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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”, and “emerging growth company” in of the Exchange Act.    

 

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 of the Exchange Act).    Yes  ☐    No  ☒

The number of shares of the registrant’s Common Stock, par value $.01 per share, outstanding as of April 30, 2022 was 11,599,334.

 

 

 

 

 

2

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

3

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

4

		March 31, 2022				December 31, 2021
ASSETS
Current assets:
Cash and cash equivalents		$	7,185			$	6,622
Accounts receivable, net of allowance for uncollectible accounts of $375 in 2022 and $375 in 2021			35,137				34,153
Unbilled receivables			11,701				9,240
Prepaid and other current assets			3,191				3,890
Total current assets			57,214				53,905
Equipment, enterprise software, and leasehold improvements, at cost:
Equipment			2,741				2,356
Enterprise software			4,172				3,753
Leasehold improvements			760				842
			7,673				6,951
Less – accumulated depreciation and amortization			(4,133	)			(3,913	)
Net equipment, enterprise software, and leasehold improvements			3,540				3,038
Operating lease right-of-use assets			5,033				4,894
Non-current deposits			511				595
Goodwill, net of impairment			32,510				32,510
Intangible assets, net of amortization			17,968				18,760
Total assets		$	116,776			$	113,702
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt		$	4,400			$	4,400
Accounts payable			6,242				4,954
Accrued payroll and related costs			13,367				14,240
Current portion of operating lease liability			1,571				1,479
Other accrued liabilities			779				1,227
Deferred revenue			443				544
Total current liabilities			26,802				26,844
Long-term liabilities:
Long-term debt, less current portion, net			7,252				8,334
Long-term operating lease liability, less current portion			3,677				3,706
Long-term accrued income taxes			125				125
Deferred income taxes			888				265
Total liabilities			38,744				39,274
Commitments and contingent liabilities (Note 6)
Shareholders’ equity:
Preferred Stock, no par value; 20,000,000 shares authorized; none outstanding			—				—
Common Stock, par value $.01; 250,000,000 shares authorized and 13,233,767 shares issued as of March 31, 2022 and 13,112,202 shares issued as of December 31, 2021			133				131
Additional paid-in-capital			29,667				28,250
Retained earnings			53,173				50,841
Accumulated other comprehensive income (loss)			(754	)			(607	)
Treasury stock, at cost; 1,646,420 shares as of March 31, 2022 and as of December 31, 2021			(4,187	)			(4,187	)
Total shareholders’ equity			78,032				74,428
Total liabilities and shareholders’ equity		$	116,776			$	113,702

		Common Stock				Additional Paid-in Capital				Accumulated Retained Earnings				Treasury Stock				Accumulated Other Comprehensive Income (Loss)				Total Shareholders’ Equity
Balances, December 31, 2021		$	131			$	28,250			$	50,841			$	(4,187	)		$	(607	)		$	74,428
Net income			—				—				2,332				—				—				2,332
Other comprehensive (loss), net of taxes			—				—				—				—				(147	)			(147	)
Stock-based compensation expense			—				526				—				—				—				526
Stock options exercised			2				891				—				—				—				893
Balances, March 31, 2022		$	133			$	29,667			$	53,173			$	(4,187	)		$	(754	)		$	78,032

		Common Stock				Additional Paid-in Capital				Accumulated Retained Earnings				Treasury Stock				Accumulated Other Comprehensive Income (Loss)				Total Shareholders’ Equity
Balances, December 31, 2020		$	130			$	25,509			$	38,620			$	(4,187	)		$	(539	)		$	59,533
Net income			—				—				1,194				—				—				1,194
Other comprehensive gain, net of taxes			—				—				—				—				7				7
Stock-based compensation expense			—				621				—				—				—				621
Stock options exercised			—				101				—				—				—				101
Balances, March 31, 2021		$	130			$	26,231			$	39,814			$	(4,187	)		$	(532	)		$	61,456

		Three Months Ended March 31,
		2022				2021
OPERATING ACTIVITIES:
Net income		$	2,332			$	1,194
Adjustments to reconcile net income to cash provided by (used in) operating activities:
Depreciation and amortization			1,020				997
Interest amortization of deferred financing costs			18				20
Stock-based compensation expense			526				621
Deferred income taxes, net			623				(8	)
Operating lease assets and liabilities, net			(76	)			12
Working capital items:
Accounts receivable and unbilled receivables			(3,445	)			(4,072	)
Prepaid and other current assets			699				108
Accounts payable			1,288				1,326
Accrued payroll and related costs			(873	)			508
Other accrued liabilities			(448	)			141
Deferred revenue			(101	)			(73	)
Net cash flows provided by operating activities			1,563				774
INVESTING ACTIVITIES:
Recovery of (payment for) non-current deposits			84				(63	)
Capital expenditures			(730	)			(128	)
Net cash flows (used in) investing activities			(646	)			(191	)
FINANCING ACTIVITIES:
(Repayments) on term loan facility			(1,100	)			(1,100	)
Proceeds from exercise of stock options			893				101
Net cash flows (used in) financing activities			(207	)			(999	)
Effect of exchange rate changes on cash and cash equivalents			(147	)			(19	)
Net change in cash and cash equivalents			563				(435	)
Cash and cash equivalents, beginning of period			6,622				7,677
Cash and cash equivalents, end of period		$	7,185			$	7,242

1.	Description of Business and Basis of Presentation:

Basis of Presentation

References in this Quarterly Report on Form

10-Q

to “we”, “our”, “Mastech Digital”, “Mastech” or “the Company” refer collectively to Mastech Digital, Inc. and its wholly-owned operating subsidiaries, which are included in these Condensed Consolidated Financial Statements (the “Financial Statements”).

