We had $15 thousand in trade receivables due from Wipro for services provided in 2017 but invoiced in 2018 as of June 30, 2018 and no trade receivables due from Wipro as of December 31, 2017.

As described in “Note F- Long-Term Debt", the Company’s Texas Capital Credit Facility is 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 to the Amended and Restated Fee, Reimbursement and Indemnity Agreement, dated January 9, 2018, between HHS Guarantee. LLC and the Company, HHS Guarantee, LLC has the right to appoint one representative director to the Board of Directors. Currently, David L. Copeland serves as the HHS Guarantee, LLC representative on the Board of Directors.

21

Table of Contents





22

Table of Contents

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 1934 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, (2) 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) our financial outlook for revenues, earnings per share, operating income, expense related to equity-based compensation, capital resources and other financial items, (4) 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) competitive factors, (6) acquisition and development plans, (7) our stock repurchase program, (8) expectations regarding legal proceedings and other contingent liabilities, (9) the impact of recent tax reform legislation on our results of operations, and (10) 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 Securities and Exchange Commission, including the factors discussed under “Item 1A. Risk Factors” in the 2017 10-K, Quarterly Report on Form 10-Q for the quarter ended March 31, 2018 and in the “Cautionary Note Regarding Forward-Looking Statements” in our second quarter 2018 earnings release issued on August 8, 2018. 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 section is intended to help the reader understand the results of operations and financial condition of Harte Hanks, Inc. This section is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying notes to the Condensed Consolidated Financial Statements as well as our 2017 Form 10-K. Our 2017 Form 10-K contains a discussion of other matters not included herein, such as disclosures regarding critical accounting policies and estimates, and contractual obligations.

Harte Hanks partners with clients to deliver relevant, connected, and quality customer interactions. Our approach starts with discovery and learning, which leads to customer journey mapping, creative and content development, analytics, and data management, and ends with execution and support in a variety of digital and traditional channels. We do something powerful: we produce engaging and memorable customer interactions to drive business results for our clients, which is why Harte Hanks is known for developing better customer relationships and experiences and defining interaction-led marketing.

Our services offer a wide variety of integrated, multi-channel, data-driven solutions for top brands around the globe. We help our clients gain insight into their customers’ behaviors from their data and use that insight to create innovative multi-channel marketing programs to deliver a return on marketing investment. We believe our clients’ success is determined not only by how good their tools are, but how well we help them use the tools to gain insight and analyze their consumers. This results in a strong and enduring relationship between our clients and their customers. We offer a full complement of capabilities and resources to provide a broad range of marketing services, in media from direct mail to social media, including:

agency and digital services;
database marketing solutions;
direct mail, logistics and fulfillment; and
contact centers.


23

Table of Contents

The following MD&A of Financial Condition and Results of Operations gives retroactive effect to the Reverse Stock Split for all periods presented, unless otherwise noted. See Note A, Significant Accounting Policies, in the Notes to Consolidated Financial Statements for further information.

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 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 specific clients, among other factors. We remain committed to making the investments necessary to execute our multichannel strategy while also continuing to adjust our cost structure to reduce costs in the parts of the business that are not growing as fast.

We continued to face a challenging competitive environment in 2018. The sale of 3Q Digital in 2018, and our recent preferred stock agreement with Wipro, LLC are all parts of our efforts to prioritize our investments and focus on our core business of optimizing our clients' customer journey across an omni-channel delivery platform. We expect these actions will enhance our liquidity and financial flexibility. For additional information see Liquidity and Capital Resources. We have taken actions to return the business to profitability and improve our cash, liquidity, and financial position. This includes workforce restructuring, making investments targeted at improving product offerings, and implementing expense reductions.


Results of Operations
 
Operating results were as follows:
 
 
Three Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
In thousands
 
2018
 
2017
 
% Change
 
2018
 
2017
 
% Change
Revenues
 
$
69,633

 
$
94,722

 
(26.5
)%
 
$
150,829

 
$
189,616

 
(20.5
)%
Operating expenses
 
75,941

 
96,513

 
(21.3
)%
 
162,173

 
197,748

 
(18.0
)%
Operating loss
 
$
(6,308
)
 
$
(1,791
)
 
252.2
 %
 
$
(11,344
)
 
$
(8,132
)
 
39.5
 %
 
 
 
 
 

 
 
 
 
 
 

 
 
Operating margin
 
(9.1
)%
 
(1.9
)%
 
 
 
(7.5
)%
 
(4.3
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income/(loss) before taxes
 
$
(7,318
)
 
$
(4,852
)
 
50.8
 %
 
$
16,529

 
$
(13,714
)
 
(220.5
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted earnings/(loss) per common share from operations
 
$
(1.10
)
 
$
(0.43
)
 
155.8
 %
 
$
3.62

 
$
(1.62
)
 
(323.5
)%

Revenues

Second Quarter 2018 vs. Second Quarter 2017
 
Revenues declined $25.1 million, or 26.5%, in the second quarter of 2018 compared to the second quarter of 2017. These results reflect the impact of declines in all of our industry verticals. Revenues declined in our retail, B2B, financial services, consumer, healthcare and transportation verticals by $7.0 million, or 30.8%, $5.6 million, or 27.6%, $0.2 million, or 1.4%, $8.1 million, or 33.8%, $1.0 million, or 20.0%, and $3.1 million, or 40.0%, respectively. These declines were partially due to the sale of 3Q Digital at the end of February 2018 (caused an $8.8 million revenue reduction to the quarter-over-quarter results primarily impacting the B2B and Consumer verticals). Additionally, lost clients and lower volumes from existing clients caused the lower revenues.

