false2021Q10001305168December 31P3Y00013051682021-01-012021-03-31xbrli:shares00013051682021-04-29iso4217:USD00013051682021-03-3100013051682020-12-31iso4217:USDxbrli:shares00013051682020-01-012020-03-310001305168us-gaap:CommonStockMember2019-12-310001305168us-gaap:AdditionalPaidInCapitalMember2019-12-310001305168us-gaap:RetainedEarningsMember2019-12-310001305168us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-12-310001305168us-gaap:TreasuryStockMember2019-12-310001305168us-gaap:NoncontrollingInterestMember2019-12-3100013051682019-12-310001305168us-gaap:CommonStockMember2020-01-012020-03-310001305168us-gaap:AdditionalPaidInCapitalMember2020-01-012020-03-310001305168us-gaap:TreasuryStockMember2020-01-012020-03-310001305168us-gaap:RetainedEarningsMember2020-01-012020-03-310001305168us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-01-012020-03-310001305168us-gaap:NoncontrollingInterestMember2020-01-012020-03-310001305168us-gaap:CommonStockMember2020-03-310001305168us-gaap:AdditionalPaidInCapitalMember2020-03-310001305168us-gaap:RetainedEarningsMember2020-03-310001305168us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-03-310001305168us-gaap:TreasuryStockMember2020-03-310001305168us-gaap:NoncontrollingInterestMember2020-03-3100013051682020-03-310001305168us-gaap:CommonStockMember2020-12-310001305168us-gaap:AdditionalPaidInCapitalMember2020-12-310001305168us-gaap:RetainedEarningsMember2020-12-310001305168us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-12-310001305168us-gaap:TreasuryStockMember2020-12-310001305168us-gaap:NoncontrollingInterestMember2020-12-310001305168us-gaap:CommonStockMember2021-01-012021-03-310001305168us-gaap:AdditionalPaidInCapitalMember2021-01-012021-03-310001305168us-gaap:TreasuryStockMember2021-01-012021-03-310001305168us-gaap:RetainedEarningsMember2021-01-012021-03-310001305168us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-01-012021-03-310001305168us-gaap:NoncontrollingInterestMember2021-01-012021-03-310001305168us-gaap:CommonStockMember2021-03-310001305168us-gaap:AdditionalPaidInCapitalMember2021-03-310001305168us-gaap:RetainedEarningsMember2021-03-310001305168us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-03-310001305168us-gaap:TreasuryStockMember2021-03-310001305168us-gaap:NoncontrollingInterestMember2021-03-310001305168arc:ConstructionDocumentandInformationManagementMember2021-01-012021-03-310001305168arc:ConstructionDocumentandInformationManagementMember2020-01-012020-03-310001305168arc:ManagedPrintServicesMember2021-01-012021-03-310001305168arc:ManagedPrintServicesMember2020-01-012020-03-310001305168arc:ArchivingandInformationManagementMember2021-01-012021-03-310001305168arc:ArchivingandInformationManagementMember2020-01-012020-03-310001305168us-gaap:ProductMember2021-01-012021-03-310001305168us-gaap:ProductMember2020-01-012020-03-3100013051682020-01-012020-09-300001305168us-gaap:CustomerRelationshipsMember2021-01-012021-03-310001305168us-gaap:CustomerRelationshipsMember2021-03-310001305168us-gaap:CustomerRelationshipsMember2020-12-310001305168us-gaap:TrademarksAndTradeNamesMember2021-03-310001305168us-gaap:TrademarksAndTradeNamesMember2020-12-31xbrli:pure0001305168us-gaap:LineOfCreditMemberus-gaap:RevolvingCreditFacilityMember2021-03-310001305168us-gaap:LineOfCreditMemberus-gaap:RevolvingCreditFacilityMember2020-12-310001305168us-gaap:LineOfCreditMemberus-gaap:RevolvingCreditFacilityMember2018-11-300001305168us-gaap:LineOfCreditMemberus-gaap:RevolvingCreditFacilityMember2019-12-170001305168arc:TermLoanMemberus-gaap:LineOfCreditMember2019-12-172019-12-170001305168us-gaap:RevolvingCreditFacilityMemberus-gaap:LetterOfCreditMember2021-03-310001305168us-gaap:LineOfCreditMemberus-gaap:LondonInterbankOfferedRateLIBORMembersrt:MinimumMember2021-01-012021-03-310001305168us-gaap:LineOfCreditMembersrt:MaximumMemberus-gaap:LondonInterbankOfferedRateLIBORMember2021-01-012021-03-310001305168us-gaap:LineOfCreditMemberus-gaap:FederalFundsEffectiveSwapRateMember2021-01-012021-03-310001305168us-gaap:LineOfCreditMemberus-gaap:LondonInterbankOfferedRateLIBORMember2021-01-012021-03-310001305168us-gaap:LineOfCreditMemberus-gaap:PrimeRateMembersrt:MinimumMember2021-01-012021-03-310001305168us-gaap:LineOfCreditMembersrt:MaximumMemberus-gaap:PrimeRateMember2021-01-012021-03-310001305168us-gaap:LineOfCreditMember2021-01-012021-03-310001305168us-gaap:LineOfCreditMemberus-gaap:RevolvingCreditFacilityMember2019-12-172019-12-1700013051682021-02-012021-02-2800013051682018-04-262018-04-260001305168us-gaap:SubsequentEventMember2021-04-292021-04-290001305168srt:MinimumMember2021-01-012021-03-310001305168srt:MaximumMember2021-01-012021-03-310001305168us-gaap:ShareBasedPaymentArrangementEmployeeMember2021-01-012021-03-310001305168us-gaap:RestrictedStockMember2020-01-012020-03-310001305168arc:TermLoanMemberus-gaap:LineOfCreditMember2021-03-310001305168us-gaap:SubsequentEventMemberus-gaap:LineOfCreditMemberarc:A2021CreditAgreementMember2021-04-220001305168us-gaap:SubsequentEventMemberus-gaap:LineOfCreditMemberarc:A2021CreditAgreementMemberus-gaap:LondonInterbankOfferedRateLIBORMembersrt:MinimumMember2021-04-222021-04-220001305168us-gaap:SubsequentEventMemberus-gaap:LineOfCreditMembersrt:MaximumMemberarc:A2021CreditAgreementMemberus-gaap:LondonInterbankOfferedRateLIBORMember2021-04-222021-04-220001305168us-gaap:SubsequentEventMemberus-gaap:LineOfCreditMemberarc:A2021CreditAgreementMemberus-gaap:FederalFundsEffectiveSwapRateMember2021-04-222021-04-220001305168us-gaap:SubsequentEventMemberus-gaap:LineOfCreditMemberarc:A2021CreditAgreementMemberus-gaap:LondonInterbankOfferedRateLIBORMember2021-04-222021-04-220001305168us-gaap:SubsequentEventMemberus-gaap:LineOfCreditMemberarc:A2021CreditAgreementMemberus-gaap:PrimeRateMembersrt:MinimumMember2021-04-222021-04-220001305168us-gaap:SubsequentEventMemberus-gaap:LineOfCreditMembersrt:MaximumMemberarc:A2021CreditAgreementMemberus-gaap:PrimeRateMember2021-04-222021-04-22

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________ 
Form 10-Q
 _______________________________________ 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2021
or
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: 001-32407
_______________________________________ 
ARC DOCUMENT SOLUTIONS, INC.
(Exact name of Registrant as specified in its Charter)
_______________________________________ 
Delaware 20-1700361
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
12657 Alcosta Blvd, Suite 200
San Ramon California 94583
(Address of principal executive offices) (Zip Code)
(925) 949-5100
(Registrant's telephone number, including area code)
_______________________________________ 
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, par value $0.001 per share ARC The New York Stock Exchange
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 (§ 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      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes      No  
The number of outstanding shares of the registrant's common stock, par value $0.001 per share, was 42,706,873 as of April 29, 2021.



ARC DOCUMENT SOLUTIONS, INC.
Form 10-Q
For the Quarter Ended March 31, 2021
Table of Contents
 
PART I—FINANCIAL INFORMATION
6
Item 1. Condensed Consolidated Financial Statements
6
Condensed Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020 (Unaudited)
6
Condensed Consolidated Statements of Operations for the three months ended March 31, 2021 and 2020 (Unaudited)
7
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2021 and 2020 (Unaudited)
8
Condensed Consolidated Statements of Equity for the three months ended March 31, 2021 and 2020 (Unaudited)
9
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020 (Unaudited)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
Signatures
3


In this Quarterly Report on Form 10-Q, “ARC Document Solutions,” “ARC,” “the Company,” “we,” “us,” and “our” refer to ARC Document Solutions, Inc., a Delaware corporation, and its consolidated subsidiaries, unless the context otherwise dictates.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact contained in this report are statements that could be deemed forward-looking statements, including without limitation statements with respect to expectations regarding the impact of the COVID-19 pandemic on our financial results and the effectiveness of the Company's responses to the pandemic, future cash flows, and capital requirements, and the Company's anticipated effective tax rate, and statements of assumptions underlying any of the foregoing. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.
In some cases, you can identify forward-looking statements by terms such as “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “project,” “target,” “likely,” “will,” “would,” “could,” and other similar language, whether in the negative or affirmative. The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to a number of risks, uncertainties and assumptions as described under the section titled "Part I - Item 1A. Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2020. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as indicative of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Some of the key factors that could cause actual results to differ from our expectations include:
our financial condition and results of operations for fiscal 2021 and beyond have been and are expected to continue to be adversely affected by the recent novel coronavirus (or COVID-19) pandemic;
we are highly dependent on the architectural, engineering, construction and building owner/operator (AEC/O) industry and any decline in that industry could adversely affect our future revenue and profitability;
because a significant portion of our overall costs are fixed, our earnings are highly sensitive to changes in revenue;
if we are unable to charge for our value-added services to offset declines in print volumes, our long-term revenue could decline;
we derive a significant percentage of net sales from within the State of California and our business could be disproportionately harmed by an economic downturn or natural disaster affecting California;
our growth strategy depends, in part, on our ability to successfully market and execute several different, but related, service offerings;
we are dependent upon our vendors to continue to supply us equipment, parts, supplies, and services at comparable terms and price levels as the business grows;
our failure to adequately protect the proprietary aspects of our technology, including SKYSITE, PlanWell, and Abacus may cause us to lose market share;
our failure to protect our customers’ confidential information against security breaches could damage our reputation, harm our business and adversely affect our results of operations;
our failure to comply with laws related to privacy and data security could adversely affect our financial condition;
added risks are associated with our international operations;
a large percentage of our cash and cash equivalents are held outside of the United States, and we could be subject to repatriation delays and costs which could reduce our financial flexibility;
4


the market prices of our common stock is volatile, and is impacted by factors other than our financial performance, which could cause the value of an investment in our stock to decline;
changes in tax laws and interpretations could adversely affect our business;
our debt instruments impose certain restrictions on our ability to operate which in turn could negatively affect our ability to respond to business and market conditions and therefore could have an adverse effect on our business and results of operations;
if the interest rates on our borrowings increase, our access to capital and net income could be adversely affected; and
we may be exposed to employment-related claims and costs and periodic litigation that could adversely affect our business and results of operations.
Except where otherwise indicated, the statements made in this Quarterly Report on Form 10-Q are made as of the date we filed this report with the Securities and Exchange Commission and should not be relied upon as of any subsequent date. All future written and verbal forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We undertake no obligation, and specifically disclaim any obligation, to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You should, however, consult further disclosures we make in future filings of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, and any amendments thereto, as well as our proxy statements.
TRADEMARKS AND TRADE NAMES
We own or have rights to a number of trademarks, service marks, and trade names that we use in conjunction with the operation of our business, including the name and design mark “ARC Document Solutions,” “ABACUS,” “METAPRINT,” “PlanWell,” “PlanWell PDS,” “Riot Creative Imaging,” “SKYSITE,” and various design marks associated therewith. In addition, we own or have rights to various trademarks, service marks, and trade names that we use regionally in conjunction with our operations. This report also includes trademarks, service marks and trade names of other companies.