Description of Business

We are a provider of Digital Transformation IT Services to mostly large and

medium-sized

organizations.

Our portfolio of offerings includes data management and analytics services; digital learning services; and IT staffing services.

In our 2017 acquisition of the services division of Canada-based InfoTrellis, Inc., we added specialized capabilities in delivering data and analytics services to our customers globally, which became our Data and Analytics Services segment. This segment offers project-based consulting services in the areas of data management, data engineering and data science, with such services delivered using

on-site

and offshore resources. In October 2020, we acquired AmberLeaf Partners, Inc. (“AmberLeaf”), a Chicago-based customer experience consulting firm. This acquisition expanded our Data and Analytics Services segment’s capabilities in customer experience strategy and managed services offering for a variety of Cloud-based enterprise applications across sales, marketing and customer services organizations.

Our IT Staffing Services segment combines technical expertise with business process experience to deliver a broad range of staffing services in digital and mainstream technologies. Our digital technologies include data management, analytics, cloud, mobility, social and artificial intelligence. We work with businesses and institutions with significant IT spending and recurring staffing service needs. We also support smaller organizations with their “project focused” temporary IT staffing requirements.

The

COVID-19

pandemic had a material impact on activity levels in both of our business segments in 2020. This impact was reduced in 2021 as a result of the global

roll-out

of vaccination programs and signs of improving economic conditions. As we enter 2022, we are hopeful that

COVID-19

related concerns will be less impactful on our business. The proliferation of

COVID-19

variants, however, have caused some uncertainty and may continue to disrupt global markets during 2022.

Accounting Principles

The accompanying Financial Statements have been prepared by management in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and applicable rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and disclosures required by U.S. GAAP for complete consolidated financial statements. In the opinion of management, all adjustments, consisting principally of normal recurring adjustments, considered necessary for a fair presentation have been included. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the Financial Statements and the accompanying notes. Actual results could differ from these estimates. These Financial Statements should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes for the year ended December 31, 2021, included in our Annual Report on Form

10-K

filed with the SEC on March 14, 2022. Additionally, our operating results for the three months ended March 31, 2022, are not necessarily indicative of the results that can be expected for the year ending December 31, 2022 or for any other period.

Principles of Consolidation

The Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation.

Critical Accounting Policies

Please refer to Note 1 “Summary of Significant Accounting Policies” of the Consolidated Financial Statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations–Critical Accounting Policies and Estimates” in our Annual Report on Form

10-K

for the year ended December 31, 2021, for a more detailed discussion of our significant accounting policies and critical accounting estimates. There were no material changes to these critical accounting policies during the three months ended March 31, 2022.

 

Segment Reporting

The Company has two reportable segments, in accordance with Accounting Standards Committee (“ASC”) Topic 280 “Disclosures About Segments of an Enterprise and Related Information”: Data and Analytics Services; and IT Staffing Services.    

2.	Revenue from Contracts with Customers

The Company recognizes revenue on

time-and-material

contracts over time as services are performed and expenses are incurred.

Time-and-material

contracts typically bill at an agreed-upon hourly rate, plus

out-of-pocket

expense reimbursement.

Out-of-pocket

expense reimbursement amounts vary by assignment, but on average represent less than 2% of the total contract revenues. Revenue is earned on a per transaction or labor hour basis, as that amount directly corresponds to the value of the Company’s performance. Revenue recognition is negatively impacted by holidays and consultant vacation and sick days.

The Company recognizes revenue on fixed price contracts over time as services are rendered and uses a cost-based input method to measure progress. Determining a measure of progress requires management to make judgments that affect the timing of revenue recognized. Under the cost-based input method, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues, including estimated fees or profits, are recorded proportionally as costs are incurred. The Company has determined that the cost-based input method provides a faithful depiction of the transfer of goods or services to the customer. Estimated losses are recognized immediately in the period in which current estimates indicate a loss. We record deferred revenues when cash payments are received or due in advance of our performance, including amounts which may be refundable.

The Company’s

time-and-material

and fixed price revenue streams are recognized over time as the customer receives and consumes the benefits of the Company’s performance as the work is performed.

In certain situations related to client direct hire assignments, where the Company’s fee is contingent upon the hired resources continued employment with the client, revenue is not fully recognized until such employment conditions are satisfied.

We do not sell, lease or otherwise market computer software or hardware, and essentially 100% of our revenue is derived from the sale of data and analytics, IT staffing and digital transformation services. We expense sales commissions in the same period in which revenues are realized. These costs are recorded within sales and marketing expenses.

Each contract the Company enters into is assessed to determine the promised services to be performed and includes identification of the performance obligations required by the contract. In substantially all of our contracts, we have identified a single performance obligation for each contract either because the promised services are distinct or the promised services are highly interrelated and interdependent and therefore represent a combined single performance obligation.

Our Data and Analytics Services segment provides specialized capabilities in delivering data management and analytics services to customers globally. This business offers project-based consulting services in the areas of Master Data Management, Enterprise Data Integration, Data Engineering and Analytics, which can be delivered using onsite and offshore resources.