First Half of 2018 vs. First Half of 2017

Revenues declined $38.8 million, or 20.5%, in the first half of 2018 compared to the first half of 2017. These results reflect the impact of declines in all of our industry verticals. Our retail, B2B, financial services, consumer, healthcare and transportation verticals declined $13.7 million, or 29.8%, $8.6 million, or 20.4%, $0.9 million, or 3.0%, $9.8 million, or 21.8%, $2.5 million, or 22.8%, and $3.2 million, or 20.2%, respectively. These declines were partially due to the sale of 3Q at the end of February 2018 (caused a $10.1 million revenue reduction to the six-month period-over-period results primarily impacting our B2B and Consumer verticals). Additionally, lost clients and lower volumes from existing clients caused the lower revenues.


24

Table of Contents

Among other factors, our revenue performance will depend 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 in a benefit to our business. Targeted media advertising results can be more effectively tracked, enabling measurement of the return on marketing investment.

Operating Expenses

Second Quarter 2018 vs. Second Quarter 2017

Operating expenses were $75.9 million in the second quarter of 2018, compared to $96.5 million in the second quarter of 2017. This decline was partially caused by the sale of 3Q Digital (caused a $7.6 million total operating expense reduction to quarter-over-quarter results). Labor costs declined $17.4 million, or 30.4%, compared to the second quarter of 2017, primarily due to lower payroll expense, our expense reduction efforts, lower severance expense and the sale of 3Q Digital (caused a $6.2 million expense reduction to the quarter-over-quarter results). Production and distribution expenses declined $0.2 million, compared to the second quarter of 2017 primarily due to the sale of 3Q Digital resulting in $0.6 million lower expense quarter-over-quarter, offset by an increase of $0.4 million in production and distribution expenses elsewhere in the business. Advertising, Selling and General expense declined $2.3 million, or 22.2%, compared to the second quarter of 2017, primarily due to a reduction in facilities expense, marketing/promotional expense, employee-related expenses and the sale of 3Q Digital (caused a $0.7 million reduction in the quarter-over-quarter comparison). Depreciation, software and intangible asset amortization expense declined $0.8 million, or 28.5%, compared to the second quarter of 2017, primarily due to the elimination of the intangible assets on the sale of 3Q Digital and reduced capital expenditures.

First Half of 2018 vs. First Half of 2017

Operating expenses were $162.2 million in the first half of 2018, compared to $197.7 million in the first half of 2017. This decline was partially caused by the sale of 3Q Digital (caused a $10.1 million total operating expense reduction to the six-month period-over-period results). Labor costs declined $27.1 million, or 23.0%, compared to the first half of 2017, primarily due to lower payroll expense as a result of our expense reduction efforts and the sale of 3Q Digital (caused a $7.8 million expense reduction to the six-month period-over-period results). Production and distribution expenses declined $2.9 million, or 5.4%, compared to the first half of 2017 primarily due to lower outsourced services, lower direct mail related supply chain expenses and the sale of 3Q Digital (caused a $0.9 million expense reduction to the six-month period-over-period results). Advertising, Selling and General expense declined $4.1 million, or 19.0%, compared to the first half of 2017, primarily due to a reduction in employee-related expenses and the sale of 3Q Digital (caused a $1.3 million expense reduction to the six-month period-over-period results). Depreciation, software and intangible asset amortization expense declined $1.6 million, or 27.7%, compared to the first half of 2017, primarily due to the elimination of the intangible assets on the sale of 3Q Digital and reduced capital expenditures.

Our largest cost components are labor, outsourced costs, and mail transportation expenses. Each of these costs is somewhat variable and tends to fluctuate with revenues and the demand for our services. Mail transportation 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 may have an impact on future demand for our supply chain management services.

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

Operating Loss

Second Quarter of 2018 vs. Second Quarter of 2017

Operating loss was $6.3 million in the second quarter of 2018, compared to $1.8 million in the second quarter of 2017. The -$4.5 million increase in operating loss reflects the impact of lower revenues of $25.1 million, partially offset by a $20.6 million decline in operating expenses. The sale of 3Q Digital in late February 2018, resulted in an operating loss increase of $1.2 million, as compared to second quarter of 2017.

First Half of 2018 vs. First Half of 2017

Operating loss was $11.3 million in the first half of 2018, compared to $8.1 million in the first half of 2017. The $3.2 million increase in operating loss reflects the impact of lower revenues of $38.8 million, partially offset by a $35.6 million decline in

25

Table of Contents

operating expenses. The sale of 3Q Digital in late February 2018, resulted in an immaterial operating loss increase compared to the first half of 2017.

Interest Expense
 
Second Quarter 2018 vs. Second Quarter 2017
 
Interest expense, net, in the second quarter of 2018 declined $1.1 million compared to the second quarter of 2017. This decline was due to a lower overall debt balance and the elimination of interest accretion expense related to the 3Q Digital contingent consideration liability as of February 2018 (caused a $1.0 million expense reduction to the quarter-over-quarter results).

First Half of 2018 vs. First Half of 2017

Interest expense, net, in the first half of 2018 declined $1.1 million compared to the first half of 2017. This decline is due to a lower interest accretion expense in the first half of 2018 due to the elimination of the 3Q Digital contingent consideration liability in late February 2018 (caused a $1.3 million expense reduction to the six-month period-over-period results), partially offset by a $0.2 million increase in interest expense, net, in the first half of 2018, as compared to the first half of 2017.

Gain on sale

The gain on sale during 2018 is the result of the sale of 3Q Digital in late February 2018 whereby the sum of proceeds received plus net obligations eliminated resulted in a gain on sale of $31.0 million.

Other Income and Expense

Second Quarter 2018 vs. Second Quarter 2017

Other expense, net, declined $1.0 million in the second quarter of 2018, compared to the second quarter of 2017. This was primarily the result of the net impact of a foreign currency gain in 2018, versus a net foreign currency loss in 2017.