5


PART I—FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
ARC DOCUMENT SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
March 31, December 31,
(In thousands, except per share data) 2021 2020
Assets
Current assets:
Cash and cash equivalents $ 49,460  $ 54,950 
Accounts receivable, net of allowances for accounts receivable of $2,294 and $2,357
36,847  36,279 
Inventory 9,751  9,474 
Prepaid expenses 4,029  4,065 
Other current assets 3,180  3,979 
Total current assets 103,267  108,747 
Property and equipment, net of accumulated depreciation of $222,665 and $219,834
52,874  57,830 
Right-of-use assets from operating leases 35,749  37,859 
Goodwill 121,051  121,051 
Other intangible assets, net 441  515 
Deferred income taxes 16,819  17,261 
Other assets 2,110  2,175 
Total assets $ 332,311  $ 345,438 
Liabilities and Equity
Current liabilities:
Accounts payable $ 19,468  $ 18,661 
Accrued payroll and payroll-related expenses 8,868  10,088 
Accrued expenses 16,541  17,783 
Current operating lease liability 11,421  12,158 
Current portion of finance leases 16,600  17,557 
Total current liabilities 72,898  76,247 
Long-term operating lease liabilities 31,584  33,561 
Long-term debt and finance leases 71,780  79,679 
Other long-term liabilities 1,672  1,615 
Total liabilities 177,934  191,102 
Commitments and contingencies (Note 6)
Shareholders’ equity:
ARC Document Solutions, Inc. shareholders’ equity:
Preferred stock, $0.001 par value, 25,000 shares authorized; 0 shares issued and outstanding
  — 
Common stock, $0.001 par value, 150,000 shares authorized; 49,433 and 49,422 shares issued and 42,733 and 42,792 shares outstanding
49  49 
Additional paid-in capital 128,108  127,755 
Retained earnings 37,250  37,308 
Accumulated other comprehensive loss (2,708) (2,787)
162,699  162,325 
Less cost of common stock in treasury, 6,700 and 6,630 shares
14,813  14,657 
Total ARC Document Solutions, Inc. shareholders’ equity 147,886  147,668 
Noncontrolling interest 6,491  6,668 
Total equity 154,377  154,336 
Total liabilities and equity $ 332,311  $ 345,438 
The accompanying notes are an integral part of these condensed consolidated financial statements.
6




ARC DOCUMENT SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
  Three Months Ended 
March 31,
(In thousands, except per share data) 2021 2020
Net sales $ 61,730  $ 88,425 
Cost of sales 42,943  60,828 
Gross profit 18,787  27,597 
Selling, general and administrative expenses 16,995  24,338 
Amortization of intangible assets 75  597 
Income from operations 1,717  2,662 
Other income, net (11) (16)
Interest expense, net 620  1,109 
Income before income tax provision 1,108  1,569 
Income tax provision 496  1,107 
Net income 612  462 
Loss attributable to the noncontrolling interest 177  221 
Net income attributable to ARC Document Solutions, Inc. shareholders $ 789  $ 683 
Earnings per share attributable to ARC Document Solutions, Inc. shareholders:
Basic $ 0.02  $ 0.02 
Diluted $ 0.02  $ 0.02 
Weighted average common shares outstanding:
Basic 42,264  43,676 
Diluted 42,634  43,811 
The accompanying notes are an integral part of these condensed consolidated financial statements.

7


ARC DOCUMENT SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
 
  Three Months Ended 
March 31,
(In thousands) 2021 2020
Net income $ 612  $ 462 
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments, net of tax 79  (974)
Other comprehensive income (loss), net of tax 79  (974)
Comprehensive income (loss) 691  (512)
Comprehensive loss attributable to noncontrolling interest, net of tax (177) (354)
Comprehensive income (loss) attributable to ARC Document Solutions, Inc. shareholders $ 868  $ (158)
The accompanying notes are an integral part of these condensed consolidated financial statements.

8


ARC DOCUMENT SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited) 
  ARC Document Solutions, Inc. Shareholders    
  Common Stock   Accumulated    
(In thousands, except per share data) Shares Par
Value
Additional Paid-in
Capital
Retained Earnings Other Comprehensive
Loss
Common Stock in
Treasury
Noncontrolling
Interest
Total
Balance at December 31, 2019 49,189  $ 49  $ 126,117  $ 31,969  $ (3,357) $ (11,410) $ 6,672  $ 150,040 
Stock-based compensation 300  504  505 
Issuance of common stock under Employee Stock Purchase Plan 28  20  20 
Treasury shares (2,432) (2,432)
Cash dividends - common stock ($0.01 per share)
(427) (427)
Comprehensive income (loss) 683  (841) (354) (512)
Balance at March 31, 2020 49,517  $ 50  $ 126,641  $ 32,225  $ (4,198) $ (13,842) $ 6,318  $ 147,194 
  ARC Document Solutions, Inc. Shareholders    
  Common Stock   Accumulated    
(In thousands, except per share data) Shares Par
Value
Additional Paid-in
Capital
Retained
Earnings
Other Comprehensive
Loss
Common Stock in
Treasury
Noncontrolling
Interest
Total
Balance at December 31, 2020 49,422  $ 49  $ 127,755  $ 37,308  $ (2,787) $ (14,657) $ 6,668  $ 154,336 
Stock-based compensation   339  339 
Issuance of common stock under Employee Stock Purchase Plan 11  14  14 
Treasury shares (156) (156)
Cash dividends - common stock ($0.02 per share)
(847) (847)
Comprehensive income (loss) 789  79  (177) 691 
Balance at March 31, 2021 49,433  $ 49  $ 128,108  $ 37,250  $ (2,708) $ (14,813) $ 6,491  $ 154,377 
The accompanying notes are an integral part of these condensed consolidated financial statements.
9




ARC DOCUMENT SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
  Three Months Ended 
March 31,
(In thousands) 2021 2020
Cash flows from operating activities
Net income $ 612  $ 462 
Adjustments to reconcile net income to net cash provided by operating activities:
Allowance for accounts receivable (36) 266 
Depreciation 6,449  7,407 
Amortization of intangible assets 75  597 
Amortization of deferred financing costs 16  16 
Stock-based compensation 339  504 
Deferred income taxes 392  751 
Deferred tax valuation allowance 60  290 
Other non-cash items, net (38) (18)
Changes in operating assets and liabilities:
Accounts receivable, net (504) (1,995)
Inventory (290) 1,027 
Prepaid expenses and other assets 3,350  3,404 
Accounts payable and accrued expenses (5,050) (9,937)
Net cash provided by operating activities 5,375  2,774 
Cash flows from investing activities
Capital expenditures (568) (1,121)
Other 131  73 
Net cash used in investing activities (437) (1,048)
Cash flows from financing activities
Proceeds from issuance of common stock under Employee Stock Purchase Plan 14  20 
Share repurchases (156) (2,432)
Payments on finance leases (4,817) (4,602)
Borrowings under revolving credit facilities 15,000  40,000 
Payments under revolving credit facilities (20,000) (25,000)
Dividends paid (422) (443)
Net cash (used in) provided by financing activities (10,381) 7,543 
Effect of foreign currency translation on cash balances (47) (484)
Net change in cash and cash equivalents (5,490) 8,785 
Cash and cash equivalents at beginning of period 54,950  29,425 
Cash and cash equivalents at end of period $ 49,460  $ 38,210 
Supplemental disclosure of cash flow information
Noncash investing and financing activities
Finance lease obligations incurred $ 874  $ 5,353 
Operating lease obligations incurred $ 418  $ 3,498 
The accompanying notes are an integral part of these condensed consolidated financial statements.
10


ARC DOCUMENT SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data or where otherwise noted)
(Unaudited)
1. Description of Business and Basis of Presentation
ARC Document Solutions, Inc. (“ARC Document Solutions,” “ARC” or the “Company”) is a leading document solutions provider to architectural, engineering, construction, and facilities management professionals, while also providing document solutions to businesses of all types. ARC offers a variety of services including: Construction Document Information Management ("CDIM"), Managed Print Services ("MPS"), and Archive and Information Management ("AIM"). In addition, ARC also sells Equipment and Supplies. The Company conducts its operations through its wholly-owned operating subsidiary, ARC Document Solutions, LLC, a Texas limited liability company, and its affiliates.
Basis of Presentation
The accompanying interim Condensed Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in conformity with the requirements of the U.S. Securities and Exchange Commission ("SEC"). As permitted under those rules, certain footnotes or other financial information required by GAAP for complete financial statements have been condensed or omitted. In management’s opinion, the accompanying interim Condensed Consolidated Financial Statements reflect all adjustments of a normal and recurring nature that are necessary to fairly present the interim Condensed Consolidated Financial Statements. All intercompany accounts and transactions have been eliminated in consolidation. The operating results for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the interim Condensed Consolidated Financial Statements and accompanying notes. The Company evaluates its estimates and assumptions on an ongoing basis and relies on historical experience and various other factors that it believes to be reasonable under the circumstances to determine such estimates. Actual results could differ from those estimates and such differences may be material to the interim Condensed Consolidated Financial Statements.
These interim Condensed Consolidated Financial Statements and accompanying notes should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
Revenue Recognition
Revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Net sales of the Company’s principal services and products were as follows:
 
  Three Months Ended 
March 31,
  2021 2020
CDIM $ 37,434  $ 49,160 
MPS(1)
17,334  27,308 
AIM 3,025  3,600 
Equipment and supplies sales 3,937  8,357 
Net sales $ 61,730  $ 88,425 
(1) MPS includes $15.8 million of rental income and $1.5 million of service income for the three months ended March 31, 2021. MPS includes $25.4 million of rental income and $1.9 million of service income for the three months ended March 31, 2020.
11