Our IT Staffing Services segment combines technical expertise with business process experience to deliver a broad range of services in digital and mainstream technologies. Our digital technology stack includes data management and analytics, cloud, mobility, social and automation. Our mainstream technologies include business intelligence / data warehousing; web services; enterprise resource planning & customer resource management; and

e-Business

solutions. We work with businesses and institutions with significant IT spend and recurring staffing needs. We also support smaller organizations with their “project focused” temporary IT staffing requirements.

The following table depicts the disaggregation of our revenues by contract type and operating segment:

		Three Months Ended March 31,
		2022				2021
		(Amounts in thousands)
Data and Analytics Services Segment
Time-and-material Contracts		$	6,181			$	5,854
Fixed-price Contracts			3,971				2,940
Subtotal Data and Analytics Services		$	10,152			$	8,794

 

		Three Months Ended March 31,
		2022				2021
		(Amounts in thousands)
IT Staffing Services Segment
Time-and-material Contracts		$	49,399			$	40,981
Fixed-price Contracts			204				—
Subtotal IT Staffing Services		$	49,603			$	40,981
Total Revenues		$	59,755			$	49,775

For the three months ended March 31, 2022, the Company had one client (CGI =17.8%) that exceeded 10% of total revenues. For the three months ended March 31, 2021, the Company had the same one client (CGI = 15.0%) that exceeded 10% of total revenues.

The Company’s top ten clients represented approximately 51% and 47% of total revenues for the three months ended March 31, 2022 and 2021, respectively.

The following table presents our revenue from external customers disaggregated by geography, based on the work location of our customers:

		Three Months Ended March 31,
		2022				2021
		(Amounts in thousands)
United States		$	58,347			$	47,942
Canada			1,019				1,264
India and other			389				569
Total		$	59,755			$	49,775

3.	Goodwill and Other Intangible Assets, Net

Goodwill related to our June 15, 2015, acquisition of Hudson Global Resources Management’s U.S. IT staffing business (“Hudson IT”) totaled $8.4 million. Goodwill related to our July 13, 2017, acquisition of the services division of InfoTrellis totaled $27.4 million. During 2018, the Company recorded a goodwill impairment related to the InfoTrellis acquisition of $9.7 million. Goodwill related to our October 1, 2020, acquisition of AmberLeaf totaled $6.4 million.

The Company is amortizing the identifiable intangible assets on a straight-line basis over estimated average lives ranging from 3 to 12 years. Identifiable intangible assets were comprised of the following as of March 31, 2022, and December 31, 2021:

		As of March 31, 2022
(Amounts in thousands)		Amortization Period (In Years)				Gross Carrying Value				Accumulative Amortization				Net Carrying Value
IT Staffing Services:
Client relationships			12			$	7,999			$	4,528			$	3,471
Covenant-not-to-compete			5				319				319				—
Trade name			3				249				249				—
Data and Analytics Services:
Client relationships			12				19,641				6,911				12,730
Covenant-not-to-compete			5				1,201				848				353
Trade name			5				1,711				1,297				414
Technology			7				1,979				979				1,000
Total Intangible Assets						$	33,099			$	15,131			$	17,968

 

		As of December 31, 2021
(Amounts in thousands)		Amortization Period (In Years)				Gross Carrying Value				Accumulative Amortization				Net Carrying Value
IT Staffing Services:
Client relationships			12			$	7,999			$	4,361			$	3,638
Covenant-not-to-compete			5				319				319				—
Trade name			3				249				249				—
Data and Analytics Services:
Client relationships			12				19,641				6,503				13,138
Covenant-not-to-compete			5				1,201				788				413
Trade name			5				1,711				1,211				500
Technology			7				1,979				908				1,071
Total Intangible Assets						$	33,099			$	14,339			$	18,760

Amortization expense for the three months ended March 31, 2022 and 2021 totaled $792,000 and $793,000, respectively, and is included in selling, general and administrative expenses in the Condensed Consolidated Statement of Operations.

The estimated aggregate amortization expense for intangible assets for the years ending December 31, 2022 through 2026 is as follows:

		Years Ended December 31,
		2022				2023				2024				2025				2026
		(Amounts in thousands)
Amortization expense		$	2,987			$	2,772			$	2,693			$	2,553			$	2,413

4. Leases

The Company rents certain office facilities and equipment under noncancelable operating leases. As of March 31, 2022, approximately 97,000 square feet of office space is utilized for our sales and recruiting offices, delivery centers, and corporate headquarters. All of our leases are classified as operating leases. The average initial lease term is four years. Several leases have an option to renew, at our sole discretion, for an additional term. Our present lease terms range from less than one year to 5 years with a weighted average of 3.8 years. Leases with an initial term of twelve months or less are not recorded on the balance sheet.

The following table summarizes the balance sheet classification of the lease assets and related lease liabilities:

		March 31, 2022				December 31, 2021
		( in thousands)
Assets:
Long-term operating lease right-of-use assets		$	5,033			$	4,894
Liabilities:
Short-term operating lease liability		$	1,571			$	1,479
Long-term operating lease liability			3,677				3,706
Total liabilities		$	5,248			$	5,185

Future minimum rental payments for office facilities and equipment under the Company’s noncancelable operating leases are as follows:

		Amount as of March 31, 2022
		(in thousands)
2022 (For remainder of year)		$	1,299
2023			1,732
2024			1,002
2025			734
2026			717

 

		Amount as of March 31, 2022
		(in thousands)
Thereafter			171
Total			5,655
Less: Imputed interest			(407	)
Present value of operating lease liabilities		$	5,248

The weighted average discount rate used to calculate the present value of future lease payments was 4.0%.