First Half of 2018 vs. First Half of 2017

Other expense, net, declined $1.4 million in the first half of 2018, compared to the first half of 2017. This was primarily the result of the impact of a net foreign currency gain in 2018, versus a net foreign currency loss in 2017.

Income Taxes

Second Quarter 2018 vs. Second Quarter 2017

The income tax benefit of $0.6 million in the second quarter of 2018 represents a decline in our income tax benefit of $1.6 million, as compared to the second quarter of 2017. Our effective tax rate was 8.0% for the second quarter of 2018 as compared to our effective tax rate of 45.3% for the second quarter of 2017. The effective income tax rate for the second quarter of 2018 differs from the federal statutory rate of 21.0%, primarily due to valuation allowances recorded on our deferred tax assets for current period federal net operating losses incurred, as we have concluded that it is more likely than not that these deferred tax assets will not be realized.

First Half 2018 vs. First Half 2017

The income tax benefit of $9.4 million in the first half of 2018 represents an increase in our income tax benefit of $5.7 million, as compared to the first half of 2017. Our effective tax rate was (56.7)% for the first half of 2018 as compared to our effective tax rate of 26.8% for the first half of 2017. The effective income tax rate for the first half of 2018 differs from the federal statutory rate of 21.0%, primarily due to the capital loss generated from the sale of 3Q Digital which will be available for carryback.

We have historically, including for 2017, calculated the provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate for the full calendar year to ordinary income or loss for the reporting period. However, we used a discrete effective tax rate method to calculate income taxes for the three and six months ended June 30, 2018 because we determined that our ordinary income or loss cannot be reliably estimated and small changes in estimated ordinary income would result in significant changes in the estimated annual effective tax rates.


26

Table of Contents

Diluted Earnings/(Loss) Per Share from Operations
 
Second Quarter 2018 vs. Second Quarter 2017

We recognized a net loss of $6.7 million and a diluted loss of $1.10 per share in the second quarter of 2018. These results compared to net loss of $2.7 million and a diluted loss of $0.43 per share in the second quarter of 2017.

First Half of 2018 vs. First Half of 2017

We recognized net income of $25.9 million and diluted earnings of $3.62 per share in the first half of 2018. These results compared to net loss of $10.0 million and a diluted loss of $1.62 per share in the first half 2017.

Liquidity and Capital Resources

Sources and Uses of Cash

Our cash and cash equivalent balances were $20.2 million and $8.4 million at June 30, 2018 and December 31, 2017, respectively. 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.

Operating Activities

Net cash provided by operating activities for the six months ended June 30, 2018 was $2.5 million, compared to net cash used in operating activities of $41.8 million for the six months ended June 30, 2017. The $44.3 million year-over-year increase was primarily the result of a change in accrued liabilities, which included the impact of a 2017 federal income tax payment due to the sale of our Trillium Software business in 2016 and the impact of an increase in accounts payable during 2018, as compared to a decrease in 2017.

Investing Activities

Net cash provided in investing activities was $1.8 million for the six months ended June 30, 2018, compared to the net cash used in investing activities of $3.0 million for the six months ended June 30, 2017. This change was due to the sale of 3Q Digital in late February 2018.

Financing Activities

Net cash provided from financing activities was $8.5 million for the six months ended June 30, 2018, compared to net cash provided of $11.3 million for the six months ended June 30, 2017. The $2.8 million decrease was primarily due to issuing Preferred Stock in 2018 and lower net borrowings under the Company’s credit facilities in 2018 compared to 2017.

Foreign Holdings of Cash

Consolidated foreign holdings of cash as of June 30, 2018 and 2017 were $3.3 million and $3.0 million, respectively.

Credit Facilities

On January 9, 2018, we entered into an amendment to the Texas Capital Credit Facility that increased the borrowing capacity to $22 million and extended the maturity by one year to April 17, 2020. The Texas Capital Credit Facility remains secured by substantially all of our assets and continues to be guaranteed by HHS Guaranty, LLC.

At June 30, 2018, we had letters of credit in the amount of $2.8 million. No amounts were drawn against these letters of credit at June 30, 2018. These letters of credit exist to support insurance programs relating to workers’ compensation, automobile, and general liability.

Outlook

We consider such factors as total cash and cash equivalents, current assets, current liabilities, total debt, revenues, operating income, 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,

27

Table of Contents

considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern for the 12 months following the issuance of the Condensed Consolidated Financial Statements.

Critical Accounting Policies

Critical accounting policies 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. Refer to the 2017 Form 10-K for a discussion of our critical accounting policies.

The following represent changes to our critical accounting policies as described in detail in our 2017 Form 10-K:

The adoption of ASC 606, Revenue from Contracts with Customers - the impact of this change in accounting policy is described in detail in Note C, Revenue from Contracts with Customers, in the Notes to Unaudited Condensed Consolidated Financial Statements; and
Goodwill and intangible assets is no longer included as a critical accounting policy as we no longer have these assets on our consolidated balance sheet

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.


28

Table of Contents

Item 3.  Quantitative and Qualitative Disclosures About Market Risk
 
Market risk includes the risk of loss arising from adverse changes in market rates and prices. We face market risks related to interest rate variations and to foreign exchange rate variations. From time to time, we may utilize derivative financial instruments to manage our exposure to such risks.
 
We did not have any long-term debt as of June 30, 2018. A hypothetical one percentage point change in average interest rates would not have a significant impact on our earnings for the three and six months ended June 30, 2018.

On April 17, 2017, we entered into the Texas Capital Credit Facility. On January 9, 2018, we entered into an amendment to the Texas Capital Credit Facility that increased the borrowing capacity to $22 million and extended the maturity by one year to April 17, 2020. The credit facility increased exposure to market risks relating to changes in interest rates because borrowings under the facility bear interest at a variable rate. We do not believe that a one percentage point change in average interest rates would have a material impact on our interest expense. As such, we do not believe that we currently have significant exposure to market risks associated with changing interest rates. At this time, we have not entered into any interest rate swap or other derivative instruments to hedge the effects of adverse fluctuations in interest rates.