CDIM consists of professional services and software services to (i) reproduce and distribute large-format and small-format documents in either black and white or color (“Ordered Prints”) and (ii) specialized graphic color printing. Substantially all of the Company’s revenue from CDIM comes from professional services to reproduce Ordered Prints. Sales of Ordered Prints are initiated through a customer order or quote and are governed by established terms and conditions agreed upon at the onset of the customer relationship. Revenue is recognized when the performance obligation under the terms of a contract with a customer are satisfied, which generally occurs with the transfer of control of the Ordered Prints. Transfer of control occurs at a specific point in time, when the Ordered Prints are delivered to the customer’s site or handed to the customer for walk-in orders. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Taxes collected concurrent with revenue-producing activities are excluded from revenue.
MPS consists of placement, management, and optimization of print and imaging equipment in customers' offices, job sites, and other facilities. MPS relieves the Company’s customers of the burden of purchasing print equipment and related supplies and maintaining print devices and print networks, and it shifts their costs to a “per-use” basis. MPS is supported by our hosted proprietary technology, Abacus®, which allows our customers to capture, control, manage, print, and account for their documents. Under its MPS contracts, the Company is paid a fixed rate per unit for each print produced (per-use), often referred to as a “click charge”. MPS sales are driven by the ongoing print needs of the Company’s customers at their facilities. Upon the issuance of Accounting Standards Codification ("ASC") 842, Leases, the Company concluded that certain of its MPS arrangements, which had previously been accounted for as service revenue under ASC 606, Revenue from Contracts with Customers, are accounted for as operating leases under ASC 842.
AIM combines software and professional services to facilitate the capture, management, access and retrieval of documents and information that have been produced in the past. AIM includes our hosted SKYSITE® software to organize, search and retrieve documents, as well as the provision of services that include the capture and conversion of hardcopy and electronic documents into digital files (“Scanned Documents”), and their cloud-based storage and maintenance. Sales of AIM professional services, which represents the majority of AIM revenue, are initiated through a customer order or proposal and are governed by established terms and conditions agreed upon at the onset of the customer relationship. Revenue is recognized when the performance obligation under the terms of a contract with a customer are satisfied, which generally occurs with the transfer of control of the digital files. Transfer of control occurs at a specific point in time, when the Scanned Documents are delivered to the customer either through SKYSITE or on electronic media. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Taxes collected concurrent with revenue-producing activities are excluded from revenue.
Equipment and Supplies sales consist of reselling printing, imaging, and related equipment (“Goods”) to customers primarily in architectural, engineering and construction firms. Sales of equipment and supplies are initiated through a customer order and are governed by established terms and conditions agreed upon at the onset of the customer relationship. Revenue is recognized when the performance obligations under the terms of a contract with a customer are satisfied, which occurs with the transfer of control of the Goods. Transfer of control occurs at a specific point in time, when the Goods are delivered to the customer’s site. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Taxes collected concurrent with revenue-producing activities are excluded from revenue. The Company has experienced minimal customer returns or refunds and does not offer a warranty on equipment that it is reselling.
Recent Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments - Credit Loss (Topic 326) (“ASU 2016-13”), which updates the guidance on recognition and measurement of credit losses for financial assets. The new requirements, known as the current expected credit loss model ("CECL") will require entities to adopt an impairment model based on expected losses rather than incurred losses. ASU 2016-13 must be adopted on a modified-retrospective approach. This update was effective for fiscal years beginning after December 15, 2020 including interim periods within those fiscal years. In October 2019, the FASB approved an extension for all non-SEC filers, including small reporting companies, to extend the effective date to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Therefore, the effective date for this update will be January 1, 2023. The Company is currently evaluating the potential impact of the adoption of the new standard on its consolidated statements of financial condition and results of operations.
Segment Reporting
The provisions of ASC 280, Segment Reporting, require public companies to report financial and descriptive information about their reportable operating segments. The Company identifies operating segments based on the various business activities that earn revenue and incur expense and whose operating results are reviewed by the Company's Chief Executive Officer, who is the Company's chief operating decision maker. Because its operating segments have similar products and services, classes of
12


customers, production processes, distribution methods and economic characteristics, the Company operates as a single reportable segment.
Risk and Uncertainties
The Company generates the majority of its revenue from sales of services and products to customers in the architectural, engineering, construction and building owner/operator ("AEC/O") industry. As a result, the Company’s operating results and financial condition can be significantly affected by economic factors that influence the AEC/O industry, such as non-residential construction spending, GDP growth, interest rates, unemployment rates, and office vacancy rates, all of which have been amplified due to the COVID-19 pandemic. Reduced activity (relative to historic levels) in the AEC/O industry would diminish demand for some of ARC’s services and products, and it would therefore negatively affect revenues and have a material adverse effect on ARC's business, operating results and financial condition.
As part of the Company’s growth strategy, ARC intends to continue to offer and grow a variety of service offerings, some of which are relatively new to the Company. The success of the Company’s efforts will be affected by its ability to acquire new customers for the Company’s new service offerings, as well as to sell the new service offerings to existing customers. The Company’s inability to successfully market and execute these relatively new service offerings could significantly affect its business and reduce its long-term revenue, resulting in an adverse effect on its results of operations and financial condition.
2. Earnings per Share
The Company accounts for earnings per share in accordance with ASC 260, Earnings Per Share. Basic earnings per share is computed by dividing net income attributable to ARC by the weighted-average number of shares of common stock outstanding for the period. Diluted earnings per common share is computed similarly to basic earnings per share except that the denominator is increased to include the number of additional shares of common stock that would have been outstanding if shares subject to outstanding options and acquisition rights had been issued and if the additional shares were dilutive. Common share equivalents are excluded from the computation if their effect is anti-dilutive. For the three months ended March 31, 2021, 5.1 million shares of common stock were excluded from the calculation of diluted net income attributable to ARC per common share, because they were anti-dilutive. For the three months ended March 31, 2020, 5.3 million shares of common stock were excluded from the calculation of diluted net loss attributable to ARC per common share, because they were anti-dilutive. The Company's common share equivalents consist of stock options issued under the Company's stock plan.
Basic and diluted weighted average common shares outstanding were calculated as follows for the three months ended March 31, 2021 and 2020:
 
  Three Months Ended 
March 31,
  2021 2020
Weighted average common shares outstanding during the period—basic 42,264  43,676 
Effect of dilutive stock awards 370  135 
Weighted average common shares outstanding during the period—diluted 42,634  43,811 

13


3. Goodwill and Other Intangibles
Goodwill
In accordance with ASC 350, Intangibles - Goodwill and Other, the Company assesses goodwill for impairment annually as of September 30, and more frequently if events and circumstances indicate that goodwill might be impaired. At September 30, 2020, the Company performed its assessment and determined that goodwill was not impaired.
Goodwill impairment testing is performed at the reporting unit level. Goodwill is assigned to reporting units at the date the goodwill is initially recorded. Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or internally generated, are available to support the value of the goodwill. In 2017, the Company elected to early-adopt ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies subsequent goodwill measurement by eliminating step two from the goodwill impairment test.
Given the uncertainty regarding the ultimate financial impact of the COVID-19 pandemic and the ensuing economic recovery, there can be no assurance that the estimates and assumptions made for purposes of the Company’s goodwill impairment analysis in 2020 will prove to be accurate predictions of the future. If the Company’s assumptions, including forecasted EBITDA of certain reporting units, are not achieved, or its assumptions regarding disruptions caused by the pandemic, and its impact on the recovery from COVID-19 change, then the Company may be required to record goodwill impairment charges in future periods, whether in connection with the next annual impairment testing in the third quarter of 2021, or on an interim basis, if any such change constitutes a triggering event (as defined under ASC 350, Intangibles-Goodwill and Other) outside of the quarter when the Company regularly performs its annual goodwill impairment test. It is not possible at this time to determine if any such future impairment charge would result or, if it does, whether such charge would be material. There was no change in the carrying amount of goodwill from January 1, 2020 through March 31, 2021. 
See “Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations for further information regarding the process and assumptions used in the goodwill impairment analysis.
Long-lived and Other Intangible Assets
The Company periodically assesses potential impairments of its long-lived assets in accordance with the provisions of ASC 360, Accounting for the Impairment or Disposal of Long-lived Assets. An impairment review is performed whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. The Company groups its assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of the other assets and liabilities. The Company has determined that the lowest level for which identifiable cash flows are available is the regional level, which is the operating segment level.
Factors considered by the Company include, but are not limited to, significant underperformance relative to historical or projected operating results; significant changes in the manner of use of the acquired assets or the strategy for the overall business; and significant negative industry or economic trends. When the carrying value of a long-lived asset may not be recoverable based upon the existence of one or more of the above indicators of impairment, the Company estimates the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future undiscounted cash flows and eventual disposition is less than the carrying amount of the asset, the Company recognizes an impairment loss. An impairment loss is reflected as the amount by which the carrying amount of the asset exceeds the fair value of the asset, based on the fair value if available, or discounted cash flows, if fair value is not available. The Company assessed potential impairments of its long lived assets as of September 30, 2020 and concluded that there was no impairment.
Other intangible assets that have finite lives are amortized over their useful lives. Customer relationships are amortized using the accelerated method, based on customer attrition rates, over their estimated useful lives of 13 (weighted average) years.
The following table sets forth the Company’s other intangible assets resulting from business acquisitions as of March 31, 2021 and December 31, 2020 which continue to be amortized: 
14


  March 31, 2021 December 31, 2020
  Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Amortizable other intangible assets
Customer relationships $ 99,471  $ 99,302  $ 169  $ 99,425  $ 99,191  $ 234 
Trade names and trademarks 20,323  20,051  272  20,325  20,044  281 
$ 119,794  $ 119,353  $ 441  $ 119,750  $ 119,235  $ 515 
Estimated future amortization expense of other intangible assets for the remainder of the 2021 fiscal year, and each of the subsequent four fiscal years and thereafter, are as follows: 
2021 (excluding the three months ended March 31, 2021) $ 116 
2022 103 
2023 44 
2024 42 
2025 38 
Thereafter 98 
$ 441 
4. Income Taxes
On a quarterly basis, the Company estimates its effective tax rate for the full fiscal year and records a quarterly income tax provision based on the anticipated annual effective rate and the recognition of any discrete items within the quarter.
The Company recorded an income tax provision of $0.5 million in relation to pretax income of $1.1 million for the three months ended March 31, 2021, which resulted in an effective income tax rate of 44.8%, primarily impacted by certain stock-based compensation, change in valuation allowances against certain deferred tax assets and non-deductible expenses. The Company recorded an income tax provision of $1.1 million in relation to pretax income of $1.6 million for the three months ended March 31, 2020, which resulted in an effective income tax rate of 70.6% primarily driven by the shortfalls in certain stock-based compensation, valuations allowances against certain deferred tax assets, non-deductible expenses and the financial impact from COVID-19.
In accordance with ASC 740-10, Income Taxes, the Company evaluates the need for deferred tax asset valuation allowances based on a more likely than not standard. The ability to realize deferred tax assets depends on the ability to generate sufficient taxable income within the carryback or carryforward periods provided for in the tax law for each applicable tax jurisdiction. The Company considers the following possible sources of taxable income when assessing the realization of deferred tax assets:

Future reversals of existing taxable temporary differences;
Future taxable income exclusive of reversing temporary differences and carryforwards;
Taxable income in prior carryback years; and
Tax-planning strategies.
The assessment regarding whether a valuation allowance is required or should be adjusted also considers all available positive and negative evidence factors, including but not limited to:

