hrth20220331

hrth20220331_10q.htm

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U.S.

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022

☐

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

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)

2 Executive Drive, Suite 103, Chelmsford, MA 01824

(Address of principal executive offices, including zip code)

(512) 434-1100

(Registrant’s telephone number including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	HHS	NASDAQ

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the 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	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

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. ☐

Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

The number of shares outstanding of the issuer’s common stock as of April 15, 2022 was 7,015,266 shares.

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HARTE HANKS, INC. AND SUBSIDIARIES

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FORM 10-Q REPORT

For the Quarterly Period Ended March 31, 2022

		Page

Part I.	Financial Information

Item 1.	Financial Statements
	(Unaudited)

	Condensed Consolidated Balance Sheets — March 31, 2022 and December 31, 2021	3

	Condensed Consolidated Statements of Comprehensive Income (Loss) — Three months ended March 31, 2022 and 2021	4

	Condensed Consolidated Statements of Changes in Stockholders’ Deficit — Three months ended March 31, 2022 and 2021	5

	Condensed Consolidated Statements of Cash Flows — Three months ended March 31, 2022 and 2021	6

	Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30

Item 4.	Controls and Procedures	30

Part II.	Other Information

Item 1.	Legal Proceedings	31

Item 1A.	Risk Factors	31

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31

Item 3.	Defaults Upon Senior Securities	31

Item 4.	Mine Safety Disclosure	31

Item 5.	Other Information	31

Item 6.	Exhibits	32

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Item 1. Financial Statements

Harte Hanks, Inc. and Subsidiaries Condensed Consolidated Balance Sheets

(Unaudited)

	*March 31,*			*December 31,*
In thousands, except per share and share amounts	*2022*			*2021*
ASSETS
Current assets
Cash and cash equivalents	$	9,652		$	11,911
Restricted cash		2,559			3,222
Accounts receivable (less allowance for doubtful accounts of $314 at March 31, 2022 and $266 at December 31, 2021)		49,034			41,051
Unbilled accounts receivable		7,067			8,134
Contract assets		908			622
Prepaid expenses		2,614			1,948
Prepaid income taxes and income tax receivable		6,791			7,456
Other current assets		1,229			1,031
Total current assets		79,854			75,375
Property, plant and equipment (less accumulated depreciation of $52,809 at March 31, 2022 and $52,512 at December 31, 2021)		8,577			7,747
Right-of-use assets		20,298			22,142
Other assets		2,385			2,597
Total assets	$	111,114		$	107,861

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities
Accounts payable and accrued expenses	$	19,647		$	16,132
Accrued payroll and related expenses		4,274			7,028
Deferred revenue and customer advances		5,821			3,942
Customer postage and program deposits		6,167			6,496
Other current liabilities		2,903			2,291
Short-term lease liabilities		5,792			6,553
Total current liabilities		44,604			42,442

Long-term debt, net of short-term portion		5,000			5,000
Pension liabilities - Qualified plans		26,476			27,359
Pension liabilities - Nonqualified plan		24,867			25,140
Long-term lease liabilities, net of current portion		17,728			19,215
Other long-term liabilities		3,287			3,697
Total liabilities		121,962			122,853

Preferred Stock, $1 par value, 1,000,000 shares authorized; 9,926 shares of Series A Convertible Preferred Stock, issued and outstanding
		9,723			9,723
Stockholders’ deficit
Common stock, $1 par value, 25,000,000 shares authorized;12,121,484 shares issued, 7,015,266 and 6,976,144 shares outstanding at March 31, 2022 and December 31, 2021, respectively		12,121			12,121
Additional paid-in capital		278,432			290,711
Retained earnings		814,439			811,094
Less treasury stock, 5,106,218 shares at cost at March 31, 2022 and 5,145,340 shares at cost at December 31, 2021		(1,072,741	)		(1,085,313	)
Accumulated other comprehensive loss		(52,822	)		(53,328	)
Total stockholders’ deficit		(20,571	)		(24,715	)
Total liabilities, Preferred Stock and stockholders’ deficit	$	111,114		$	107,861

See Accompanying Notes to Condensed Consolidated Financial Statements

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Harte Hanks, Inc. and Subsidiaries Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