Our earnings are also affected by fluctuations in foreign currency exchange rates as a result of our operations in foreign countries. Our primary exchange rate exposure is to the Euro, British Pound, and Philippine Peso. We monitor these risks throughout the normal course of business. The majority of the transactions of our U.S. and foreign operations are denominated in the respective local currencies. Changes in exchange rates related to these types of transactions are reflected in the applicable line items making up operating income/(loss) in our Consolidated Statements of Comprehensive Income/(Loss). Due to the current level of operations conducted in foreign currencies, we do not believe that the impact of fluctuations in foreign currency exchange rates on these types of transactions is significant to our overall annual earnings. A smaller portion of our transactions are denominated in currencies other than the respective local currencies. For example, intercompany transactions that are expected to be settled in the near-term are denominated in U.S. Dollars. Since the accounting records of our foreign operations are kept in the respective local currency, any transactions denominated in other currencies are accounted for in the respective local currency at the time of the transaction. Any foreign currency gain or loss from these transactions, whether realized or unrealized, results in an adjustment to income, which is recorded in “Other, net” in our Consolidated Statements of Comprehensive Income/(Loss). Transactions such as these amounted to $0.6 million in pre-tax currency transaction gains in the first half of 2018. At this time, we are not entered into any foreign currency forward exchange contracts or other derivative instruments to hedge the effects of adverse fluctuations in foreign currency exchange rates.
 
We do not enter into derivative instruments for any purpose other than cash flow hedging. We do not speculate using derivative instruments.


Item 4.  Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in such reports is accumulated and communicated to management, including our Chief Executive Officer, Chief Financial Officer, and Corporate Controller as appropriate to allow timely decisions regarding required disclosure.

Our management, including our Chief Executive Officer, Chief Financial Officer, and Corporate Controller, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as of June 30, 2018. Based on that evaluation, our Chief Executive Officer, Chief Financial Officer and Corporate Controller concluded that the company's disclosure controls and procedures were not effective as of June 30, 2018 due to the material weaknesses in internal control over financial reporting as described in Item 9A of the 2017 10-K.

Material Weakness in Internal Control over Financial Reporting

We identified material weaknesses in the following areas (i) the effectiveness of the control environment, risk assessment, information and communication, and monitoring, (ii) the effectiveness of internal controls over revenue recognition.


29

Table of Contents

Notwithstanding the material weaknesses, each of our Chief Executive Officer, Chief Financial Officer, and Corporate Controller concluded that the consolidated financial statements included in this report present fairly, in all material respects, our financial position, results of operations, and cash flows as of the dates and for the periods presented, in conformity with U.S. GAAP.

Changes in Internal Control over Financial Reporting

As discussed in Item 9A of our 2017 10-K, we have undertaken actions to redesign processes and controls to address all of the material weaknesses. We have engaged specialists to assist us with reviewing, documenting, and (as needed) supplementing our controls, with a goal of providing controls that not only better address both the accuracy and precision of management’s review, but also enhance our ability to manage our business as it has evolved. We expect to make further changes as our specialists deliver recommendations from their reviews. As we implement these plans, management may determine that additional steps may be necessary to remediate the material weaknesses.

Beginning January 1, 2018, we implemented ASC 606, Revenue from Contracts with Customers. Although the new revenue standard did not have a material impact on consolidated financial statements, we did implement changes to our processes related to revenue recognition and the control activities within them. These included the development of new policies based on the five-step model provided in the new revenue standard, new training, ongoing contract review requirements, and the gathering of information necessary provided for expanded disclosures.

Although we intend to resolve all of the material control deficiencies discussed in Item 9A of our 2017 10-K, we cannot provide any assurance that these remediation efforts will be successful, will be completed quickly, or that our internal control over financial reporting will be effective as a result of these efforts by any particular date. Our remediation plan will last through 2018 due to the number of controls involved, the need for new risk assessments and control design implementation, and ultimately testing of such controls.

Inherent Limitation of the Effectiveness of Internal Control

The effectiveness of any system of internal control over financial reporting is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, any system of internal control over financial reporting can only provide reasonable, not absolute, assurances. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but cannot assure that such improvements will be sufficient.







30

Table of Contents

PART II.    OTHER INFORMATION
Item 1.  Legal Proceedings
 
Information regarding legal proceedings is set forth in Note L, Litigation 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 2017 Form 10-K, which could materially affect our business, financial condition, or future results. The risks described in our 2017 Form 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. In our judgment, there were no material changes in the risk factors as previously disclosed in Part I, “Item 1A. Risk Factors” of our 2017 Form 10-K.


Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
 
The following table contains information about our purchases of equity securities during the second quarter of 2018:
Period
 
Total Number of
Shares
Purchased (1)
 
Average
Price Paid
per Share
 
Total Number of
Shares Purchased
as Part of a Publicly
Announced Plan (2)
 
Maximum Dollar
Amount that May
Yet Be Spent
Under the Plan
April 1-30, 2018
 
3,464

 
$
9.60

 

 
$
11,437,538

May 1-31, 2018
 

 
$

 

 
$
11,437,538

June 1-30, 2018
 
3,228

 
$
11.23

 

 
$
11,437,538

Total
 
6,692

 
$
10.39

 

 
 

(1)  Represents shares withheld to offset withholding taxes upon the vesting of unvested shares.
 
(2) The Board of Directors does not anticipate purchasing any shares of our Common Stock through our stock repurchase program that was publicly announced in August 2014 for the foreseeable future. Under this program, from which shares can be purchased in the open market, our Board of Directors has authorized us to spend up to $20.0 million to repurchase shares of our outstanding common stock. Through June 30, 2018, we had repurchased a total of 6.8 million shares at an average price of $18.10 per share under all current and previous repurchase programs.