Nature, frequency, and severity of recent losses;
Duration of statutory carryforward periods;
Historical experience with tax attributes expiring unused; and
Near- and medium-term financial outlook.
The Company utilizes a rolling three years of actual and current year anticipated results as the primary measure of cumulative income/losses in recent years, as adjusted for permanent differences. The evaluation of deferred tax assets requires judgment in assessing the likely future tax consequences of events that have been recognized in the Company's financial statements or tax returns and future profitability. The Company's accounting for deferred tax consequences represents its best estimate of those future events. Changes in the Company's current estimates, due to unanticipated events, such as the ultimate financial impact of and recovery from the COVID-19 pandemic or otherwise, could have a material effect on its financial condition and results of operations. The Company has a $2.1 million valuation allowance against certain deferred tax assets as of March 31, 2021.
15


Based on the Company’s current assessment, the remaining net deferred tax assets as of March 31, 2021 are considered more likely than not to be realized. The valuation allowance of $2.1 million may be increased or reduced as conditions change or if the Company is unable to implement certain available tax planning strategies. The realization of the Company’s net deferred tax assets ultimately depends on future taxable income, reversals of existing taxable temporary differences or through a loss carry back.
5. Long-Term Debt
Long-term debt consists of the following: 
March 31, 2021 December 31, 2020
Revolving Loans; 2.0% and 2.2% interest rate at March 31, 2021 and December 31, 2020
$ 50,000  $ 55,000 
Various finance leases; weighted average interest rate of 5.0% and 4.9% at March 31, 2021 and December 31, 2020; principal and interest payable monthly through December 2026
38,380  42,236 
88,380  97,236 
Less current portion (16,600) (17,557)
$ 71,780  $ 79,679 
Credit Agreement
On December 17, 2019, the Company amended its Credit Agreement (the "2019 Amendment") which was originally entered into on November 20, 2014 with Wells Fargo Bank, National Association, as administrative agent and the lenders party thereto (the "2014 Credit Agreement").
The 2019 Amendment increased the maximum aggregate principal amount of revolving loans under the 2014 Credit Agreement from $65 million to $80 million. Proceeds of a portion of the revolving loans available to be drawn under the 2014 Credit Agreement were used to fully repay the $49.5 million term loan that was outstanding under the 2014 Credit Agreement.
As of March 31, 2021, the Company's borrowing availability of revolving loans under the revolving loan commitment was $27.8 million, after deducting outstanding letters of credit of $2.2 million and outstanding revolving loans of $50.0 million.
Loans borrowed under the 2014 Credit Agreement bear interest, in the case of LIBOR rate loans, at a per annum rate equal to the applicable LIBOR rate, plus a margin ranging from 1.25% to 1.75%, based on the Company’s Total Leverage Ratio (as defined in the Credit Agreement). Loans borrowed under the 2014 Credit Agreement that are not LIBOR rate loans bear interest at a per annum rate equal to (i) the greatest of (A) the Federal Funds Rate plus 0.50%, (B) the one month LIBOR rate plus 1.00%, per annum, and (C) the rate of interest announced, from time to time, by Wells Fargo Bank, National Association as its “prime rate,” plus (ii) a margin ranging from 0.25% to 0.75%, based on the Company’s Total Leverage Ratio.
The Company pays certain recurring fees with respect to the 2014 Credit Agreement, including administration fees to the administrative agent.
Subject to certain exceptions, including, in certain circumstances, reinvestment rights, the loans extended under the Credit Agreement are subject to customary mandatory prepayment provisions with respect to: the net proceeds from certain asset sales; the net proceeds from certain issuances or incurrences of debt (other than debt permitted to be incurred under the terms of the 2014 Credit Agreement); the net proceeds from certain issuances of equity securities; and net proceeds of certain insurance recoveries and condemnation events of the Company.
The 2014 Credit Agreement contains customary representations and warranties, subject to limitations and exceptions, and customary covenants restricting the ability (subject to various exceptions) of the Company and its subsidiaries to: incur additional indebtedness (including guarantee obligations); incur liens; sell certain property or assets; engage in mergers or other fundamental changes; consummate acquisitions; make investments; pay dividends, other distributions or repurchase equity interest of the Company or its subsidiaries; change the nature of their business; prepay or amend certain indebtedness; engage in certain transactions with affiliates; amend their organizational documents; or enter into certain restrictive agreements. In addition, the 2014 Credit Agreement contains financial covenants which requires the Company to maintain (i) at all times, a Total Leverage Ratio in an amount not to exceed 2.75 to 1.00; and (ii) a Fixed Charge Coverage Ratio (as defined in the 2014 Credit Agreement), as of the last day of each fiscal quarter, an amount not less than 1.15 to 1.00. We were in compliance with our covenants as of March 31, 2021.
16


The 2019 Amendment also modified certain tests the Company is required to meet in order to pay dividends, repurchase stock and make other restricted payments. In order to make such payments which are permitted subject to certain customary conditions set forth in the 2014 Credit Agreement, the amount of all such payments will be limited to $15 million during any twelve-month period. Pursuant to the 2019 Amendment, when calculating the fixed charge coverage ratio, the Company may exclude up to $10 million of such restricted payments that would otherwise constitute fixed charges in any twelve-month period.
The 2019 Amendment allows for payment of dividends. In February 2021, the Company's board of directors declared a quarterly cash dividend of $0.02 per share that is payable on May 31, 2021 to shareholders of record as of April 30, 2021. Accordingly, the Company recorded a dividend payable of $847 thousand within accrued expenses as of March 31, 2021.
The 2014 Credit Agreement contains customary events of default, including with respect to: nonpayment of principal, interest, fees or other amounts; failure to perform or observe covenants; material inaccuracy of a representation or warranty when made; cross-default to other material indebtedness; bankruptcy, insolvency and dissolution events; inability to pay debts; monetary judgment defaults; actual or asserted invalidity or impairment of any definitive loan documentation, repudiation of guaranties or subordination terms; certain ERISA related events; or a change of control.
The obligations of the Company’s subsidiary that is the borrower under the 2014 Credit Agreement are guaranteed by the Company and each of its other United States subsidiaries. The 2014 Credit Agreement and any interest rate protection and other hedging arrangements provided by any lender party to the credit facility or any affiliate of such a lender are secured on a first priority basis by a perfected security interest in substantially all of the borrower’s, the Company’s and each guarantor’s assets (subject to certain exceptions).
On April 22, 2021, the Company replaced its 2014 Credit Agreement. See Note 9, "Subsequent Events" for further information.
6. Commitments and Contingencies
Operating Leases. The Company leases machinery, equipment, and office and operational facilities under non-cancelable operating lease agreements used in the ordinary course of business. Certain lease agreements for the Company's facilities generally contain renewal options and provide for annual increases in rent based on the local Consumer Price Index. Refer to Note 7, Leasing, on our Annual Report on Form 10-K for the year ended December 31, 2020 a schedule of the Company's future minimum operating lease payments.
Legal Proceedings. The Company is involved, and will continue to be involved, in legal proceedings arising out of the conduct of our business, including commercial and employment-related lawsuits. Some of these lawsuits purport or may be determined to be class actions and seek substantial damages, and some may remain unresolved for several years. The Company establishes accruals for specific legal proceedings when it is considered probable that a loss has been incurred and the amount of the loss can be reasonably estimated. The Company's evaluation of whether a loss is reasonably probable is based on our assessment and consultation with legal counsel regarding the ultimate outcome of the matter. As of March 31, 2021, the Company has accrued for the potential impact of loss contingencies that are probable and reasonably estimable. The Company does not currently believe that the ultimate resolution of any of these matters will have a material adverse effect on its results of operations, financial condition, or cash flows. However, the results of these matters cannot be predicted with certainty, and an unfavorable resolution of one or more of these matters could have a material adverse effect on the Company's results of operations, financial condition, or cash flows.
7. Stock-Based Compensation
The Company's 2014 Stock Incentive Plan provides for the grant of incentive and non-statutory stock options, stock appreciation rights, restricted stock, restricted stock units, stock bonuses and other forms of awards granted or denominated in the Company's common stock or units of the Company's common stock, as well as cash bonus awards, to employees, directors and consultants of the Company. On April 26, 2018, the Company's shareholders approved an amendment to the Company's 2014 Stock Incentive Plan to increase the aggregate number of shares authorized for issuance under such plan by 3.5 million shares. As of March 31, 2021, 1.0 million shares remained available for issuance under the 2014 Stock Incentive Plan. On April 29, 2021, the Company's shareholders approved the Company's 2021 Incentive Plan, replacing the 2014 Stock Incentive Plan, as amended, which is the only equity incentive plan under which the Company can currently grant equity incentive awards. The 2021 Incentive Plan increases the aggregate number of equity incentive shares authorized for issuance by 3.5 million shares.
Stock options granted under the Company's stock plan generally expire no later than ten years from the date of grant. Options generally vest and become fully exercisable over a period of three to four years from date of award, except that options granted to non-employee directors may vest over a shorter time period. The exercise price of options is equal to at least 100% of the fair
17


market value of the Company’s common stock on the date of grant. The Company allows for cashless exercises of vested outstanding options.
During the three months ended March 31, 2021, the Company granted options to acquire a total of 0.6 million shares of the Company's common stock to certain key employees with an exercise price equal to the fair market value of the Company’s common stock on the date of grant. During the three months ended March 31, 2021, the Company did not grant any shares of restricted stock awards.
Stock-based compensation expense was $0.3 million for the three months ended March 31, 2021, compared to stock-based compensation expense of $0.5 million for the three months ended March 31, 2020.
As of March 31, 2021, total unrecognized compensation cost related to unvested stock-based payments totaled $1.5 million and is expected to be recognized over a weighted-average period of approximately 2.0 years.
8. Fair Value Measurements
In accordance with ASC 820, Fair Value Measurement, the Company has categorized its assets and liabilities that are measured at fair value into a three-level fair value hierarchy. If the inputs used to measure fair value fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement. The three levels of the hierarchy are defined as follows:
Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.
As of March 31, 2021, the Company's assets and liabilities that are measured at fair value were not material.
Fair Values of Financial Instruments. The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments for disclosure purposes:
Cash equivalents: Cash equivalents are time deposits with maturity of three months or less when purchased, which are highly liquid and readily convertible to cash. Cash equivalents reported in the Company’s interim Condensed Consolidated Balance Sheet were $13.5 million as of March 31, 2021 and $13.2 million as of December 31, 2020 and are carried at cost and approximate fair value due to the relatively short period to maturity of these instruments.
Short and long-term debt: The carrying amount of the Company’s finance leases reported in the interim Condensed Consolidated Balance Sheets approximates fair value based on the Company’s current incremental borrowing rate for similar types of borrowing arrangements. The carrying amount reported in the Company’s interim Condensed Consolidated Balance Sheet as of March 31, 2021 for borrowings under its 2014 Credit Agreement is $50.0 million. The Company has determined, utilizing observable market quotes, that the fair value of borrowings under its 2014 Credit Agreement is $50.0 million as of March 31, 2021.
18


9. Subsequent Events
On April 22, 2021, the Company entered into a Credit Agreement with U.S. Bank National Association, as administrative agent and the lender party thereto (the "2021 Credit Agreement"). The 2021 Credit Agreement provides for the extension of revolving loans in an aggregate principal amount not to exceed $70 million and replaces the 2014 Credit Agreement dated as of November 20, 2014, as amended. The 2021 Credit Agreement features terms similar to the 2014 Credit Agreement, including the ability to use excess cash of up to $15 million per year for restricted payments such as share repurchases and dividends. The obligation under the 2021 Credit Agreement matures on April 22, 2026.
Loans borrowed under the 2021 Credit Agreement bear interest, in the case of LIBOR loans, at a per annum rate equal to the applicable LIBOR (which rate shall not be less than zero), plus a margin ranging from 1.25% to 1.75%, based on the Company’s Total Leverage Ratio (as defined in the 2021 Credit Agreement). Loans borrowed under the 2021 Credit Agreement that are not LIBOR loans bear interest at a per annum rate (which rate shall not be less than zero) equal to (i) the greatest of (A) the Federal Funds Rate plus 0.50%, (B) the one month LIBOR plus 1.00% per annum, and (C) the rate of interest announced, from time to time, by U.S. Bank National Association as its “prime rate,” plus (ii) a margin ranging from 0.25% to 0.75%, based on the Company’s Total Leverage Ratio.