	*Three Months Ended March 31,*
In thousands, except per share amounts	*2022*			*2021*
Revenue	$	49,062		$	43,754
Operating expenses
Labor		25,945			26,352
Production and distribution		13,991			11,269
Advertising, selling, general and administrative		4,633			4,121
Restructuring expense		—			2,198
Depreciation expense		599			698
Total operating expenses		45,168			44,638
Operating income (loss)		3,894			(884	)
Other incomes
Interest expense, net		134			268
Other (income) expense		(39	)		15
Total other income		95			283
Income (loss) before income taxes		3,799			(1,167	)
Income tax expense		454			591
Net income (loss)		3,345			(1,758	)
Less: Preferred Stock dividends		122			122
Less: Earnings attributable to participating securities		404			—
Income (loss) attributable to common stockholders	$	2,819		$	(1,880	)

Earnings (loss) per common share
Basic	$	0.40		$	(0.28	)
Diluted	$	0.39		$	(0.28	)

Weighted average shares used to compute income (loss) per share attributable to common shares
Basic		6,991			6,651
Diluted		7,286			6,651

Comprehensive income (loss), net of tax:
Net income (loss)	$	3,345		$	(1,758	)

Adjustment to pension liability, net		1,010			736
Foreign currency translation adjustment		(504	)		(458	)
Total other comprehensive income, net of tax	$	506		$	278

Comprehensive income (loss)	$	3,851		$	(1,480	)

See Accompanying Notes to Condensed Consolidated Financial Statements

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Harte Hanks, Inc. and Subsidiaries Condensed Consolidated Statements of Changes in Stockholders' Deficit

(Unaudited)

														*Accumulated*
					*Additional*									*Other*			*Total*
	*Preferred*		*Common*		*Paid-in*			*Retained*			*Treasury*			*Comprehensive*			*Stockholders’*
In thousands	*Stock*		*Stock*		*Capital*			*Earnings*			*Stock*			*Loss*			*Deficit*
Balance at December 31, 2020	$	9,723	$	12,121	$	383,043		$	796,123		$	(1,178,799	)	$	(65,611	)	$	(53,123	)
Stock-based compensation		—		—		210			—			—			—			210
Vesting of RSU's		—		—		(16,010	)		—			15,980			—			(30	)
Net loss		—		—		—			(1,758	)		—			—			(1,758	)
Other comprehensive income		—		—		—			—			—			278			278
Balance at March 31, 2021	$	9,723	$	12,121	$	367,243		$	794,365		$	(1,162,819	)	$	(65,333	)	$	(54,423	)

													*Accumulated*
					*Additional*								*Other*			*Total*
	*Preferred*		*Common*		*Paid-in*			*Retained*		*Treasury*			*Comprehensive*			*Stockholders’*
In thousands	*Stock*		*Stock*		*Capital*			*Earnings*		*Stock*			*Loss*			*Deficit*
Balance at December 31, 2021	$	9,723	$	12,121	$	290,711		$	811,094	$	(1,085,313	)	$	(53,328	)	$	(24,715	)
Stock-based compensation		—		—		427			—		—			—			427
Vesting of RSU's		—		—		(12,706	)		—		12,572			—			(134	)
Net Income		—		—		—			3,345		—			—			3,345
Other comprehensive income		—		—		—			—		—			506			506
Balance at March 31, 2022	$	9,723	$	12,121	$	278,432		$	814,439	$	(1,072,741	)	$	(52,822	)	$	(20,571	)

See Accompanying Notes to Condensed Consolidated Financial Statements

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Harte Hanks, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows

(Unaudited)

	*Three Months Ended March 31,*
In thousands	*2022*			*2021*
Cash Flows from Operating Activities
Net income (loss)	$	3,345		$	(1,758	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation expense		599			698
Restructuring		—			304
Stock-based compensation		288			222
Net pension (payment) cost		(296	)		(210	)
Changes in assets and liabilities:
Increase in accounts receivable and contract assets		(7,202	)		(3,585	)
Decrease (increase) in prepaid expenses, income tax receivable and other current assets		106			(1,220	)
Increase (decrease) in accounts payable and accrued expenses		3,935			(164	)
(Decrease) increase in other accrued expenses and liabilities		(1,539	)		38
Net cash used in operating activities		(764	)		(5,675	)

Cash Flows from Investing Activities
Purchases of property, plant and equipment		(1,429	)		(735	)
Proceeds from sale of property, plant and equipment		57			—
Net cash used in investing activities		(1,372	)		(735	)

Cash Flows from Financing Activities
Debt financing costs		(93	)		(113	)
Payment of finance leases		(55	)		(56	)
Treasury stock activities		(134	)		(30	)
Net cash used in financing activities		(282	)		(199	)

Effect of exchange rate changes on cash, cash equivalents and restricted cash		(504	)		(458	)