31

Table of Contents

Item 3.  Defaults Upon Senior Securities

Not applicable.

Item 4.  Mine Safety Disclosures

Not applicable.

Item 5.  Other Information

None.

Item 6.  Exhibits
Exhibit
No.
 
Description of Exhibit
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
*101
 
XBRL Instance Document.
 
 
*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.


32

Table of Contents

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.
 
 
 
August 9, 2018
 
/s/ Karen A. Puckett
Date
 
Karen A. Puckett
 
 
President and Chief Executive Officer
 
 
 
August 9, 2018
 
/s/ Jon C. Biro
Date
 
Jon C. Biro
 
 
Executive Vice President and Chief Financial Officer
 
 
 
 
 
 
August 9, 2018
 
/s/ Carlos M. Alvarado
Date
 
Carlos M. Alvarado
 
 
Vice President, Finance and
 
 
Corporate Controller


33
Exhibit
                             


CO- MARKETING AGREEMENT

THIS CO- MARKETING AGREEMENT (“Agreement”) is entered into as of January 23, 2018 by and between:

HARTE HANKS, INC, a Delaware corporation with its principal office at 9601 McAllister Freeway, Suite 610; San Antonio, TX 78216, (the “Company,” which shall be deemed to include its successors and assigns to the extent permitted hereunder), and

WIPRO, LLC, a Delaware limited liability corporation having its registered office at 2 Tower Center Blvd, Suite 2200; East Brunswick, NJ 08816, USA (“Wipro”, which shall be deemed to include its successors and assigns to the extent permitted hereunder);

Each of Wipro and the Company shall be individually referred to as a “Party”, and jointly as the “Parties”.
WHEREAS, Wipro is a leading global services provider of global information technology, consulting and business process services (collectively, “Wipro Offerings”);
WHEREAS, the Company is a provider of global marketing services offering omni-channel marketing solutions that include consulting, strategic assessment, data, analytics, digital, social, mobile, print, direct mail and contact center (collectively, “Company Offerings”):
WHEREAS, the Parties intend to collaborate to offer and provide the Wipro Offerings and Company Offerings jointly to each other's customers and potentially other potential new customers of either party; and
WHEREAS, the parties may also provide to any of such customers integrated product and/or service offerings that are jointly developed, configured and/or customized and that employ both Wipro Offerings and Company Offerings (“Joint Offerings”); and any of the Wipro Offerings, Company Offerings or Joint Offerings may be referred to in this Agreement individually or collectively as “Offerings,” where dictated by the context), in all cases under the framework set forth in this Agreement and on such additional terms, and with such specific responsibilities and obligations, as the Parties may mutually agree with respect to each such opportunity (the activities and relationship described in this Agreement); and
WHEREAS, the Parties wish to establish the terms and conditions governing the Parties relationship with respect to the activities provided under Agreement.
NOW, THEREFORE, for the mutual covenants contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:
Section 1. Overview of the Alliance; Relationship of the Parties
1.1
Objectives of the Alliance. Parties have aspirations to expand their revenues from Chief Marketing and Digital officer spend. The Parties have complimentary skills and scale to address this spend; and hence have agreed to cooperate to jointly market, promote and sell and their respective Offerings to existing and new customers as a team under the terms and conditions of this Agreement.
Through this cooperation, Company will become a Sell-with partner for Wipro (and vice versa). Both parties have commitments to each other around other relationships they have around Sell-to (where Wipro provides services directly to Company) and Sell-through (where Wipro provides sub-contracted services to Company clients through a shared service agreement/statement of work); and these commitments are foundational to this Sell-with partnership success and delivery effectiveness of new programs. For clarity, any resulting work to be performed by a Party in connection with a Joint Offering as described in this Agreement and any Project Addendum, will be provided under the separate services agreement between such Parties, as applicable to such Joint Offering.
Following are the Parties’ principle objectives as a starting point. Relationship Managers from both parties will update the objectives and achievement progress on periodic basis (quarterly updated and reviewed with Governance council)
Increasing Overall revenues from Wipro-Company relationship—this includes Sell-to, Sell-through and Sell-with revenue agreement and expectations.  Wipro’s target revenue objectives are reflected in Schedule 2.
Prioritization of Potential Customers to be targeted under this Co-Marketing agreement—both parties will work together towards identifying Customers, create business plans in an effort to make  a sale to such Customers, and deliver on programs jointly.  The initial list of targeted customers is reflected in Schedule 3.
Development of Joint Offerings—both parties are working towards identifying specific Joint Offerings that will be taken to Customers as part of this agreement.  These Joint Offerings will undergo regular updates and reviews both internally within the Company and Wipro, and externally with Customers. Both Parties will endeavour keep this schedule updated so services being jointly offered to Customers are relevant to the time and market trends.  The initial list of Joint Offerings is reflected in Schedule 4.
1.2
Customers and Proposals. The Company and Wipro agree to collaborate for the purpose of preparing and submitting to their own, each other's and potentially additional prospective customers of either Party (each, a “Customer”) proposals for the offering of Joint Offerings (each, a “Proposal”). No printed or electronic materials that refer or relate to any Wipro Offerings or Company Offerings will be provided to any Customer by the Company or Wipro, respectively, without Wipro’s or the Company’s prior written approval (not to be unreasonably withheld or delayed) and with email approval sufficient for this purpose. No printed or electronic materials that refer or relate to any Joint Offerings will be provided to any Customer by either Party without the other Party’s prior written approval (not to be unreasonably withheld or delayed) and with email approval sufficient for this purpose.
1.3
Projects. If a Proposal is accepted by the Customer, the Parties will cooperate in carrying out the project described therein (the “Project”) in accordance with the applicable terms of this Agreement, the Proposal and the applicable Project Addendum (as defined in Section 1.3).
1.4
Project Plans. The Parties’ general roles and responsibilities for each Proposal and Project will initially be specified in a project plan (“Project Plan”).
1.5
Project Addenda. Wipro’s and the Company’s respective responsibilities and obligations and their relationship with respect to the respective Project shall be as specified in this Agreement as supplemented by a Project-specific addendum to be agreed and executed by the Parties with respect to the applicable Project (a “Project Addendum”). Each Project Addendum entered into by the Parties when Wipro is the party designated as the Prime (as defined in Schedule 1 to this Agreement) shall be substantially in the form attached hereto in Schedule-1 and shall conform to the specifications in Section 4 of this Agreement. Each Project Addendum entered into by the Parties when Company is the party designated as the Prime shall be in the form of the Supplier Supply and Services Agreement (“SSSA”) dated the 22nd day of July, 2016, except clauses VIII and X of the SSSA which stand amended as below, only for the purposes of this Agreement:
“VIII     INDEMNITY
Supplier agrees to indemnify and hold harmless Harte Hanks, its affiliates, and each of their officers, directors, employees, successors and assigns (all hereinafter referred to in this clause as “Indemnified Parties”) from and against any proven or alleged third party claims, demands, suits, losses, damages, liabilities, fines, penalties and expenses (including attorney’s fees) that relate to the provision of Products/ Services by the Supplier, its affiliates, and each of their officers, directors, employees, suppliers, contractors or successors in the performance of this Agreement and cause: (1) injuries or death to persons or damage to property, including theft; (2) failure by Supplier to conform to any applicable laws and regulations relating to the Product/ Services, and/or its confidentiality obligations under this Agreement; (3) grossly negligent or intentional acts or omissions of Supplier; and (4) infringement of any patent, copyright, trademark, trade secret or other intellectual property right resulting from the  Supplier’s provision of Products/Services,  provided however that Supplier shall not have any indemnity obligation to Harte Hanks under this Section to the extent that any infringement or claim thereof is attributable to:  (1) the combination, operation or use of Products/Services with equipment or software supplied by Harte Hanks where the Products/Services would not itself be infringing; (2) compliance with designs, specifications, materials, inputs, or instructions provided by Harte Hanks;  (3) use of Products/Services in an application or environment for which it was not designed or contemplated under this Agreement; or (4) modifications of a Products/Services by anyone other than Supplier where the unmodified version of the Products/Services would not have been infringing.  Harte Hanks agrees to immediately notify Supplier of any written claims or demands against Harte Hanks for which Supplier is responsible under this clause. Lack of immediate notice shall not preclude Supplier’s obligations hereunder unless same materially prejudices Supplier’s legal rights in such action. Supplier will be entitled to have sole control over the defense and settlement of the claim. In addition, Supplier will not be required to reimburse Harte Hanks for any amount paid or payable by Harte Hanks in settlement of the claim if the settlement was agreed to without the written consent of the Supplier.
Subject to the cap on liability contained in clause X (Limitation of Liability) of this Agreement, Supplier agrees to indemnify and hold harmless Indemnified Parties from and against any proven or alleged third party claims, demands, suits, losses, damages, liabilities, fines, penalties and expenses (including attorney’s fees) that are not covered by the indemnities listed above, and in any way arise out of, relate to or result from the fault or negligence of Supplier in the provision of Products/ Services by the Supplier, its affiliates, and each of their officers, directors, employees, suppliers, contractors or successors in the performance of this Agreement”