19


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our interim Condensed Consolidated Financial Statements and the related notes and other financial information appearing elsewhere in this report, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2020 and this Quarterly Report on Form 10-Q for the quarter ended March 31, 2021.
Business Summary
ARC Document Solutions, Inc. (“ARC Document Solutions,” “ARC,” “we,” “us,” or “our”) is a leading document solutions provider to design, engineering, construction, and facilities management professionals, while also providing document solutions to businesses of all types.
Our customers need us to manage the scale, complexity and workflow of their documents. We help them reduce their costs and increase their efficiency by improving their access and control over documents, and we offer a wide variety of ways to access, distribute, collaborate on, and store documents.
Each of our service offerings is enabled through a suite of supporting proprietary technology and a wide variety of value-added services. We have categorized our service and product offerings to report distinct sales recognized from:

Construction Document and Information Management (CDIM), which consists of professional services to manage and distribute documents and information related to construction projects and related project-based businesses outside of the architectural, engineering and construction (AEC) industry. Our reconfiguration of the Company's sales and marketing functions in late-2019, as well as customer needs driven by the COVID-19 pandemic, have led to the significant expansion of the non-AEC segment of our CDIM business, primarily through the provision of color graphics and signage. CDIM sales also include software services such as SKYSITE®, our cloud-based project communication application, as well as providing document and information management services that are often technology-enabled. The bulk of our current revenue from CDIM comes from large-format and small-format printing services we provide in both black and white and in color.

Managed Print Services (MPS), which consists of placement, management, and optimization of print and imaging equipment in our customers' offices, job sites, and other facilities. MPS relieves our customers of the burden of owning and managing print devices and print networks, and shifts their costs to a “per-use” basis. MPS is supported by our proprietary technology, Abacus, which allows our customers to capture, control, manage, print, and account for their documents. MPS sales represent recurring, contracted revenue in which we are paid a single cost per unit of material used, often referred to as a “click charge.” MPS sales are driven by the ongoing print needs of our customers at their facilities. Because the recent pandemic has forced a large number of our clients to direct their employees to work from home, MPS volume and sales have declined over the past year.

Archiving and Information Management (AIM), which consists of software and professional services to facilitate the capture, management, access and retrieval of documents and information that have been produced in the past. AIM includes our SKYSITE software application to organize, search and retrieve documents, as well as the provision of services that include the capture and conversion of hardcopy and electronic documents, and their cloud-based storage and maintenance. A growing portion of our sales are being driven by our ability to handle protected health information (PHI) as our regional scanning centers are HIPAA-compliant. AIM sales are driven by the need to leverage past intellectual property for present or future use, facilitate cost savings and efficiency improvements over current hardcopy and digital storage methods, as well as comply with regulatory and records retention requirements. Remote access to digital documents driven by work-from-home conditions created by the recent pandemic have also contributed to recent sales in this area of our business.

Equipment and Supplies, which consists of reselling printing, imaging, and related equipment to customers primarily to architectural, engineering and construction firms.

We have expanded our business beyond the services we traditionally provided to the architectural, engineering, construction, and building owner/operator (AEC/O) industry in the past and are currently focused on growing MPS, AIM and CDIM, as we believe the mix of services demanded by the AEC/O industry continues to shift toward document management at customer locations and in the cloud, and away from its historical emphasis on large-format construction drawings produced “offsite” in our service centers.
20


We deliver our services via the cloud, through a nationwide network of service centers, regionally-based technical specialists, locally-based sales executives, and a national/regional sales force known as Global Solutions.
Based on our analysis of our operating results, we estimate that sales to the AEC/O industry accounted for approximately 67% of our net sales for the three months ended March 31, 2021, with the remaining 33% consisting of sales to businesses outside of the AEC/O industry.
Costs and Expenses
Our cost of sales consists primarily of materials (paper, toner, and other consumables), labor, and indirect costs, which consist primarily of equipment expenses related to our MPS contracts and our service center facilities. Facilities and equipment expenses include maintenance, repairs, rental payments, insurance, and depreciation. Paper is the largest component of our material cost; however, paper pricing typically does not significantly affect our operating margins due, in part, to our efforts to pass increased costs on to our customers. We closely monitor material cost as a percentage of net sales to measure volume and waste. We also track labor utilization, or net sales per employee, to measure productivity and determine staffing levels.
We maintain low levels of inventory. Historically, our capital expenditure requirements have varied due to the cost and availability of finance lease lines of credit. Our relationships with credit providers have provided attractive lease rates over the recent years, and as a result, we chose to lease rather than purchase equipment in a significant portion of our engagements.
Research and development costs consist mainly of the salaries, leased building space, and computer equipment that comprises our data storage and development centers in San Ramon, California, and Kolkata, India. Such costs are primarily recorded to cost of sales.
21


COVID-19 Pandemic
The global spread of the novel coronavirus (COVID-19) has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets. The impact of this pandemic has created significant prolonged uncertainty in the global economy and has negatively affected our business, employees, suppliers, and customers. Our sales during the first quarter of 2021 were negatively impacted by the COVID-19 pandemic. The duration of these trends and the magnitude of such impacts cannot be precisely estimated at this time, as they are affected by a number of factors, many of which are outside management’s control, including those presented in "Part I - Item 1A. Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2020.
To adapt to the uncertainty and shifting demands brought on by the COVID-19 pandemic, we transformed our business during the second quarter of 2020 into a smaller but stronger company, offering a range of products beyond the construction vertical and our historical print segments, and reconfiguring our operations and cost structure to fit the needs of our customers in the current market. We have repositioned the Company based on the belief that there is potential for new growth and similar, if not better margins, barring any unforeseen changes that may arise due to the COVID-19 pandemic or otherwise.
Sustained adverse impacts to us, as well as to certain of our suppliers, dealers or customers may also affect our future valuation of certain assets and therefore may increase the likelihood of an impairment charge, write-off, or reserve associated with such assets, including goodwill, intangible assets, property and equipment, inventories, accounts receivable, tax assets, and other assets.
We believe that we have taken appropriate measures to mitigate the impacts of the COVID-19 pandemic as it relates to the health and safety of our employees and customers. As the situation continues to persist, we will continue to analyze additional mitigation measures that may be needed to preserve the health and safety of our workforce and our customers, and the ongoing continuity of our business operations. Those measures might include temporarily suspending operations at select service centers, modifying workspaces, continuing social distancing protocols, incorporating additional personal protective equipment and/or incorporating health screening policies at our facilities, or such other industry best practices needed to comply with applicable government orders and to continue to maintain a healthy and safe environment for our employees during the COVID-19 pandemic.
Given the ongoing economic uncertainty resulting from the COVID-19 pandemic, we have taken actions to improve our current liquidity position, including reducing working capital, postponing capital expenditures, reducing operating costs, initiating workforce reductions and salary reductions, and substantially reducing discretionary spending.
We are the largest document services provider to industries that build and maintain our country's infrastructure and thus considered an essential business. We also serve the housing, healthcare, and technology industries, and have been able to keep almost all of our service centers open during the pandemic, though at reduced volumes, in order to fulfill our customers' needs. However, there is uncertainty around the extent and duration of interruptions to our business related to the COVID-19 pandemic, as well as the pandemic's overall impact on the U.S. economy, on our clients' ongoing business operations, and on our results of operations and financial condition. While our management team is actively monitoring the impacts of the COVID-19 pandemic, and may take further actions altering our business operations that we determine are in the best interests of our employees and clients or as required by federal, state, or local authorities, the full impact of the COVID-19 pandemic on the results of our operations, financial condition, or liquidity for the remainder of fiscal year 2021 and beyond cannot be estimated at this point. The following discussions are subject to the future effects of the COVID-19 pandemic on our ongoing business operations.

22


Results of Operations
 
  Three Months Ended 
March 31,
Increase (decrease)
(In millions, except percentages)
2021(2)
2020(2)
$ %
CDIM $ 37.4  $ 49.2  $ (11.7) (23.9) %
MPS 17.3  27.3  (10.0) (36.5) %
AIM 3.0  3.6  (0.6) (16.0) %
Equipment and supplies sales 3.9  8.4  (4.4) (52.9) %
Total net sales $ 61.7  $ 88.4  $ (26.7) (30.2) %
Gross profit $ 18.8  $ 27.6  $ (8.8) (31.9) %
Selling, general and administrative expenses $ 17.0  $ 24.3  $ (7.3) (30.2) %
Amortization of intangible assets $ 0.1  $ 0.6  $ (0.5) (87.4) %
Interest expense, net $ 0.6  $ 1.1  $ (0.5) (44.1) %
Income tax provision $ 0.5  $ 1.1  $ (0.6) (55.2) %
Net income attributable to ARC $ 0.8  $ 0.7  $ 0.1  15.5  %
Non-GAAP (1)
Adjusted net income attributable to ARC (1)
$ 0.9  $ 1.2  $ (0.3) (22.2) %
EBITDA (1)
$ 8.4  $ 10.9  $ (2.5) (22.7) %
Adjusted EBITDA (1)
$ 8.8  $ 11.4  $ (2.6) (23.1) %
 
(1)See "Non-GAAP Financial Measures" on pg. 25 for additional information.
(2)Column does not foot due to rounding.

The following table provides information on the percentages of certain items of selected financial data as a percentage of net sales for the periods indicated:
  As Percentage of Net Sales
Three Months Ended March 31,
  2021
2020(1)
Net Sales 100.0  % 100.0  %
Cost of sales 69.6  68.8 
Gross profit 30.4  31.2 
Selling, general and administrative expenses 27.5  27.5 
Amortization of intangible assets 0.1  0.7 
Income from operations 2.8  3.0 
Interest expense, net 1.0  1.3 
Income before income tax provision 1.8  1.8 
Income tax provision 0.8  1.3 
Net income 1.0  0.5 
Loss attributable to the noncontrolling interest 0.3  0.2 
Net income attributable to ARC 1.3  % 0.8  %
Non-GAAP (2)
EBITDA (2)
13.7  % 12.3  %
Adjusted EBITDA (2)
14.2  % 12.9  %
 
(1)Column does not foot due to rounding.
(2)See "Non-GAAP Financial Measures" on pg. 25 for additional information.
23


Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020
Net Sales
Net sales for the three months ended March 31, 2021 decreased 30.2%, compared to three months ended March 31, 2020 due to the negative impact of the COVID-19 pandemic on revenues from all of our service offerings.
CDIM. Year-over-year sales of CDIM services decreased $11.7 million, or 23.9%, for the three months ended March 31, 2021, due to the impact of the COVID-19 pandemic. CDIM services represented 61% of total net sales for the three months ended March 31, 2021, compared to 56% for the three months ended March 31, 2020. The impact of the pandemic on CDIM was not as pronounced as other parts of our business due to the expansion of products and services beyond the construction vertical and our historical print segments that resulted from the reconfiguration of our sales and marketing functions in 2019 and 2020.
MPS. Year-over-year sales of MPS services for the three months ended March 31, 2021 decreased $10.0 million, or 36.5%. The decline in MPS sales was driven primarily by office employees in the U.S. and Canada who followed directives to work from home, significantly reducing the volume of printing done in our customers' offices. MPS engagements on construction job sites continued to operate, and many customers have required minimums that helped mitigate the drop in print volumes. MPS sales represented approximately 28% of total net sales for the three months ended March 31, 2021, compared to 31% for the three months ended March 31, 2020.
The number of MPS locations have declined year over year to approximately 10,750 as of March 31, 2021, representing a net decrease of approximately 200 locations compared to March 31, 2020.
AIM. Year-over-year sales of AIM services decreased $0.6 million, or 16.0%, for the three months ended March 31, 2021. The decrease in sales of our AIM services was primarily due to the lack of office activity resulting from the COVID-19 pandemic, which caused a reduction in scanning opportunities. We continue to drive an expansion of our addressable market for AIM services by targeting building owners and facility managers that require on-demand access to their legacy documents to operate their assets efficiently. We believe that, with the expansion of our addressable market and the desire of our customers to have digital access to documents, our AIM services will grow in the future.
Equipment and Supplies Sales. Year-over-year sales of Equipment and Supplies decreased $4.4 million, or 52.9%, for the three months ended March 31, 2021. The decline in Equipment and Supplies sales was primarily driven by the slowdown in China related to the COVID-19 pandemic, which decreased sales from UNIS Document Solutions Co. Ltd (“UDS”), our Chinese joint venture. Equipment and Supplies sales at UDS were $0.8 million for the three months ended March 31, 2021, compared to $3.4 million for the three months ended March 31, 2020. Traditionally, our customers in China have exhibited a preference for owning print and imaging related equipment as opposed to using equipment through onsite services arrangements. Equipment and Supplies sales continued to decline in the U.S. for the three months ended March 31, 2021, in part due to the COVID-19 pandemic. We do not anticipate growth in Equipment and Supplies sales as we continue to place more focus on growing MPS sales and converting sales contracts to MPS agreements.
Gross Profit
During the three months ended March 31, 2021, gross profit decreased to $18.8 million and gross margin decreased to 30.4%, compared to $27.6 million, or 31.2% during the three months ended March 31, 2020, on a sales decline of $26.7 million.
Despite the significant drop in net sales due to the COVID-19 pandemic, gross margin for the three months ended March 31, 2021, remained above 30%. Gross margins were aided by the drop in low margin Equipment and Supplies sales from UDS and cost savings initiated in response to the ongoing COVID-19 pandemic. During the second quarter of 2020, we began to reconfigure our operating structure and costs to serve new customer needs and to reflect the reduction in our revenues as a result of the COVID-19 pandemic.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $7.3 million, or 30.2%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The reduction was due to cost savings initiated in response to the current COVID-19 pandemic that included headcount reductions, suspension of business travel, reduced consulting expenses, reduced bonuses and commissions, and the elimination of discretionary spending.
24


Amortization of Intangibles
Amortization of intangibles of $0.1 million for the three months ended March 31, 2021, decreased by $0.5 million compared to the three months ended March 31, 2020, due to the completed amortization of certain customer relationship intangibles related to historical acquisitions.
Interest Expense, Net
Net interest expense of $0.6 million for the three months ended March 31, 2021, decreased compared to the three months ended March 31, 2020 due to the continued pay down of our long-term debt, decrease in LIBOR, and decrease in bank debt interest spread due to the improvement in our leverage ratio.
Income Taxes
We recorded an income tax provision of $0.5 million in relation to pretax income of $1.1 million for the three months ended March 31, 2021, which resulted in an effective income tax rate of 44.8%. Our effective income tax rate for the three months ended March 31, 2021 was primarily impacted by certain stock-based compensation, a change in valuation allowances against certain deferred tax assets and non-deductible expenses. Excluding the impact of the change in valuation allowances, certain nondeductible stock-based compensation, and other discrete tax items, our effective income tax rate would have been 28.9%, for the three months ended March 31, 2021.
By comparison, we recorded an income tax provision of $1.1 million in relation to pretax income of $1.6 million for the three months ended March 31, 2020, which resulted in an effective income tax rate of 70.6%. The increase in our effective income tax rate for the three months ended March 31, 2020 was primarily due to shortfalls in certain stock-based compensation, valuations allowances against certain deferred tax assets, non-deductible expenses and the financial impact from COVID-19. Excluding the impact of valuation allowances, certain nondeductible stock-based compensation, and other discrete tax items, our effective income tax rate would have been 33.4% for the three months ended March 31, 2020.
We have a $2.1 million valuation allowance against certain deferred tax assets as of March 31, 2021.
Noncontrolling Interest
Net loss attributable to noncontrolling interest represents 35% of the income/loss of UDS and its subsidiaries, which together comprise our Chinese joint venture operations.
Net Income Attributable to ARC
Net income attributable to ARC increased to $0.8 million during the three months ended March 31, 2021. The increase in net income attributable to ARC compared to the prior year period for the three months ending March 31, 2020 was driven by the decrease in income taxes.
EBITDA
EBITDA margin increased to 13.7% for the three months ended March 31, 2021, from 12.3% for the same period in 2020. Excluding the effect of stock-based compensation, adjusted EBITDA margin increased to 14.2% during the three months ended March 31, 2021, as compared to 12.9% for the same period in 2020. The increase in adjusted EBITDA margin for the three months ended March 31, 2021 was primarily due to the significant decline in selling, general and administrative expenses, as noted above.
Impact of Inflation
We do not believe inflation has had a significant effect on our operations. Price increases for raw materials, such as paper and fuel charges, typically have been, and we expect will continue to be, passed on to customers in the ordinary course of business.
Non-GAAP Financial Measures
EBITDA and related ratios presented in this report are supplemental measures of our performance that are not required by or presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These measures are not measurements of our financial performance under GAAP and should not be considered as alternatives to net income, income from operations, or any other performance measures derived in accordance with GAAP or as an alternative to
25


cash flows from operating, investing or financing activities as a measure of our liquidity.
EBITDA represents net income before interest, taxes, depreciation and amortization. EBITDA margin is a non-GAAP measure calculated by dividing EBITDA by net sales.
We have presented EBITDA and related ratios because we consider them important supplemental measures of our performance and liquidity. We believe investors may also find these measures meaningful, given how our management makes use of them. The following is a discussion of our use of these measures.
We use EBITDA to measure and compare the performance of our operating segments. Our operating segments’ financial performance includes all of the operating activities except debt and taxation which are managed at the corporate level for U.S. operating segments. We use EBITDA to compare the performance of our operating segments and to measure performance for determining consolidated-level compensation. In addition, we use EBITDA to evaluate potential acquisitions and potential capital expenditures.
EBITDA and related ratios have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are as follows:
They do not reflect our cash expenditures, or future requirements for capital expenditures and contractual commitments;
They do not reflect changes in, or cash requirements for, our working capital needs;
They do not reflect the significant interest expense, or the cash requirements necessary, to service interest or principal payments on our debt;
Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements; and
Other companies, including companies in our industry, may calculate these measures differently than we do, limiting their usefulness as comparative measures.
Because of these limitations, EBITDA and related ratios should not be considered as measures of discretionary cash available to us to invest in business growth or to reduce our indebtedness. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA and related ratios only as supplements.
Our presentation of adjusted net income and adjusted EBITDA over certain periods is an attempt to provide meaningful comparisons to our historical performance for our existing and future investors. The unprecedented changes in our end markets over the past several years have required us to take measures that are unique in our history and specific to individual circumstances. Comparisons inclusive of these actions make normal financial and other performance patterns difficult to discern under a strict GAAP presentation. Each non-GAAP presentation, however, is explained in detail in the reconciliation tables below.
Specifically, we have presented adjusted net income attributable to ARC and adjusted earnings per share attributable to ARC shareholders for the three months ended March 31, 2021 and 2020 to reflect the exclusion of changes in the valuation allowances related to certain deferred tax assets and other discrete tax items. This presentation facilitates a meaningful comparison of our operating results for the three months ended March 31, 2021 and 2020. We believe these charges were the result of items which are not indicative of our actual operating performance.
We have presented adjusted EBITDA for the three months ended March 31, 2021 and 2020 to exclude stock-based compensation expense. The adjustment to exclude stock-based compensation expense to EBITDA is consistent with the definition of adjusted EBITDA in our 2014/2021 Credit Agreement; therefore, we believe this information is useful to investors in assessing our financial performance.
26


The following is a reconciliation of cash flows provided by operating activities to EBITDA:
 
  Three Months Ended 
March 31,
(In thousands) 2021 2020
Cash flows provided by operating activities $ 5,375  $ 2,774 
Changes in operating assets and liabilities 2,494  7,501 
Non-cash expenses, including depreciation and amortization (7,257) (9,813)
Income tax provision 496  1,107 
Interest expense, net 620  1,109 
Loss attributable to the noncontrolling interest 177  221 
Depreciation and amortization 6,524  8,004 
EBITDA $ 8,429  $ 10,903 
The following is a reconciliation of net income attributable to ARC Document Solutions, Inc. to EBITDA and adjusted EBITDA:
  Three Months Ended 
March 31,
(In thousands) 2021 2020
Net income attributable to ARC Document Solutions, Inc. $ 789  $ 683 
Interest expense, net 620  1,109 
Income tax provision 496  1,107 
Depreciation and amortization 6,524  8,004 
EBITDA 8,429  10,903 
Stock-based compensation 339  504 
Adjusted EBITDA $ 8,768  $ 11,407 

The following is a reconciliation of net income margin attributable to ARC Document Solutions, Inc. to EBITDA margin and adjusted EBITDA margin:
  Three Months Ended 
March 31,
2021
2020(1)
Net income margin attributable to ARC Document Solutions, Inc. 1.3  % 0.8  %
Interest expense, net 1.0  1.3 
Income tax provision 0.8  1.3 
Depreciation and amortization 10.6  9.1 
EBITDA margin 13.7  12.3 
Stock-based compensation 0.5  0.6 
Adjusted EBITDA margin 14.2  % 12.9  %
 
(1)Column does not foot due to rounding.

