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 Company is closely monitoring the impact of the COVID-

pandemic on all aspects of its business. In connection with the pandemic, some of our customers have reduced their demand for our services while other customers have requested accommodations including extensions of payment or restructuring of agreements. In addition, some of our customers have declared bankruptcy and it is possible that additional customers will file for bankruptcy in the coming months. Our Customer Care business has experienced increases in volumes and has added new business from existing clients as well as new clients due to the increased demand for these services driven by COVID-

19.

While the COVID-

pandemic has

not

had a material adverse impact on the Company's business operations, liquidity or ability to comply with covenants to date, the pandemic has caused significant volatility in the global markets and has caused many companies to slow production or find alternative means for employees to perform their work. It is possible that the COVID-

pandemic, the measures taken by governments around the globe, which as a result of increasing infection rates have become more restrictive, 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-

pandemic

may

also exacerbate other risks discussed in Part I, “Item

1A.

Risk Factors” in our Annual Report on Form-

10K

for the fiscal year ended

December 31, 2020,

which could materially affect our business, financial condition, or future results. We recommend that you review “Item

1A.

Risk Factors” in our Annual Report on Form

-K for the fiscal year ended

December 31, 2020

filed with the U.S. Securities and Exchange Commission (the “SEC”) on

March 24, 2021,

and as amended on

April 30, 2021 (

the

“2020

-K”) for a further discussion on COVID-

and the risks the Company currently faces.

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”).

Related Party Transactions

From

2016

until

October

2020,

we conducted business with Wipro LLC (“Wipro”), whereby Wipro provided us with a variety of technology-related services. We have since terminated all service agreements with Wipro.

Effective

January 30, 2018,

Wipro became a related party when it purchased

9,926

shares of our Series A Preferred Stock (which are convertible at Wipro's option into

1,001,614

shares, or

15%

of our common stock as of

December

31,

2020

), for aggregate consideration of

$9.9

million. For information pertaining to the Company's Series A Preferred Stock, See Note E,

Convertible Preferred Stock

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

-Q should be read in conjunction with information included in our

2020

-K.

Consolidation

The accompanying unaudited interim 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, as the context

may

require.

Interim Financial Information

The condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form

-Q and Rule

of Regulation S-

Accordingly, they do

not

include all the information and footnotes required by 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.

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 lease accounting; 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 Comprehensi

ve (Loss) Income

The “Labor” line in the Condensed Consolidated Statements of Comprehensive (Loss) Income 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 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 foregoing conditions 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 all our segments is recognized as the work is performed. 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.

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

Quoted prices in active markets for identical assets or liabilities.

Level

Observable inputs other than Level

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

Unobservable inputs that are supported by little or

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 disclosed 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.