We recognize rent expense for these leases on a straight-line basis over the lease term. Rental expense for the three months ended March 31, 2022 and 2021 totaled $0.4 million and $0.4 million, respectively.

Total cash paid for lease liabilities for the three months ended March 31, 2022 and 2021 totaled $0.4 million and $0.4 million, respectively.

New leases entered into during the three months ended March 31, 2022 and 2021 totaled $0.5 million and $0.3 million, respectively, and are considered non cash transactions.

5.	Payroll Tax Liability

As allowed under the Coronavirus Aid, Relief and Economic Security (CARES) Act, the Company elected to defer payment of the employer’s share of social security tax. As of March 31, 2022, and December 31, 2021, the balance of this liability is $2.3 million and $2.3 million, respectively. The Company is required to repay the $2.3 million by December 31, 2022, which is reflected as part of current liabilities under the caption accrued payroll and related costs.

6.	Commitments and Contingencies

In the ordinary course of our business, the Company is involved in a number of lawsuits and administrative proceedings. While uncertainties are inherent in the final outcome of these matters, the Company’s management believes, after consultation with legal counsel, that the disposition of these proceedings should not have a material adverse effect on our financial position, results of operations or cash flows.

7.	Employee Benefit Plan

The Company provides an Employee Retirement Savings Plan (the “Retirement Plan”) under Section 401(k) of the Internal Revenue Code of 1986, as amended (the “Code”), that covers substantially all U.S. based salaried and

W-2

hourly employees. Employees may contribute a percentage of eligible compensation to the Retirement Plan, subject to certain limits under the Code. The Company did not provide for any matching contributions for the three months ended March 31, 2022 and 2021.

8.	Stock-Based Compensation

In 2008, the Company adopted a Stock Incentive Plan (the “Plan”) which, as amended, provides that up to 4,900,000 shares of the Company’s Common Stock shall be allocated for issuance to directors, officers and key personnel. Grants under the Plan can be made in the form of stock options, stock appreciation rights, performance shares or stock awards. During the three months ended March 31, 2022, the Company granted 11,304 restricted share units and 400,000 stock options at a strike price of $18.41 under the Plan. During the three months ended March 31, 2021, the Company granted restricted share units of 11,955 and 270,000 stock options at an average strike price of $17.65. As of March 31, 2022 there were 244,000 shares available for grants under the Plan.

Stock-based compensation expense for the three months ended March 31, 2022 and 2021 was $526,000 and $621,000, respectively, and is included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.

During the three months ended March 31, 2022 and 2021, the Company issued 90,933 and 29,739 shares, respectively, related to the grant of restricted share units and the exercise of stock options.

In October 2018, the Board of Directors of the Company approved the Mastech Digital, Inc. 2019 Employee Stock Purchase Plan (the “Employee Stock Purchase Plan”). The Employee Stock Purchase Plan is intended to meet the requirements of Section 423 of the Code and was approved by the Company’s shareholders to be qualified. On May 15, 2019, the Company’s shareholders approved the Employee Stock Purchase Plan. Under the Employee Stock Purchase Plan, 600,000 shares of Common Stock (subject to adjustment upon certain changes in the Company’s capitalization) are available for purchase by eligible employees who become participants in the Employee Stock Purchase Plan. The purchase price per share is 85% of the lesser of (i) the fair market value per share of Common Stock on the first day of the offering period, or (ii) the fair market value per share of Common Stock on the last day of the offering period.

 

The Company’s eligible full-time employees are able to contribute up to 15% of their base compensation into the Employee Stock Purchase Plan, subject to an annual limit of $25,000 per person. Employees are able to purchase Company Common Stock at a 15% discount to the lower of the fair market value of the Company’s Common Stock on the initial or final trading dates of each

six-month

offering period. Offering periods begin on January 1 and July 1 of each year. The Company uses the Black-Scholes option pricing model to determine the fair value of Employee Stock Purchase Plan share-based payments. The fair value of the

six-month

“look-back” option in the Company’s Employee Stock Purchase Plan is estimated by adding the fair value of 15% of one share of stock to 85% of the fair value of an option on one share of stock. The Company utilized U.S. Treasury yields as of the grant date for its risk-free interest rate assumption, matching the Treasury yield terms to the

six-month

offering period. The Company utilized historical company data to develop its dividend yield and expected volatility assumptions.

During the three months ended March 31, 2022 and 2021, there were no shares issued under the Employee Stock Purchase Plan. As of March 31, 2022, there were 516,399 shares available for purchases under the Employee Stock Purchase Plan.

9.	Credit Facility

On July 13, 2017, the Company entered into a Credit Agreement (the “Credit Agreement”) with PNC Bank, as administrative agent, swing loan lender and issuing lender, PNC Capital Markets LLC, as sole lead arranger and sole book-runner, and certain financial institution parties thereto as lenders (the “Lenders”). The Credit Agreement, as amended, provides for a total aggregate commitment of $53.1 million, consisting of (i) a revolving credit facility (the “Revolver”) in an aggregate principal amount not to exceed $40 million and; (ii) a $13.1 million term loan facility (the “Term Loan), as more fully described in Exhibit 10.1 to the Company’s Form

8-Ks

filed with the SEC on July 19, 2017, April 25, 2018 and October 7, 2020, and Exhibit 10.2 to the Form

8-K/A

filed with the SEC on January 4, 2022. Additionally, the facility includes an accordion feature for additional borrowing of up to $20 million upon satisfaction of certain conditions.