27


The following is a reconciliation of net income attributable to ARC Document Solutions, Inc. to adjusted net income attributable to ARC Document Solutions, Inc.:
  Three Months Ended 
March 31,
(In thousands, except per share amounts) 2021 2020
Net income attributable to ARC Document Solutions, Inc. $ 789  $ 683 
Deferred tax valuation allowance and other discrete tax items 131  499 
Adjusted net income attributable to ARC Document Solutions, Inc. $ 920  $ 1,182 
Actual:
Earnings per share attributable to ARC Document Solutions, Inc. shareholders:
Basic $ 0.02  $ 0.02 
Diluted $ 0.02  $ 0.02 
Weighted average common shares outstanding:
Basic 42,264  43,676 
Diluted 42,634  43,811 
Adjusted:
Earnings per share attributable to ARC Document Solutions, Inc. shareholders:
Basic $ 0.02  $ 0.03 
Diluted $ 0.02  $ 0.03 
Weighted average common shares outstanding:
Basic 42,264  43,676 
Diluted 42,634  43,811 

Liquidity and Capital Resources
Our principal sources of cash have been cash flows from operations and borrowings under our debt and lease agreements. Our recent historical uses of cash have been for ongoing operations, payment of principal and interest on outstanding debt obligations, capital expenditures and stock repurchases.
Total cash and cash equivalents as of March 31, 2021 was $49.5 million. Of this amount, $15.9 million was held in foreign countries, with $14.6 million held in China. Repatriation of some of our cash and cash equivalents in foreign countries could be subject to delay for local country approvals and could have potential adverse tax consequences. As a result of holding cash and cash equivalents outside of the U.S., our financial flexibility may be reduced.
Supplemental information pertaining to our historical sources and uses of cash is presented as follows and should be read in conjunction with our interim Condensed Consolidated Statements of Cash Flows and notes thereto included elsewhere in this report.
 
  Three Months Ended 
March 31,
(In thousands) 2021 2020
Net cash provided by operating activities $ 5,375  $ 2,774 
Net cash used in investing activities $ (437) $ (1,048)
Net cash (used in) provided by financing activities $ (10,381) $ 7,543 


28


Operating Activities
Cash flows from operations are primarily driven by sales and net profit generated from these sales, excluding non-cash charges.
The increase in cash flows from operations during the three months ended March 31, 2021, compared to the same period in 2020, resulted from improved management of operating assets and liabilities. Days sales outstanding (“DSO”) was 54 days as of March 31, 2021 and as of March 31, 2020. We are closely managing cash collections which have remained consistent since the outbreak of the COVID-19 pandemic.
Investing Activities
Net cash used in investing activities was primarily related to capital expenditures. We incurred capital expenditures totaling $0.6 million and $1.1 million for the three months ended March 31, 2021 and 2020, respectively. The decrease in capital expenditures is driven primarily by a concerted effort to reduce and closely manage capital expenditures during the COVID-19 pandemic.
As we continue to foster our relationships with credit providers and obtain attractive lease rates, we have increasingly chosen to lease rather than purchase equipment.
Financing Activities
Net cash of $10.4 million used in financing activities during the three months ended March 31, 2021 primarily relates to payments on our revolver debt agreement, finance leases and dividends.
Our cash position, working capital, and debt obligations as of March 31, 2021 and December 31, 2020 are shown below and should be read in conjunction with our interim Condensed Consolidated Balance Sheets and related notes contained elsewhere in this report. 
(In thousands) March 31, 2021 December 31, 2020
Cash and cash equivalents $ 49,460  $ 54,950 
Working capital $ 30,369  $ 32,500 
Borrowings from revolving credit facility $ 50,000  $ 55,000 
Other debt obligations 38,380  42,236 
Total debt obligations $ 88,380  $ 97,236 
 
The decrease of $2.1 million in working capital was primarily driven by the decrease in cash due to a $5 million pay down of the revolving credit facility during the first quarter of 2021. To manage our working capital, we chiefly focus on our DSO and monitor the aging of our accounts receivable, as receivables are the most significant element of our working capital.
We believe that our current cash and cash equivalents balance of $49.5 million, combined with availability under our revolving credit facility, availability under our equipment lease lines, and cash flows provided by operations should be sufficient to cover the next twelve months working capital needs, leasing requirements consisting of scheduled principal and interest payments, and planned capital expenditures, to the extent such items are known or are reasonably determinable based on current business and market conditions. However, as the impact of the COVID-19 pandemic on the economy and our operations evolves, we will continue to assess our liquidity needs. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets. An extended period of global supply chain and economic disruption could materially affect our business, results of operations, ability to meet debt covenants, access to sources of liquidity and financial condition. Given the economic uncertainty as a result of the COVID-19 pandemic, we have taken actions to improve our current liquidity position by reducing working capital, postponing capital expenditures, reducing operating costs, initiating workforce reductions and salary reductions, and substantially reducing discretionary spending. See “Debt Obligations” section for further information related to our revolving credit facility.
We generate the majority of our revenue from sales of services and products to the AEC/O industry. As a result, our operating results and financial condition can be significantly affected by economic factors that influence the AEC/O industry, including the COVID-19 pandemic which has already reduced non-residential and residential construction spending. Additionally, a general economic downturn may adversely affect the ability of our customers and suppliers to obtain financing for significant operations and purchases, and to perform their obligations under their agreements with us. We believe that credit constraints in
29


the financial markets could result in a decrease in, or cancellation of, existing business, could limit new business, and could negatively affect our ability to collect our accounts receivable on a timely basis.
We have not been actively seeking growth through acquisition, nor do we intend to in the near future.
Debt Obligations
Credit Agreement
On December 17, 2019, we entered into an amendment (the "2019 Amendment") to our Credit Agreement, dated as of November 20, 2014 (the "2014 Credit Agreement") with Wells Fargo Bank.
The 2019 Amendment increased the maximum aggregate principal amount of revolving loans under the 2014 Credit Agreement from $65 million to $80 million. Proceeds of a portion of the revolving loans drawn under the 2014 Credit Agreement were used to fully repay the $49.5 million term loan that was then outstanding under the 2014 Credit Agreement (the "Term Loan").
The 2019 Amendment also modified certain tests we are required to meet in order to pay dividends, repurchase stock and make other restricted payments. In order to make such payments which are permitted subject to certain customary conditions set forth in the 2014 Credit Agreement, the amount of all such payments will be limited to $15 million during any twelve-month period. Per the 2019 Amendment, when calculating the fixed charge coverage ratio, we may exclude up to $10 million of such restricted payments that would otherwise constitute fixed charges in any twelve-month period.
As of March 31, 2021, our borrowing availability under the revolving loan commitment was $27.8 million, after deducting outstanding letters of credit of $2.2 million and outstanding revolving loans of $50.0 million.
Loans borrowed under the 2014 Credit Agreement bear interest, in the case of LIBOR rate loans, at a per annum rate equal to the applicable LIBOR rate, plus a margin ranging from 1.25% to 1.75%, based on our Total Leverage Ratio (as defined in the 2014 Credit Agreement). Loans borrowed under the 2014 Credit Agreement that are not LIBOR rate loans bear interest at a per annum rate equal to (i) the greatest of (A) the Federal Funds Rate plus 0.50%, (B) the one month LIBOR rate plus 1.00%, per annum, and (C) the rate of interest announced, from time to time, by Wells Fargo Bank, National Association as its “prime rate,” plus (ii) a margin ranging from 0.25% to 0.75%, based on our Total Leverage Ratio. We pay certain recurring fees with respect to the 2014 Credit Agreement, including administration fees to the administrative agent.
Subject to certain exceptions, including, in certain circumstances, reinvestment rights, the loans extended under the 2014 Credit Agreement are subject to customary mandatory prepayment provisions with respect to: the net proceeds from certain asset sales; the net proceeds from certain issuances or incurrences of debt (other than debt permitted to be incurred under the terms of the 2014 Credit Agreement); the net proceeds from certain issuances of equity securities; and net proceeds of certain insurance recoveries and condemnation events.
The 2014 Credit Agreement contains customary representations and warranties, subject to limitations and exceptions, and customary covenants restricting the ability (subject to various exceptions) of us and our subsidiaries to: incur additional indebtedness (including guarantee obligations); incur liens; sell certain property or assets; engage in mergers or other fundamental changes; consummate acquisitions; make investments; pay dividends, other distributions or repurchase equity interest of us or our subsidiaries; change the nature of their business; prepay or amend certain indebtedness; engage in certain transactions with affiliates; amend our organizational documents; or enter into certain restrictive agreements. In addition, the 2014 Credit Agreement contains financial covenants which requires us to maintain (i) at all times, a Total Leverage Ratio in an amount not to exceed 2.75 to 1.00; and (ii) a Fixed Charge Coverage Ratio (as defined in the 2014 Credit Agreement), as of the last day of each fiscal quarter, an amount not less than 1.15 to 1.00. We were in compliance with our covenants as of March 31, 2021. After considering a variety of potential effects the COVID-19 pandemic could have on our consolidated sales, as well as the actions we have already taken and other options available to us, we currently believe we will be in compliance with our covenants for the remainder of the term of the 2014 Credit Agreement. The impact of the COVID-19 pandemic, however, and the speed of economic recovery in the markets we serve is highly uncertain. If conditions change in the future due to the ongoing COVID-19 pandemic or for other reasons and we expect to be out of compliance as a result, we will likely seek waivers from the lenders prior to any covenant violation. Any covenant waiver may lead to increased costs, increased interest rates, additional restrictive covenants and other available lender protections that would be applicable. There can be no assurance that we would be able to obtain any such waivers in a timely manner, or on acceptable terms, or at all. If we were not able to obtain covenant violation waivers or repay our debt facilities, this would lead to an event of default and potential acceleration of amounts due under all of our outstanding debt. As a result, the failure to obtain covenant violation waivers or repay our debt obligations when they become due would have a material adverse effect on us. Refer to "Part I - Item 1A. Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2020, for more information.
30