“X. LIMITATION OF LIABILITY
NEITHER PARTY SHALL BE LIABLE FOR ANY INDIRECT, INCIDENTAL, SPECIAL, CONSEQUENTIAL, PUNITIVE, OR EXEMPLARY DAMAGES, INCLUDING BUT NOT LIMITED TO DAMAGES FOR LOSS OF PROFITS, REVENUE, GOODWILL, USE, DATA, ELECTRONICALLY TRANSMITTED ORDER, OR OTHER ECONOMIC ADVANTAGE (EVEN IF IT HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES), HOWEVER CAUSED AND REGARDLESS OF THE THEORY OF LIABILITY, ARISING OUT OF OR RELATED TO ANY DELAY, OMISSION OR ERROR IN THE TRANSMISSION OR RECEIPT OF ANY DOCUMENTS PURSUANT TO THIS AGREEMENT. EACH PARTY’S TOTAL LIABILITY TO THE OTHER PARTY HEREUNDER IS LIMITED TO THE AMOUNT HARTE HANKS HAS PAID TO THE SUPPLIER IN THE PRECEDING 12 MONTHS FOR THE WORK ORDER, SERVICES OR PRODUCTS PROPERLY DELIVERED TO COMPANY UNDER THE SPECIFIC ORDER THAT GAVE RISE TO THE CLAIM FOR LIABILITY. THE FOREGOING SHALL NOT SERVE TO LIMIT THE SUPPLIER’S INDEMNIFICATION OBLIGATIONS OR CONFIDENTIALITY OBLIGATIONS, UNLESS STATED OTHERWISE IN CLAUSE VIII OF THIS AGREEMENT.

1.6
The affiliates and subsidiaries of either Party may also enter into Project Addendum(s) and/or Statement(s) of Work (as defined in Section 2.1 of Schedule 1) pursuant to the terms and conditions of this Agreement during the term of this Agreement. As used herein, the terms “Company”, “Wipro”, the “Parties” and similar terms shall also include each party’s respective affiliates and subsidiaries who enter into one or more Project Addendum(s) and/or Statement(s) of Work (as applicable when Wipro is Prime) to this Agreement. Each Project Addendum(s) and/or Statement(s) of Work (as applicable when Wipro is the Prime) shall constitute a supplement to this Agreement and shall be deemed to incorporate all of the terms and conditions of this Agreement.
1.7
Nature of Relationship. The Parties agree and acknowledge that neither this Agreement nor any other activities hereunder constitute or shall be deemed to create between the Parties a legal partnership, joint venture, agency or other similar relationship, and that neither Party shall have any right to bind or obligate the other Party or act on the other Party’s behalf in any manner, except as may be expressly agreed in a Project Addendum. Any use of the term “partner” or “partnership” in or in connection with this Agreement is solely to denote the spirit of cooperation and collaboration between the Parties in connection with the Projects contemplated hereunder. The Parties are independent contractors, and no employee or contractor of a Party shall be deemed to be an employee or contractor of the other Party or shall be entitled to any compensation or benefit provided by the other Party to its personnel.
1.
Governance of the Alliance
In the event that Parties execute the Project Addendum, such Project Addendum shall be a binding agreement on both the Parties with respect to such Project. The Parties will work exclusively with each other for the Joint Opportunity as specified in that specific Project Addendum as set forth in Section 5.2 and neither Party shall withdraw from the Project for that specific Proposal except as contemplated under Section 9.4 hereof.
2.1
Relationship Managers; Representatives. Each Party will identify
(a)
a relationship manager to serve as its primary contact and manager of the alliance on behalf of such Party (its “Relationship Manager”) and;
(b)
at least two additional employees to serve as its additional representatives (its “Representatives”) to the governance council that will oversee the alliance (the “Governance Council”).
A Party may change its Relationship Manager and any Representative at any time and from time to time and shall provide the other Party a written notice in accordance with Section 10.6, of such replacement, along with the replacement Relationship Manager's or Representative’s contact information, within ten days from the date of such change being made effective.
2.2
Oversight by Governance Council. The Governance Council will have responsibility for general oversight of the alliance, subject to the provisions of this Agreement. For such purpose, the Governance Council will meet (in person or telephonically) periodically, but no less frequently than quarterly, as agreed from time to time by the Parties, and including an initial meeting as soon as reasonably practicable (but no more than 30 days) following the Effective Date (as defined in section 9.1 herein). Any matters that, under this Agreement or any Project Addendum, require approval of the Governance Council, require documented approval by (without limitation) both Parties' Relationship Managers, following review and consideration by the Governance Council.
2.3
Joint Business Plan. The Governance Council will create and approve from time to time one or more business plans for the alliance, which shall include, without limitation, Wipro Customers and the Company Customers proposed to be targeted, revenue targets for the alliance, and such other matters as the Governance Council shall deem appropriate (a “Business Plan”). The Parties intend that the Governance Council will adopt an initial Business Plan, for the first year of the alliance, within 30 days following the Effective Date. The Governance Council may modify any Business Plan at any time and from time to time. Such Business Plans created and approved by the Governance Council shall not be binding on the Parties.
2.
Project Management
3.1
Project Manager. For each proposed Project, each Party will appoint one person to be its Project manager (who may but will not necessarily be the Party's Relationship Manager or other Representative) for preparing a Proposal and serving as the Party's primary point of contact for the Proposal and resulting Project (the Party's “Project Manager”). Each Project Manager will be responsible for compiling all of the respective Party's resources (e.g., information and necessary personnel) required for preparing the respective Party's contributions to the Proposal, making presentations to Customers and for communications on behalf of the respective Party for purposes of such Project. The Project Plan will identify each Party's Project Manager and his or her contact information, and the respective Party may change its Project Manager from time to time and will promptly notify the other Party of any such change or any change to a Project Managers contact information, in accordance with Section 10.6.
3.2
Proposals. The Company and Wipro shall each prepare its portion of each Proposal. Submission of the Proposal to the Customer shall be subject to advance approval by both Parties' Project Managers and the Governance Council, and generally such Proposal to be submitted by the party acting as Prime (as specified in the applicable Project Addendum). The Parties will mutually agree to the Joint Offering(s) to be offered under the Proposal and the allocation of roles and responsibilities between the Parties (i.e. Prime vs Sub, etc.) during preparation of the Project Plan and prior to submitting the Proposal to the Customer. Each Party will make all reasonably necessary preparations and will perform all reasonably necessary activities to meet the Customer's requirements for submission of a Proposal;
3.3
Project Addendum. If the Customer accepts a Proposal, the Parties will negotiate and endeavor in good faith to sign, within 30 days of such selection (as the Parties may extend such period by written agreement, the “Negotiation Period”), a Project Addendum with respect to the Project. The Project Addendum, upon the Parties’ execution thereof, will supplement and, to the extent of any express conflict or inconsistency with the terms of this Agreement, supersede this Agreement solely with respect to the applicable Project.
3.4
Statement of Work. If a Customer signs a separate Customer Agreement with the Party acting as Prime, the Parties shall also execute a separate Statement of Work (as defined in the Schedule 1 to this Agreement) for the applicable Project as stipulated in the applicable Project Addendum. Each Statement of Work, upon the Parties’ execution thereof, will supplement and be subject to the terms and conditions of the applicable Project Addendum as referenced in such Statement of Work.
3.
General Terms Applicable to Projects
Customer Agreements. The Parties will negotiate in good faith and document in the applicable Project Addendum who the contracting Party or Parties will be in the resulting Customer agreement with respect to Joint Offerings (“Customer Agreement”), and the Parties’ respective entitlement to revenues from Joint Offerings. The Party or Parties will negotiate in good faith such Customer Agreement.
4.
Exclusivity and Certain Restrictive Covenants