The Revolver expires in December 2026 and includes swing loan and letter of credit

sub-limits

in the aggregate amount not to exceed $6.0 million for swing loans and $5.0 million for letters of credit. Borrowings under the Revolver may be denominated in U.S. dollars or Canadian dollars. The maximum borrowings in U.S. dollars may not exceed the sum of 85% of eligible U.S. accounts receivable and 60% of eligible U.S. unbilled receivables, less a reserve amount established by the administrative agent. The maximum borrowings in Canadian dollars may not exceed the lesser of (i) $10.0 million; and (ii) the sum of 85% of eligible Canadian receivables, plus 60% of eligible Canadian unbilled receivables, less a reserve amount established by the administrative agent.

Amounts borrowed under the Term Loan are required to be repaid in consecutive quarterly installments through and including the maturity date of October 1, 2024. The principal amount of each quarterly installment payable on the Term Loan equals $1.1 million through and including the maturity date, with the maturity date payment equal to the outstanding amount of the loan on that date.

Borrowings under the revolver and the term loan, at the Company’s election, bear interest at either (a) the higher of PNC’s prime rate or the federal funds rate plus 0.50%, plus an applicable margin determined based upon the Company’s senior leverage ratio or (b) the Bloomberg Short-Term Bank Yield Index (“BSBY”), plus an applicable margin determined based upon the Company’s senior leverage ratio. The applicable margin on the base rate is between 0.50% and 1.25% on revolver borrowings and between 1.75% and 2.50% on term loans. The applicable margin on the BSBY is between 1.50% and 2.25% on revolver borrowings and between 2.75% and 3.50% on term loans. A 20 to

30-basis

point per annum commitment fee on the unused portion of the revolver facility is charged and due monthly in arrears. The applicable commitment fee is determined based upon the Company’s senior leverage ratio.

The Company pledged substantially all of its assets in support of the Credit Agreement. The Credit Agreement contains standard financial covenants, including, but not limited to, covenants related to the Company’s senior leverage ratio and fixed charge ratio (as defined under the Credit Agreement) and limitations on liens, indebtedness, guarantees, contingent liabilities, loans and investments, distributions, leases, asset sales, stock repurchases and mergers and acquisitions. As of March 31, 2022, the Company was in compliance with all provisions under the facility.

In connection with securing the commitments under the Credit Agreement and the April 20, 2018, October 1, 2020, and December 29, 2021 amendments to the Credit Agreement, the Company paid a commitment fee and incurred deferred financing costs totaling $975,000, which were capitalized and are being amortized as interest expense over the life of the facility. Deferred financing costs of $348,000 and $366,000 (net of amortization) as of March 31, 2022, and December 31, 2021, respectively, are presented as reductions in long-term debt in the Company’s Consolidated Balance Sheets.

 

As of March 31, 2022, and December 31, 2021, the Company’s outstanding borrowings under the Revolver totaled $0 million and $0 million, respectively; and unused borrowing capacity available was approximately $35.5 million and $32.4 million, respectively. The Company’s outstanding borrowings under the term loan were $12.0 million and $13.1 million as of March 31, 2022 and December 31, 2021, respectively. Additionally, under the Term Loan agreement there is a mandatory repayment requirement related to excess cash flows (as defined in the Credit Agreement) generated in a given fiscal year. This provision takes effect in first quarter of 2023 should the Company senior leverage ratio exceeds 1.50x.

10.	Income Taxes

The components of income before income taxes, as shown in the accompanying Financial Statements, consisted of the following for the three months ended March 31, 2022, and 2021:

		Three Months Ended March 31,
		2022				2021
		(Amounts in thousands)
Income before income taxes:
Domestic		$	3,315			$	1,881
Foreign			(68	)			(244	)
Income before income taxes		$	3,247			$	1,637

The Company has foreign subsidiaries outside the United States, which generate revenues from

non-US

based clients. Additionally, these subsidiaries provide services to the Company’s U.S. parents. Accordingly, the Company allocates a portion of its income to these subsidiaries based on a “transfer pricing” model and reports such income as foreign in the above table.

The provision for income taxes, as shown in the accompanying Financial Statements, consisted of the following for the three months ended March 31, 2022, and 2021:

		Three Months Ended March 31,
		2022				2021
		(Amounts in thousands)
Current provision:
Federal		$	98			$	358
State			25				93
Foreign			86				10
Total current provision			209				461
Deferred provision (benefit):
Federal			542				(6	)
State			137				(2	)
Foreign			(56	)			(42	)
Total deferred provision (benefit)			623				(50	)
Change in valuation allowance			83				32
Total provision for income taxes		$	915			$	443

The reconciliation of income taxes computed using the statutory U.S. income tax rate and the provision for income taxes for the three months ended March 31, 2022, and 2021 were as follows (amounts in thousands):

		Three Months Ended March 31, 2022								Three Months Ended March 31, 2021
Income taxes computed at the federal statutory rate		$	682				21.0	%		$	344				21.0	%
State income taxes, net of federal tax benefit			176				5.4				104				6.3
Excess tax benefits from stock options/restricted shares			(77	)			(2.4	)			(67	)			(4.1	)
Difference in tax rate on foreign earnings/other			51				1.6				30				1.9
Change in valuation allowance			83				2.6				32				2.0
		$	915				28.2	%		$	443				27.1	%

 

We evaluate deferred income taxes quarterly to determine if valuation allowances are required or should be adjusted. GAAP accounting guidance requires us to assess whether valuation allowances should be established against deferred tax assets based on all available evidence, both positive and negative using a “more likely than not” standard. Our assessment considers, among other things, the nature of cumulative losses; forecasts of future profitability; the duration of statutory carry-forward periods; and tax planning alternatives. As of March 31, 2022, our valuation allowance was comprised of balances within locations of Singapore and the United Kingdom. The valuation allowance balances at these locations totaled $394,000 and $311,000 as of March 31, 2022, and December 31, 2021, respectively, and reflect net operating losses which may not be realizable in the future.