The 2014 Credit Agreement contains customary events of default, including with respect to: nonpayment of principal, interest, fees or other amounts; failure to perform or observe covenants; material inaccuracy of a representation or warranty when made; cross-default to other material indebtedness; bankruptcy, insolvency and dissolution events; inability to pay debts; monetary judgment defaults; actual or asserted invalidity or impairment of any definitive loan documentation, repudiation of guaranties or subordination terms; certain ERISA related events; or a change of control.
The obligations of our subsidiary that is the borrower under the 2014 Credit Agreement are guaranteed by us and each of our other United States domestic subsidiaries. The 2014 Credit Agreement and any interest rate protection and other hedging arrangements provided by any lender party to the credit facility or any affiliate of such a lender are secured on a first priority basis by a perfected security interest in substantially all of our and each guarantor’s assets (subject to certain exceptions).
On April 22, 2021, we entered into a Credit Agreement with U.S. Bank National Association, as administrative agent and the lender party thereto (the "2021 Credit Agreement"). The 2021 Credit Agreement provides for the extension of revolving loans in an aggregate principal amount not to exceed $70 million and replaces the 2014 Credit Agreement dated as of November 20, 2014, as amended. The new agreement features terms similar to the 2014 Credit Agreement, including the ability to use excess cash of up to $15 million per year for restricted payments such as share repurchases and dividends. The obligation under the 2021 Credit Agreement matures on April 22, 2026.
Loans borrowed under the 2021 Credit Agreement will bear interest, in the case of LIBOR loans, at a per annum rate equal to the applicable LIBOR (which rate shall not be less than zero), plus a margin ranging from 1.25% to 1.75%, based on our Total Leverage Ratio (as defined in the 2021 Credit Agreement). Loans borrowed under the 2021 Credit Agreement that are not LIBOR loans bear interest at a per annum rate (which rate shall not be less than zero) equal to (i) the greatest of (A) the Federal Funds Rate plus 0.50%, (B) the one month LIBOR plus 1.00% per annum, and (C) the rate of interest announced, from time to time, by U.S. Bank National Association as its “prime rate,” plus (ii) a margin ranging from 0.25% to 0.75%, based on our Total Leverage Ratio.
Finance Leases
As of March 31, 2021, we had $38.4 million of finance lease obligations outstanding, with a weighted average interest rate of 5.0% and maturities between 2021 and 2026. Refer to Note 7, Leasing, as previously disclosed on our Annual Form 10-K for the fiscal year ended for December 31, 2020 for the schedule on maturities of finance lease liabilities, as there have been no material changes to report as of March 31, 2021.
Off-Balance Sheet Arrangements
As of March 31, 2021, we did not have any off-balance-sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.
Contractual Obligations and Other Commitments
Operating Leases. We have entered into various non-cancelable operating leases primarily related to facilities, equipment and vehicles used in the ordinary course of business. Refer to Note 7, Leasing, as previously disclosed on our Annual Form 10-K for the fiscal year ended for December 31, 2020 for the schedule on maturities of operating lease liabilities as there were no material changes as of March 31, 2021.
Legal Proceedings. We are involved, and will continue to be involved, in legal proceedings arising out of the conduct of our business, including commercial and employment-related lawsuits. Some of these lawsuits purport or may be determined to be class actions and seek substantial damages, and some may remain unresolved for several years. We establish accruals for specific legal proceedings when it is considered probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Our evaluation of whether a loss is reasonably probable is based on our assessment and consultation with legal counsel regarding the ultimate outcome of the matter. As of March 31, 2021 we have accrued for the potential impact of loss contingencies that are probable and reasonably estimable. We do not currently believe that the ultimate resolution of any of these matters will have a material adverse effect on our results of operations, financial condition, or cash flows. However, the results of these matters cannot be predicted with certainty, and an unfavorable resolution of one or more of these matters could have a material adverse effect on our results of operations, financial condition, or cash flows.
31


Critical Accounting Policies
Critical accounting policies are those accounting policies that we believe are important to the portrayal of our financial condition and results and require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our Annual Report on Form 10-K for the year ended December 31, 2020 includes a description of certain critical accounting policies, including those with respect to goodwill, revenue recognition, and income taxes. There have been no material changes to our critical accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2020.
Goodwill Impairment
In accordance with ASC 350, Intangibles - Goodwill and Other, we assess goodwill for impairment annually as of September 30, and more frequently if events and circumstances indicate that goodwill might be impaired. At September 30, 2020, the Company performed its assessment and determined that goodwill was not impaired.
Goodwill impairment testing is performed at the reporting unit level. Goodwill is assigned to reporting units at the date the goodwill is initially recorded. Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or internally generated, are available to support the value of the goodwill. In 2017, we elected to early-adopt ASU 2017-04 which simplifies subsequent goodwill measurement by eliminating step two from the goodwill impairment test.
We determine the fair value of our reporting units using an income approach. Under the income approach, we determined fair value based on estimated discounted future cash flows of each reporting unit. Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates and EBITDA margins, discount rates and future market conditions, among others. The level of judgment and estimation is inherently higher in the current environment considering the uncertainty created by the COVID-19 pandemic.  We have evaluated numerous factors disrupting our business and made significant assumptions which include the severity and duration of our business disruption, the timing and degree of economic recovery and ultimately, the combined effect of these assumptions on our future operating results and cash flows.
The results of the annual goodwill impairment test, as of September 30, 2020, were as follows:
(Dollars in thousands) Number of
Reporting
Units
Representing
Goodwill of
No goodwill balance $ — 
Fair value of reporting units exceeds their carrying values by more than 50% 121,051 
$ 121,051 
Based upon a sensitivity analysis, a reduction of approximately 50-basis points of projected EBITDA in 2020 and beyond, assuming all other assumptions remain constant, would result in no impairment of goodwill.
Based upon a separate sensitivity analysis, a 50-basis point increase to the weighted average cost of capital would result in no further impairment of goodwill.
Given the uncertainty regarding the ultimate financial impact of the COVID-19 pandemic and the proceeding economic recovery, and the changing document and printing needs of our customers and the uncertainties regarding the effect on our business, there can be no assurance that the estimates and assumptions made for purposes of our goodwill impairment testing in 2020 will prove to be accurate predictions of the future. If our assumptions, including forecasted EBITDA of certain reporting units, are not achieved, or our assumptions change regarding disruptions caused by the pandemic, and the impact on the recovery from COVID-19 change, then we may be required to record goodwill impairment charges in future periods, whether in connection with our next annual impairment testing in the third quarter of 2021, or on an interim basis, if any such change constitutes a triggering event (as defined under ASC 350, Intangibles - Goodwill and Other) outside of the quarter when we regularly perform our annual goodwill impairment test. It is not possible at this time to determine if any such future impairment charge would result or, if it does, whether such charge would be material.
Income Taxes
Deferred tax assets and liabilities reflect temporary differences between the amount of assets and liabilities for financial and tax reporting purposes. Such amounts are adjusted, as appropriate, to reflect changes in tax rates expected to be in effect when the temporary differences reverse. A valuation allowance is recorded to reduce our deferred tax assets to the amount that is more
32


likely than not to be realized. Changes in tax laws or accounting standards and methods may affect recorded deferred taxes in future periods.
When establishing a valuation allowance, we consider future sources of taxable income such as future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards and tax planning strategies. A tax planning strategy is an action that: is prudent and feasible; an enterprise ordinarily might not take, but would take to prevent an operating loss or tax credit carryforward from expiring unused; and would result in realization of deferred tax assets. In the event we determine that our deferred tax assets, more likely than not, will not be realized in the future, the valuation adjustment to the deferred tax assets will be charged to earnings in the period in which we make such a determination. We have a $2.1 million valuation allowance against certain deferred tax assets as of March 31, 2021.
In future quarters we will continue to evaluate our historical results for the preceding twelve quarters and our future projections to determine whether we will generate sufficient taxable income to utilize our deferred tax assets, and whether a valuation allowance is required.
We calculate our current and deferred tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed in subsequent years. Adjustments based on filed returns are recorded when identified.
Income taxes have not been provided on certain undistributed earnings of foreign subsidiaries because such earnings are considered to be permanently reinvested.
The amount of taxable income or loss we report to the various tax jurisdictions is subject to ongoing audits by federal, state and foreign tax authorities. We estimate of the potential outcome of any uncertain tax issue is subject to management’s assessment of relevant risks, facts, and circumstances existing at that time. We use a more-likely-than-not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. We record a liability for the difference between the benefit recognized and measured and tax position taken or expected to be taken on its tax return. To the extent that our assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made. We report tax-related interest and penalties as a component of income tax expense.
Recent Accounting Pronouncements
See Note 1, “Description of Business and Basis of Presentation” to our interim Condensed Consolidated Financial Statements for disclosure on recent accounting pronouncements not yet adopted.
Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934 ("Exchange Act") are recorded, processed, summarized, and reported within the time periods specified in the U.S. Securities and Exchange Commission’s ("SEC") rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2021. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that as of March 31, 2021, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There were no changes to internal control over financial reporting during the three months ended March 31, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

33


PART II—OTHER INFORMATION
Item 1. Legal Proceedings
We are involved, and will continue to be involved, in legal proceedings arising out of the conduct of our business, including commercial and employment-related lawsuits. Some of these lawsuits purport or may be determined to be class actions and seek substantial damages, and some may remain unresolved for several years. We establish accruals for specific legal proceedings when it is considered probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Our evaluation of whether a loss is reasonably probable is based on our assessment and consultation with legal counsel regarding the ultimate outcome of the matter. As of March 31, 2021, we have accrued for the potential impact of loss contingencies that are probable and reasonably estimable. We do not currently believe that the ultimate resolution of any of these matters will have a material adverse effect on our results of operations, financial condition, or cash flows. However, the results of these matters cannot be predicted with certainty, and an unfavorable resolution of one or more of these matters could have a material adverse effect on our results of operations, financial condition, or cash flows.
Item 1A. Risk Factors
Information concerning certain risks and uncertainties are set forth in "Part I - Item 1A. Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on February 24, 2021. There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
(In thousands, except for price per share) (a) Total Number of
Shares Purchased (1)
(b) Average Price Paid per Share ($) (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (d) Approximate Dollar Value of Shares That May Yet Be Purchased Under The Plans or Programs (1)
Period
January 1, 2021 - January 31, 2021 —  —  $ 9,901 
February 1, 2021 - February 28, 2021 —  —  $ 9,901 
March 1, 2021 - March 31, 2021 29  $ 2.02  29  $ 9,842 
Total 29  29 

(1) The Company's Board of Directors approved a stock repurchase program that authorizes the Company to purchase up to $15.0 million of the Company's outstanding common stock through March 31, 2023.


34


Item 6. Exhibits
 
Exhibit
Number
Description
101.INS XBRL Instance Document *
101.SCH XBRL Taxonomy Extension Schema *
101.CAL XBRL Taxonomy Extension Calculation Linkbase *
101.DEF XBRL Taxonomy Extension Definition Linkbase *
101.LAB XBRL Taxonomy Extension Label Linkbase *
101.PRE XBRL Taxonomy Extension Presentation Linkbase *
* Filed herewith
^ Indicates management contract or compensatory plan or agreement
35


SIGNATURES
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 thereunto duly authorized.
Date: May 4, 2021
 
ARC DOCUMENT SOLUTIONS, INC.
/s/ KUMARAKULASINGAM SURIYAKUMAR
Kumarakulasingam Suriyakumar
Chairman, President and Chief Executive Officer
/s/ JORGE AVALOS
Jorge Avalos
Chief Financial Officer
36
ARC Document Solutions (NYSE:ARC)
Historical Stock Chart
From Sep 2021 to Oct 2021 Click Here for more ARC Document Solutions Charts.
ARC Document Solutions (NYSE:ARC)
Historical Stock Chart
From Oct 2020 to Oct 2021 Click Here for more ARC Document Solutions Charts.