5.1
No Obligation of Exclusivity.  Except as contemplated by this Agreement and any Project Addendum, Proposal or in Section 5.2 hereof, neither Party shall be committed to work exclusively with the other Party in respect of their respective Marketing Services and Solutions.
5.2
Non-competition.  Neither Party nor its affiliates will directly or indirectly (through a third party) offer to a Customer that has received a Proposal hereunder a competitive proposal relating to the applicable Project, unless offered pursuant to this Agreement, until either:
(a)
the Customer has rejected the Proposal, or
(b)
if the Customer accepts the Proposal, the latest of
i.
six months following the termination by a Party of negotiation of a Project Addendum pursuant to Section 3.3,
ii.
if the Parties enter into a Project Addendum relating to the Proposal,
(A) six months following execution of the Project Addendum relating to the Proposal, if at such time no contract with respect thereto has been entered into with the Customer, or
(B) if a Customer contract is entered into relating to the Proposal, six months following termination or expiration of such applicable Customer contract. 
5.3
Referrals. During the term of this Agreement it is also contemplated that either Party may refer a business opportunity to the other Party in connection with a current customer or prospective customer of the referring Party, and where the referring Party will not act in capacity of a Sub or Prime in connection with such business opportunity, but rather the referred Party will contract directly with the customer or prospective customer for such business opportunity for the services provided by the referred Party (“Opportunity”). The referred Party agrees that during the term of this Agreement and for a period of one year thereafter, such Party will not, directly or indirectly, without the express written agreement of the referring Party, provide (or refer to others for provision of) services similar to the services being provided to such customer or prospective customer under the referring Party’s agreement with such actual or prospective customer. This Section shall survive expiration or termination of this Agreement.
5.4
Most Favorable Terms. In the event that the either Party collaborates, or provides any Company Offering or Wipro Offering, as applicable (alone or in conjunction with any other product or service of a third party) jointly, with any other system integrator comparable and similarly situated to the other Party (a “Third Party Collaboration”), such Third Party Collaboration shall be on terms no more favorable, taken as a whole, to the applicable third party than the comparable terms afforded to the other Party under this Agreement.
5.5
Non-solicitation. Neither Party shall, without the other Party’s prior written consent, during the term of this Agreement and for a period of one year thereafter, directly or indirectly: (a) solicit for employment, employ or engage any employee or individual consultant of the other Party; provided, that a Party will not be prohibited from (a) using advertisements in publications or other general solicitations for employment not directed at such persons, or (b) use any Confidential Information (as defined in Section 7.1) to directly or indirectly solicit and divert business away from the other Party.
5.
Intellectual Property and Proprietary Materials
“Intellectual Property Rights” or “IPR” means all copyright rights (including, without limitation, the exclusive right to use, reproduce, modify, distribute, publicly display and publicly perform the copyrighted work), trademark rights (including, without limitation, trade names, trademarks, service marks, and trade dress), patent rights (including, without limitation, the exclusive right to make, use and sell), trade secrets, moral rights, right of publicity, authors’ rights, contract and licensing rights, goodwill and all other intellectual property rights as may exist now and/or hereafter come into existence and all renewals and extensions thereof, regardless of whether such rights arise under the laws of the India, United States or any other state, country or jurisdiction.
6.1
Pre-existing Rights. Each Party retains all right, title and interest in and to all of its IPR and other materials, property or proprietary rights and interests it owned prior to this Agreement or that it independently develops or acquires thereafter, including its third party licensors’ works of authorship, inventions and discoveries and all derivative works and improvements to them, and neither Party is transferring any such rights to the other Party under this Agreement, by license or otherwise. If the Parties wish to license or otherwise transfer such rights, terms therefor will be expressly set forth in a Project Addendum or other separate written agreement.
6.2
Independent Development. All Intellectual Property Rights (including rights of attribution) created by a Party during the course of this Agreement independently without contribution from the other Party will belong to the creating Party only, and neither Party is transferring any such rights to the other Party under this Agreement, by license or otherwise. If the Parties wish to license or otherwise transfer such rights, terms therefor will be expressly set forth in a Project Addendum or other separate written agreement.
6.3
Brand New Materials.
(a)
If in connection with a particular Project, the Parties intend to engage in joint development, configuration, customization or other efforts that will or are reasonably expected to result in Joint Brand New Materials (as defined below), the Parties will discuss and document the specifications, scope and other matters relating to such efforts, including without limitation the ownership and maintenance of such Joint Brand New Materials and the Parties’ respective IPR with respect to, and rights to license and/or otherwise commercialize, any resulting Joint Brand New Materials, in the applicable Project Addendum or other mutually agreed document executed by the Parties. Any Project Addendum that specifies the creation of a Joint Brand New Materials, must also be signed by each Party’s respective legal representative to ensure that proper IPR rights and/or license obligations are specified in order to be valid. IPR that is owned by, or for which ownership is assigned to a client (whether pursuant to contract or by operation of law) shall be excluded from Joint Brand New Materials.
(b)
Any new developments that are newly conceived and jointly developed by Company and Wipro, if and to the extent so documented pursuant to the first sentence of Section 6.3(a), shall be jointly owned by the Parties (“Joint Brand New Materials”), and the Parties’ rights to independently license or otherwise commercialize such Joint Brand New Materials shall be as documented as set forth in Section 6.3(a) above. The Parties agree that, if and to the extent documented in a Project Addendum or otherwise in writing as required under Section 6.3(a), Joint Brand New Materials may include IPR consisting of a derivative work or improvement to a Party’s pre-existing IPR.
(c)
Each Party will grant to the other Party, pursuant to the applicable Project Addendum, all necessary license rights with respect to a Party’s pre-existing IPR or applicable derivative works or improvements as are necessary to enable the other Party to offer the applicable Joint Offerings to Customers for the period and on the other applicable terms of the Project Addendum.
6.4
Trademark License. With respect to any trademarks or service marks of a Party that are designated in the applicable Project Addendum as