The Company’s Canadian subsidiary are currently under audit by Revenue Canada for the years 2018 and 2019.

11.	Derivative Instruments and Hedging Activities

Interest Rate Risk Management

Concurrent with the Company’s July 13, 2017 borrowings under its credit facility, the Company entered into a 44–month interest-rate swap to convert the debt’s variable interest rate to a fixed rate of interest. The swap contracts, which matured on April 1, 2021, were designated as cash flow hedging instruments and qualified as effective hedges at inception under ASC Topic 815, “Derivatives and Hedging”. These contracts were recognized on the balance sheet at fair value. The effective portion of the changes in fair value on these instruments was recorded in other comprehensive income (loss) and was reclassified into the Consolidated Statements of Operations as interest expense in the same period in which the underlying hedge transaction affected earnings. Because the interest-rate swap contracts matured, they had no value as of March 31, 2022, and December 31, 2021, therefore there is no balance reflected in the Consolidated Balance Sheets for these periods.

There was no impact on the Consolidated Statements of Operations and Comprehensive Income (“OCI”) for the three months ended March 31, 2022. The effect of derivative instruments on the Consolidated Statements of Operations and OCI for the three months ended March 31, 2021 are as follows (in thousands):

Derivatives in ASC Topic 815 Cash Flow Hedging Relationships		Amount of Gain recognized in OCI on Derivatives		Location of Gain reclassified from Accumulated OCI to Income		Amount of Gain reclassified from Accumulated OCI to Income		Location of Gain reclassified in Income on Derivatives		Amount of Gain recognized in Income on Derivatives
		(Effective Portion)		(Effective Portion)		(Effective Portion)		(Ineffective Portion/Amounts excluded from effectiveness testing)
Interest-Rate Swap Contracts		$35		Interest Expense		$34		Interest Expense		$—

 

12.	Fair Value Measurements

The Company has adopted the provisions of ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”), related to certain financial and nonfinancial assets and liabilities. ASC 820 establishes the authoritative definition of fair value; sets out a framework for measuring fair value; and expands the required disclosures about fair value measurements. The valuation techniques required by ASC 820 are based on observable and unobservable inputs using the following three-tier hierarchy:

 

•

Level 1—Inputs are observable quoted prices (unadjusted) in active markets for identical assets and liabilities.

 

•

Level 2—Inputs are observable, other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are directly or indirectly observable in the marketplace.

 

•

Level 3—Inputs are unobservable that are supported by little or no market activity.

In prior periods, the company carried interest-rate swap contracts and contingent consideration liabilities at fair value measured on a recurring basis. As of March 31, 2022, and December 31, 2021, the Company did not have any balances in the financial statements related to these items as the swap matured on April 1, 2021 and the contingent consideration was revalued to zero as of December 31, 2021.    

 

13.	Shareholders’ Equity

The Company purchases shares to satisfy employee tax obligations related to its Stock Incentive Plan. During the three months ended March 31, 2022, and 2021, no purchases were made to satisfy employee tax obligations.

 

14.	Earnings Per Share

The computation of basic earnings per share is based on the Company’s net income divided by the weighted average number of common shares outstanding. Diluted earnings per share reflect the potential dilution that could occur if outstanding stock options were exercised. The dilutive effect of stock options was calculated using the treasury stock method.

For the three months ended March 31, 2022, there were 0 anti-dilutive stock options excluded from the computation of diluted earnings per share. For the three months ended March 31, 2021, there were 150,000 anti-dilutive stock options excluded from the computation of diluted earnings per share.

15.	Business Segments and Geographic Information

Our reporting segments are: 1) Data and Analytics Services; and 2) IT Staffing Services.

The Data and Analytics Services segment was acquired through the July 13, 2017 acquisition of the services division of Canada-based InfoTrellis, Inc. This segment is a project-based consulting services business with specialized capabilities in data management and analytics. The business is marketed as Mastech InfoTrellis and utilizes a dedicated sales team with deep subject matter expertise. Mastech InfoTrellis has offices in Atlanta, Toronto, London, Dublin and Singapore, and a global delivery center in Chennai, India. Project-based delivery reflects a combination of

on-site

resources and offshore resources. Assignments are secured on both a time and material and fixed price basis. In October 2020, we acquired AmberLeaf, a Chicago-based customer experience consulting firm. This acquisition expanded our capabilities in customer experience strategy and managed services offering for a variety of Cloud-based enterprise application across sales, marketing and customer service organizations.

The IT Staffing Services segment offers staffing services in digital and mainstream technologies and uses digital methods to enhance organizational learning. These services are marketed using a common sales force and delivered via our domestic and global recruitment centers. While the vast majority of our assignments are based on time and materials, we do have the capabilities to deliver our digital transformation services on a fixed price basis.