Net decrease in cash and cash equivalents and restricted cash		(2,922	)		(7,067	)
Cash and cash equivalents and restricted cash at beginning of period		15,133			33,562
Cash and cash equivalents and restricted cash at end of period	$	12,211		$	26,495

Supplemental disclosures
Cash paid for interest	$	97		$	99
Cash (received) paid for income taxes, net	$	(172	)	$	27
Non-cash investing and financing activities
Purchases of property, plant and equipment included in accounts payable	$	3,005		$	1,919

See Accompanying Notes to Condensed Consolidated Financial Statements

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Harte Hanks, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note A - Overview and Significant Accounting Policies

Background

Harte Hanks, Inc. together with its subsidiaries (“Harte Hanks,” “Company,” “we,” “our,” or “us”) is a leading global customer experience company. With offices in North America, Asia-Pacific and Europe, Harte Hanks works with some of the world’s most respected brands.

The COVID-19 pandemic and related economic repercussions have created significant volatility, uncertainty, and turmoil in the business environment generally. While the COVID-19 pandemic has not had a material adverse impact on the Company’s business operations, liquidity or ability to comply with covenants to date, it is possible that the pandemic itself, as well as the measures taken by governments around the globe, including in connection with the emergence of new variants and the resulting economic impact may materially and adversely affect the Company’s results of operations, cash flows and financial position as well as the financial stability of its customers. The COVID-19 pandemic may also exacerbate other risks discussed in Part I[SL1] [KQ2] , “Item 1A. Risk Factors” in our Annual Report on Form-10K for the fiscal year ended December 31, 2021 filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 21, 2022 (the “2021 10-K”).

Segment Reporting

The Company operates three business segments: Marketing Services; Customer Care; and Fulfillment & Logistics Services. Our Chief Executive Officer (“CEO”) is considered to be our chief operating decision maker. Our CEO reviews our operating results on an aggregate basis for purposes of allocating resources and evaluating financial performance by using the three financial measures: revenue, operating income (loss) and operating income (loss) plus depreciation and amortization (“EBITDA”).

Accounting Principles

Our unaudited interim condensed consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management, the unaudited interim condensed consolidated financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with information included in our 2021 10-K.

Consolidation

The accompanying unaudited interim condensed consolidated financial statements include the accounts of Harte Hanks, Inc. and its 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, as the context may require.

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Interim Financial Information

The condensed consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Rule 8-01 of Regulation S-X. Accordingly, they do not include all 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. Certain prior period amounts in the condensed consolidated financial statements and accompanying notes have been reclassified to conform to the current period's presentation.

Use of Estimates

Preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Actual results could differ materially from those estimates due to uncertainties. Such estimates include, but are not limited to, estimates related to lease accounting; pension accounting; fair value for purposes of assessing long-lived assets for impairment; revenue recognition; income taxes; stock-based compensation and contingencies. On an ongoing basis, management reviews its estimates and assumptions 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 costs, including stock-based compensation, along with temporary labor costs. The “Production and distribution” and “Advertising, selling, general and administrative” lines do not include any labor, depreciation, or amortization expense.

Revenue Recognition

We recognize revenue upon the transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to be entitled to receive in exchange for such products or services based on the relevant contract. We apply the following five-step revenue recognition model:

•

Identification of the contract, or contracts, with a customer

•

Identification of the performance obligations in the contract

•

Determination of the transaction price

•

Allocation of the transaction price to the performance obligations in the contract

•

Recognition of revenue when (or as) we satisfy the performance obligation

Certain client programs provide for adjustments to billings based upon whether we achieve certain performance criteria. In these circumstances, revenue is recognized when the performance criteria are met. We record revenue net of any taxes collected from customers and subsequently remitted to governmental authorities. Any payments received in advance of the performance of services or delivery of the product are recorded as deferred revenue until such time as the services are performed or the product is delivered. Costs incurred for search engine marketing solutions payable to the engine host and postage costs of mailings are billed to our clients and are not directly reflected in our revenue.

Revenue from agency and digital services, direct mail, logistics, fulfillment and contact center is recognized when control of the promised goods or services is transferred to the customer. Fees for these services are determined by the terms set forth in each contract. These fees are typically set at a fixed price or rate by transaction occurrence, service provided, time spent, or product delivered.

For arrangements requiring design and build of a database, revenue is not recognized until client acceptance occurs. Up-front fees billed during the setup phase for these arrangements are deferred and direct build costs are capitalized. Pricing for these types of arrangements is typically based on a fixed price determined in the contract. Revenue from other database marketing solutions is recognized ratably over the contractual service period. Pricing for these services is typically based on a fixed price per month or per contract.

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Fair Value of Financial Instruments

FASB ASC 820, Fair Value Measurements and Disclosures, (“ASC 820”) 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. ASC 820 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 and restricted cash, accounts receivable, trade payables, and long-term debt. The fair value of the assets in our funded pension plan is discussed in Note H, Employee Benefit Plans.

Leases

We determine if an arrangement is a lease at its inception. Operating and finance leases are included in the lease right-of-use (“ROU”) assets and in the current portion and long-term portion of lease liabilities on our condensed consolidated balance sheets. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date of each lease based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit interest rate, we use our incremental borrowing rate based on the information available at the commencement date of each lease to determine the present value of lease payments. The operating lease ROU assets also include any lease payments made and exclude lease incentives. Our lease terms may include options to extend or terminate the lease, which are included in the lease ROU assets when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. We have lease agreements with lease and non-lease components, which are generally accounted for separately. For certain real estate leases, we account for the lease and non-lease components as a single lease component.

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Note B - Recent Accounting Pronouncements

Recent Accounting Guidance Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses. This ASU added a new impairment model (known as the current expected credit loss (“CECL”) model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes its estimate of expected credit losses as an allowance. The CECL model applies to most debt instruments, trade receivables, lease receivables, financial guarantee contracts, and other loan commitments. The CECL model does not have a minimum threshold for recognition of impairment losses and entities will need to measure expected credit losses on assets that have a low risk of loss. As a smaller reporting company pursuant to Rule 12b-2 of the Securities Exchange Act of 1934, as amended, these changes became effective for the Company on January 1, 2022. The adoption of this new standard did not have a material impact on the Company's financial statements.

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Note C - Revenue from Contracts with Customers

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

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 sold or service provided. Payment terms can vary by contract, but the period between invoicing and when payment is due is not significant. The Company's contracts with its customers generally do not include rights of return or a significant financing component.

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

Disaggregation of Revenue

We disaggregate revenue by three key revenue streams which are aligned with our business segments. The nature of the services offered by each key revenue stream is different. The following table summarizes revenue from contracts with customers for the three months ended March 31, 2022 and 2021 by our three business segments and the pattern of revenue recognition:

	*Three Months Ended March 31, 2022*
In thousands	Revenue for performance obligations recognized over time		Revenue for performance obligations recognized at a point in time		Total
Marketing Services	$	10,895	$	2,029	$	12,924
Customer Care		17,742		—		17,742
Fulfillment and Logistics Services		14,888		3,508		18,396
Total Revenues	$	43,525	$	5,537	$	49,062

	*Three Months Ended March 31, 2021*
In thousands	Revenue for performance obligations recognized over time		Revenue for performance obligations recognized at a point in time		Total
Marketing Services	$	11,448	$	1,430	$	12,878
Customer Care		16,544		—		16,544
Fulfillment and Logistics Services		12,446		1,886		14,332
Total Revenues	$	40,438	$	3,316	$	43,754

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

Marketing Services

Our Marketing Services segment delivers strategic planning, data strategy, performance analytics, creative development and execution, technology enablement, marketing automation, and database management. We create relevancy by leveraging data, insight, and our extensive experience in leading clients as they engage their customers through digital, traditional, and emerging channels. We are known for helping clients build deep customer relationships, create connected customer experiences, and optimize each and every customer touch point in order to deliver desired business outcomes.

Most marketing services performance obligations are satisfied over time and often offered on a project basis. We have concluded that the best approach to measure the progress toward completion of the project-based performance obligations is the input method, which is based on either the costs or labor hours incurred to date depending 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.

Our databases 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, customer or target marketing lists and data processing services, may be satisfied over time or at a point in time. We provide 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.

Our contracts may include outsourced print production work for our clients. These 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.

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.

Customer Care

We operate tele-service workstations in the United States, 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 are satisfied over time. With regard to account management and software as a service (“SaaS”), we use a time-elapsed output method to recognize revenue. 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 SSPs.

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 are estimated using the expected value method.

Fulfillment & Logistics Services

Our services, delivered internally and with our partners, include printing, lettershop, advanced mail optimization (including commingling services), logistics and transportation optimization, monitoring and tracking, to support traditional and specialized mailings. Our print and fulfillment centers in Massachusetts and Kansas provide custom kitting services, print on demand, product recalls, trade marketing fulfillment, ecommerce product fulfillment, sampling programs, and freight optimization, thereby allowing our customers to distribute literature and other marketing materials.

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Most 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. Prior to the closure of our direct mail production facilities, our direct mail business contracts may have included 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.

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. As we do not deem these activities as transferring a separate promised service, the receipt of such fees represents 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 to five years for database solutions contracts and six months to one year for contact center contracts). The balance of upfront non-refundable fees collected from customers was immaterial as of March 31, 2022 and December 31, 2021.

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. As of March 31, 2022, we had no transaction prices allocated to unsatisfied or partially satisfied performance obligations.

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 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 March 31, 2022 and December 31, 2021:

In thousands	*March 31, 2022*		*December 31, 2021*
Contract assets	$	908	$	622
Deferred revenue and customer advances		5,821		3,942
Deferred revenue, included in other long-term liabilities		726		756

Revenue recognized during the three months ended March 31, 2022 from amounts included in deferred revenue at the beginning of the period was approximately $1.9 million.

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 the benefit in a manner that is consistent with the transfer of the related goods or services to which the asset relates. We impair the asset when recoverability is not anticipated. We capitalized a portion of commission expense, implementation and other costs that represents the cost to obtain a contract. The remaining unamortized contract costs were $1.3 million and $1.7 million as of March 31, 2022 and 2021, respectively. For the period presented, no impairment was recognized.

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Note D - Leases

We have operating and finance leases for corporate and business offices, service facilities, call centers and certain equipment. Leases with an initial term of 12 months or less are generally not recorded on the balance sheet, unless the arrangement includes an option to purchase the underlying asset, or an option to renew the arrangement, that we are reasonably certain to exercise (short-term leases). Our leases have remaining lease terms of one year to six years, some of which include options to extend the leases for up to an additional five years.

We sublease our Fullerton (CA), Jacksonville (FL) and Uxbridge (UK) facilities. The leases and subleases for these three facilities expire at various dates, the latest being fiscal year 2023.

As of March 31, 2022, assets recorded under finance and operating leases were approximately $0.7 million and $19.6 million respectively, and accumulated depreciation associated with finance leases was $0.8 million. As of December 31, 2021, assets recorded under finance and operating leases were approximately $0.8 million and $21.4 million respectively, and accumulated depreciation associated with finance leases was $0.7 million. Operating lease right of use assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The discount rate used to determine the commencement date present value of lease payment is the interest rate implicit in the lease, or when that is not readily determinable, our incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term at an amount equal to the lease payments in a similar economic environment. Since none of our leases has a readily determinable implicit interest rate, we use our incremental borrowing rate as the discount rate. Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received.

There is no impairment of leases during the three months ended March 31, 2022.

The following table presents supplemental balance sheet information related to our financing and operating leases:

In thousands	*As of March 31, 2022*
	Operating Leases		Finance Leases		*Total*
Right-of-use Assets	$	19,584	$	714	$	20,298

Liabilities
Short-term lease liabilities		5,606		186		5,792
Long-term lease liabilities		17,564		164		17,728
Total Lease Liabilities	$	23,170	$	350	$	23,520

In thousands	*As of December 31, 2021*
	Operating Leases		Finance Leases		*Total*
Right-of-use Assets	$	21,382	$	760	$	22,142

Liabilities
Short-term lease liabilities		6,359		194		6,553
Long-term lease liabilities		19,004		211		19,215
Total Lease Liabilities	$	25,363	$	405	$	25,768

For the three months ended March 31, 2022 and 2021, the components of lease expense were as follows:

In thousands	*Three Months Ended March 31, 2022*			*Three Months Ended March 31, 2021*
Operating lease cost	$	1,581		$	2,119

Finance lease cost:
Amortization of right-of-use assets		46			49
Interest on lease liabilities		5			7
Total Finance lease cost		51			56
Variable lease cost		539			920
Sublease income		(251	)		(171	)
Total lease cost, net	$	1,920		$	2,924

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Other information related to leases was as follows:

In thousands	Three Months Ended March 31, 2022			Three Months Ended March 31, 2021
Supplemental Cash Flows Information

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	3,789		$	3,950
Operating cash flows from finance leases		4			7
Financing cash flows from finance leases		55			56

Weighted average remaining lease term
Operating leases		6.2			5.8
Finance leases		2.0			2.8

Weighted average discount rate
Operating leases		3.41	%		3.58	%
Finance leases		5.47	%		5.30	%

The maturities of the Company’s finance and operating lease liabilities as of March 31, 2022 are as follows:

In thousands	*Operating Leases (1)*		*Finance Leases*
Year Ending December 31,
Remainder of 2022	$	4,189	$	150
2023

SEC Form 10-Q filed by Harte-Hanks Inc.