		Three Months Ended March 31,
		2022				2021
		(Amounts in thousands)
Revenues:
Data and Analytics Services		$	10,152			$	8,794
IT Staffing Services			49,603				40,981
Total revenues		$	59,755			$	49,775
Gross Margin %:
Data and Analytics Services			45.2	%			45.7	%
IT Staffing Services			22.9	%			21.4	%
Total gross margin %			26.7	%			25.7	%
Segment operating income:
Data and Analytics Services		$	972			$	394
IT Staffing Services			3,127				2,268
Subtotal			4,099				2,662
Amortization of acquired intangible assets			(792	)			(793	)
Interest expenses and other, net			(60	)			(232	)
Income before income taxes		$	3,247			$	1,637

Below is a reconciliation of segment total assets to consolidated total assets:

		March 31, 2022				December 31, 2021
		(Amounts in thousands)
Total assets:
Data and Analytics Services		$	57,571			$	56,634
IT Staffing Services			59,205				57,068
Total assets		$	116,776			$	113,702

 

Below is geographic information related to our revenues from external customers:

		Three Months Ended March 31,
		2022				2021
		(Amounts in thousands)
United States		$	58,347			$	47,942
Canada			1,019				1,264
India and Other			389				569
Total revenues		$	59,755			$	49,775

16.	Recently Issued Accounting Standards

Recently Adopted Accounting Pronouncements

In November 2021, the FASB issued ASU

2021-10,

“Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance”. The amendments in this ASU require annual disclosures to increase the transparency of government assistance received by a business entity including information about the nature of the government transactions, related accounting policy, the line items on the balance sheet and income statement that are affected, amounts applicable to each financial statement line item, and significant terms and conditions of the transactions, including commitments and contingencies. The amendments in this ASU are effective for annual periods beginning after December 15, 2021. We adopted this ASU on January 1, 2022, with no material impact on our financial statements.

Recent Accounting Pronouncements not yet adopted

In October 2021, the FASB issued ASU

2021-08,

“Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers”. The amendments in this ASU require that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination, including contract assets and contract liabilities arising from revenue contracts with customers, as if it had originated the contracts as of the acquisition date. The amendments in this ASU are effective for annual and interim periods beginning after December 15, 2022. Early adoption is permitted. The Company does not expect this ASU to have a material impact on its financial statements.

A variety of proposed or otherwise potential accounting standards are currently under consideration by standard-setting organizations and certain regulatory agencies. Because of the tentative and preliminary nature of such proposed standards, management has not yet determined the effect, if any that the implementation of such proposed standards would have on the Company’s consolidated financial statements.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Company’s website is . The Company’s Annual Report on Form for the year ended December 31, 2021, current reports on Form and all other reports filed with the SEC, are available free of charge on the Investors page. The website is updated as soon as reasonably practical after such reports are filed electronically with the SEC.

Please refer to Note 1 “Summary of Significant Accounting Policies” of the Consolidated Financial Statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations–Critical Accounting Policies and Estimates” in our Annual Report on Form for the year ended December 31, 2021 for a more detailed discussion of our significant accounting policies and critical accounting estimates. There were no material changes to these critical accounting policies during the three months ended March 31, 2022.

We are a provider of Digital Transformation IT Services to mostly large and organizations.

Our portfolio of offerings includes data management and analytics services; other digital transformation services such as digital learning services; and IT staffing services.

We operate in two reporting segments – Data and Analytics Services and IT Staffing Services. Our data and analytics services are marketed on a global basis under the brand Mastech InfoTrellis and are delivered largely on a project basis with and resources. These capabilities and expertise were acquired through our acquisition of InfoTrellis and enhanced and expanded subsequent to the acquisition. In October 2020, we acquired AmberLeaf Partners, Inc. (“AmberLeaf”), a Chicago-based customer experience consulting firm. This acquisition enhanced our capabilities in customer experience strategy and managed services offerings for a variety of Cloud-based enterprise applications across sales, marketing and customer services organizations. Our IT staffing business combines technical expertise with business process experience to deliver a broad range of staffing services in digital and mainstream technologies, as well as our other digital transformation services.

Both business segments provide their services across various industry verticals, including: financial services; government; healthcare; manufacturing; retail; technology; telecommunications; and transportation. In our Data and Analytics Services segment, we evaluate our revenues and gross profits largely by service line. In our IT Staffing Services segment, we evaluate our revenues and gross profits largely by sales channel responsibility. This analysis within both our reporting segments is multi-purposed and includes technologies employed, client relationships, and geographic locations.

We provide information regarding our new bookings in our Data and Analytics Services segment, which represents the estimated value of client engagements, including those acquired through acquisitions, as well as renewals, extensions and changes to existing contracts, because we believe doing so provides useful trend information regarding changes in the volume of our new business over time. New bookings can vary significantly quarter to quarter depending in part on the timing of the signing of a small number of large engagements. Among other factors, the types of services and solutions to be delivered, the duration of the engagement and the pace and level of client spending impact the timing of the conversion of new bookings to revenues. In addition, substantially all of our contracts are terminable by the client on short notice with little or no termination penalties. Information regarding our new bookings is not comparable to, nor should it be substituted for, an analysis of our revenues over time. New bookings involve estimates and judgments. There are no third-party standards or requirements governing the calculation of bookings. We do not update our new bookings for material subsequent terminations or reductions related to bookings originally provided in prior periods.

Generally, our business outlook is highly correlated to general North American economic conditions, particularly with respect to our IT Staffing Services segment. During periods of increasing employment and economic expansion, demand for our services tends to increase. Conversely, during periods of contracting employment and / or a slowing global economy, demand for our services tends to decline. As the economy slowed in 2007 and recessionary conditions emerged in 2008 and 2009, we experienced less demand for our IT staffing services. With economic expansion in 2010 through 2019, activity levels improved. However, as the recovery strengthened, we experience increased tightness in the supply-side (skilled IT professionals) of our businesses. These supply-side challenges pressured resource costs and to some extent gross margins. As we entered 2020, we were encouraged by continued growth in the domestic job markets and expanding U.S. and global economies. However, with the pandemic surfacing in the first quarter of 2020, we realized the economic growth would quickly turn into recessionary conditions, which had a material impact on activity levels in both of our business segments. This impact was reduced in 2021 as a result of the global of vaccination programs and signs of improving economic conditions. As we enter 2022, we are hopeful that related concerns will be less impactful on our business. The proliferation of variants, however, have caused some uncertainty and may continue to disrupt global markets during 2022. In addition, we are mindful of inflationary pressures and overall economic concerns regarding the potential for recessionary conditions.

 

18

In addition to tracking general economic conditions in the markets that we service, a large portion of our revenues is generated from a limited number of clients (see Item 1A, the Risk Factor entitled “Our revenues are highly concentrated, and the loss of a significant client would adversely affect our business and revenues” in our Annual Report on Form for the year ended December 31, 2021). Accordingly, our trends and outlook are additionally impacted by the prospects and well-being of these specific clients. This “account concentration” factor may result in our results of operations deviating from the prevailing economic trends from time to time.

Within our IT Staffing Services segment, a larger portion of our revenues has come from strategic relationships with systems integrators and other staffing organizations. Additionally, many large end users of IT staffing services are employing managed service providers to manage their contractor spending. Both of these dynamics may pressure our IT staffing gross margins in the future.

Recent growth in advanced technologies (social, cloud, analytics, mobility, automation) is providing opportunities within our IT Staffing Services segment. However, supply side challenges have proven to be acute with respect to many of these technologies. We believe these challenges will remain during 2022.

Within our Data and Analytics Services segment many customers are satisfying their D&A needs using a holistic approach. This often results in the customer using one vendor partner rather than with multiple vendors. We have responded to this trend by establishing a service offering called “Center of Excellence” which bundles a customer’s total requirements under a multi-year contract. This concept allows us to better understand the customer’s longer-term strategy with respect to D&A and effectively address such needs.

Revenues for the three months ended March 31, 2022 totaled $59.8 million compared to $49.8 million for the corresponding three-month period in 2021. This 20% year-over-year revenue increase reflected 15% growth in our Data and Analytics Services segment and a 21% increase in our IT Staffing Services segment. For the three months ended March 31, 2022, the Company had one client that had revenues in excess of 10% of total revenues (CGI = 17.8%). For the three months ended March 31, 2021, the Company had one client that had revenues in excess of 10% of total revenues (CGI = 15.0%). The Company’s top ten clients represented approximately 52% and 47% of total revenues for the three months ended March 31, 2022 and 2021, respectively.

Below is a tabular presentation of revenues by reportable segment for the three months ended March 31, 2022 and 2021, respectively:

 

Revenues from our Data and Analytics Services segment totaled $10.2 million in the quarter ending March 31, 2022, compared to $8.8 million in the corresponding period last year. The year-over-year improvement largely reflected improved backlog in the 2022 period. Bookings in first quarter 2022 totaled $11.8 million compared to first quarter 2021 bookings of $15.8 million. The 2021 quarter included several booking orders that included multi-year durations.

Revenues from our IT Staffing Services segment totaled $49.6 million in the three months ended March 31, 2022 compared to $41.0 million during the corresponding 2021 period. This 21% revenue increase reflected a higher level of billing consultants in the 2022 quarter versus 2021. Billing consultants at March 31, 2021 totaled compared to at March 31, 2021. Our average bill rate in the first quarter of 2022 for the segment was $78.99 / per hour compared to $75.12 / per hour in the first quarter of 2021. The increase in average bill rate was due to higher rates on new assignments and is reflective of the types of skill-sets that we deployed. Permanent placement / fee revenues were approximately $0.6 million during the quarter, which was $0.4 million higher than our permanent placement performance of a year ago.

Gross profits in the first quarter of 2022 totaled $15.9 million compared to gross profits of $12.8 million in the first quarter of 2021, a 24% year-over-year increase. Gross profit as a percentage of revenue was 26.7% for the three-month period ending March 31, 2022, compared to 25.7% during the same period of 2021. This point improvement reflected higher revenue levels in our high-margin Data and Analytics Services segment and improved gross margins in our IT Staffing Services segment due to higher permanent placement fees and revenues from our offshore staffing service offering.

 

19

Below is a tabular presentation of gross margin by reporting segment for the three months ended March 31, 2022 and 2021, respectively:

 

Gross margins from our Data and Analytics Services segment were 45.2% of revenues during the first quarter of 2022. This compares to gross margins of 45.7% in the first quarter of 2021, representing a point decrease due to lower utilization in the first half of the 2022 quarter.

Gross margins from our IT Staffing Services segment were 22.9% in the first quarter of 2022 compared to 21.4% during the corresponding quarter of 2021. This point improvement was largely due to higher permanent placement fees, improved utilization and revenues from our higher-margin offshore staffing service offering.

Below is a tabular presentation of operating expenses by sales, operations, amortization of acquired intangible assets and general and administrative categories for the three months ended March 31, 2022 and 2021, respectively: