Forward-Looking Statements
This Annual Report on Form10-K contains statements that are not historical facts and that constitute “forward looking statements” within the meaning of such terms under the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Actual outcomes and results may differ materially from those expressed in, or implied by, our forward-looking statements. Words such as “expects”, “intends”, “anticipates”, “believes”, “estimates”, “assumes”, “projects” and similar expressions are intended to identify such forward-looking statements. You should not rely solely on the forward-looking statements and should consider all uncertainties and risks throughout this Annual Report on Form10-K, including those described under “Risk Factors”. These statements are based on information currently available, and we undertake no obligation to update any forward-looking statement as circumstances change.
Factors or events that could cause results or performance to differ materially from those expressed in our forward-looking statements include the following:
changes in general U.S. and global economic conditions and economic conditions in the industries in which we operate;
social, political, and economic instability, unrest, significant changes, and other circumstances beyond our control, including circumstances related to changes in the U.S. political landscape;
| • | the severity and duration of the COVID-19 pandemic; |
our ability to retain existing clients and obtain new clients;
changes in competitive conditions;
our ability to introduce new service offerings;
availability of and retention of skilled technical employees and key personnel;
technological changes;
changes in accounting standards, rules and interpretations;
the terminability of many of our contracts are terminable by clients without penalty;penalty to our clients;
changes in immigration laws, patterns and other factors related to visa holders;
liabilities and unanticipated developments resulting from litigations, regulatory investigations and similar matters;
fluctuations due to currency exchange rate variations;
changes in other U.S. laws, rules and regulations, including the Internal Revenue Code;
changes in India’s geopolitical environment, laws, rules and regulations;
the impact and success of new acquisitions; and
management’s ability to identify and manage risks.risks;
| • | the outbreak of any highly infectious or contagious diseases or the occurrence of other health epidemics or other outbreaks that disrupt business and day-to-day activities; |
breach of our systems due to a cybersecurity attack;
changes in privacy and information security laws, regulations and policies;
seasonal weather conditions, climate change and severe weather; and
the escalation of conflicts in the Middle East and Ukraine and the occurrence or escalation of other global conflicts.
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| ITEM 1. | BUSINESS |
Overview
Mastech Digital, Inc. (referred to in this report as “Mastech Digital”, “Mastech”, the “Company”, “us”, “our” or “we”) is a provider of Digital Transformation IT Services. The Company offers data management and analytics services; othersolutions; digital transformation services;learning; and IT staffing services for both mainstreamdigital and digitalmainstream technologies. Headquartered near Pittsburgh, Pennsylvania, we have approximately 1,2001,300 consultants that provide services across a broad spectrum of industry verticals. From July 1986 through September 2008, we conducted our business as subsidiaries of iGATE Corporation (“iGATE”). We do not sell, lease or otherwise market computer software or hardware and essentially100%essentially 100% of our revenue is derived from the sale of data and analytics, IT staffing and digital transformation services.Digital Transformation services through our two reportable segments, Data and Analytics Services and IT Staffing Services.
Our dataData and analytics servicesAnalytics Services segment providesdelivers specialized capabilities in delivering data management, data engineering, customer experience consulting, data analytics and analyticscloud services to customers globally. This business offers project-based consultingEach of these services in the areas of Master Data Management, Enterprise Data Integration, Data and Analytics and Digital Transformation, which can be delivered using onsiteon-site and offshore resources.
Our IT staffing businessStaffing 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 includesservices include data management and analytics, cloud, mobility, social and automation. Our Digital Transformation services also include staffing and project-based services around digital learning. Our mainstream technologies services include business intelligence / data warehousing; web services; enterprise resource planning & customer resource management; ande-Business solutions. We work with businesses and institutions with significantIT-spend and recurring staffing needs. We also support smaller organizations with their “project focused” temporary IT staffing requirements.
Our digital transformation Additionally, we provide offshore staffing services includeto our U.S.-based clients and local offshore clients, and recently added engineering staffing and project-based services around Salesforce.com, SAP HANA and Digital Learning.to our portfolio of service offerings.
Sales and marketing of our services are handled by separate and distinct sales organizations within each of our two operatingbusiness segments. Our data and analyticanalytics services are marketed through 1) account executives who largely focus on new business development; and 2) technical relationship managers (principals) who focus on growing strong relationships within existing clients. Both account executives and technical relationship managers reside in either the U.S. or Canada. , Canada, India and the U.K.
Our IT staffing and digital transformationDigital Transformation services are conductedmarketed through account executives across the U.S. who deploy a telesales model, supplemented with client visits. This cost-effective model is aimed at integrator and other staffing clients, with a need to supplement their abilities to attract highly-qualifiedhighly qualified temporary IT personnel. Additionally, we use a branch service sales model in select geographies within the U.S. The branch services model employs local sales and recruitment resources, aimed at establishing strong relationships with both clientsend-clients and candidates.
We recruit for both segments through global recruitment centers located in the U.S. and India that deliver a full range of recruiting and sourcing services. Our centers employ approximately 170200 recruiters and sourcers that focus on recruiting U.S.-based candidates to service a geographically diversegeographically-diverse client base in the U.S. Our ability to respond to client requests from our offshore recruiting centers, with investment intheir expanded search coverage, round-the-clock sourcing, and recruiting processes, expanded search coverage,round-the-clock sourcing, and frequent candidate contact,extensive pool of candidates, gives us the ability to deliver high-quality candidates to our clients in a timely fashion.
History and Developments
Historically, we operated as the former Professional Services segment of iGATE.iGATE Corporation (“iGATE”). Mastech Digital, Inc. (f/k/a Mastech Holdings, Inc.) was incorporated in Pennsylvania as a wholly-owned subsidiary of iGATE on June 6, 2008, in anticipation of ourspin-off from iGATE. On September 30, 2008, wethe Company was spun-off from iGATE and began operating as an independent public company. OurTogether with our operating subsidiaries, we have 31over 36 years of history as a reliable providersprovider of IT staffing services.
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Established in 1986, our business model focused on importing global IT talent to the U.S. to meet the growing demand for IT professionals. In the early 2000s, the demand for IT professionals declined, and the supply of IT resources quickly exceeded a declining demand curve.demand. No longer was there a need to recruit abroad for technology talent, as supply was abundant in the U.S. Accordingly, we retooled our recruiting model to focus on the recruitment of local U.S.-based IT talent. Given our reputationextensive experience with and knowledge ofthe H1-B visas, visa process, part of our recruiting efforts focused on attractingH1-B visa holders currentlypresent in the U.S. at the time. This approach gave us access to a larger and differentiated recruiting pool when compared to many of our competitors.
In 2003, we launched our offshore global recruitment center model in an effort to meet an increase in industry demand with lower cost recruiting resources. Over the last fourteennineteen years, we have made significant investments in our offshore center to improve infrastructure, processes and effectiveness. Additionally, we have made investments in recent years in our domestic recruitment structure, primarily to support our branch service model.
During 2010, we made two strategic moves designed to enhance and expand our service offerings. In January 2010, we acquired Curastat, Inc., anArizona-based specialized healthcare staffing organization. This acquisition, along with the creation of Mastech Healthcare, Inc., expanded our service offerings into the healthcare staffing space. Also in January 2010, we sold our brokerage staffing business, thus focusing on our IT and healthcare staffing operations.
In August 2013, we sold our healthcare staffing operations to focus entirely on our core IT staffing business.
During the fourth quarter of 2014, we established a technology center to evaluate practice opportunities for high-demand IT skill-sets and emerging technologies. In 2015, we embarked on our first technology practice, Salesforce.com.
On June 15, 2015, we completed the acquisition of Hudson Global Resources Management, Inc.’s U.S. IT staffing business (“Hudson IT”). Hudson IT was a domestic IT staffing business with offices in Chicago, Boston, Tampa and Orlando. Hudson IT deployed a branch service business model that targeted clients that are directend-users of IT staffing services. Additionally, as part of the Hudson IT acquisition, we acquired a digital learning services practice which became one of our second technology practice.practices.
In 2016, we launched our third technology practice, SAP HANA andre-aligned our recruitment organization along technology streams to improve our focus on digital technologies, in addition to our proven capabilities to staff mainstream technologies. Additionally in 2016, we changed our name to Mastech Digital, Inc. The name change was part of our rebranding initiative that reflects our transformation into a digital technologies company. The rebranding also included a logo change and a refreshed corporate website.
In 2017, we added specialized capabilities in delivering data management and analytics services to a global customer-base through the acquisition of the services division of InfoTrellis, Inc.
Recent Developments
On July 13, 2017, we completed our acquisition of the services division of Canada-based InfoTrellis, Inc. (“InfoTrellis”), a project-based consulting services company with specialized capabilities in data management and analytics. The
In 2018 and 2019, we significantly expanded our service offerings and capabilities within our Data and Analytics Services segment.
In 2020, we launched a new service offering in our IT Staffing Services segment branded as MAS-REMOTE. This new offering allows clients to transcend beyond self-imposed geographical boundaries to gain access to top talent in the U.S. and Canada and reflects learnings from the COVID-19 pandemic that remote workers can be equally or more effective. Also in 2020, we completed the acquisition is expected to significantly strengthenof AmberLeaf Partners, Inc., (“AmberLeaf”), which enhanced our Data and Analytics Services segment’s capabilities with its expertise in customer experience consulting and managed services.
In 2021, we added cloud service capabilities to offer consultingour Data and project-based delivery of digital transformationAnalytics Services segment and expanded our IT Staffing Services segment’s MAS-REMOTE offering to include offshore staffing services. InfoTrellis, Inc. is headquartered
In 2022, we established a new subsidiary in Toronto, Canada, with offices in Austin, Texas and a global delivery center in Chennai, India.NOIDA, India to support our offshore staffing services business.
The purchase agreement for the InfoTrellis acquisition totaled $55 million, with $35.75 million paid in cash at closing (which was reduced by working capital adjustments of $861,000) and $19.25 million deferred over the two years after closing. The deferred purchase price is contingent upon the acquired business generating specified EBIT (earnings before interest and taxes) targets during the first two years following closing.In late 2023, we expanded our services offerings to include engineering staffing services.
Operating Segments
Our revenues are generated from two business segments: Data and Analytics Services and IT Staffing Services. Details related to these two businesses are discussed separately below, while information about our employees, differentiators, technologiesintellectual property rights and various other aspects of our business is shown in the aggregate for Mastech Digital, Inc.
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Data and Analytics Services
Our Data and Analytics Services business issegment began with the result of our acquisition of the services business of InfoTrellis, Inc., a Canada-based organization with locations in Austin, TX. and Chennai, India. The acquisition was completed’s service business in July 2017, and the resulting business segment is marketed as Mastech InfoTrellis, a brand that
combines the attributes of both Mastech Digital and2017. InfoTrellis, Inc. This segment provides specialized capabilities in delivering data management and analytics services to customers globally. Our business offers project-based consulting services inwas founded by the areas ofengineering principals behind IBM’s Master Data Management Enterprise (“MDM”) products and Informatica’s Customer 360 code-base. This acquisition provided Mastech InfoTrellis with a solid foundation upon which to build, as we acquired a business with one of the largest concentrations of technology-agnostic data management expertise in the marketplace. With our October 2020 acquisition of AmberLeaf, we gained complementary capabilities in customer experience consulting and managed services, as well as a sizeable roster of existing clients.
Today, professional service firms have increasingly focused their efforts on partnering with their clients on enterprise-wide Digital Transformation. Organizations that are not digitally-native are facing increased pressure to modernize the way they operate to remain competitive within their industry. The landscape of Digital Transformation providers is constantly changing with new entrants. There is constant positioning and re-positioning of existing providers to claim new and niche spaces within the transformation arena. Additionally, the components of “Digital Transformation” are open to interpretation. While there continues to be large scale discussion and a lack of consensus on what constitutes Digital Transformation, there is a general view that, at the core of the transformation is Data Integration, BigModernization — migration from legacy platforms, processes and strategies to new, dynamic, cloud-based approaches that focus on solving business problems and driving business outcomes.
Data Modernization is the core focus of our Data and Analytics Services segment. We have partnered with industry leaders in this space and Digital Transformation, which canintend to continue to broaden our reach with new partners in the future. With our recent investments, our world class delivery center in Chennai, India provides us with the ability to increase capacity to nearly 500 concurrent team members, while providing white glove access to upwards of a dozen additional clients in their own dedicated “clean rooms”. We are also re-aligning ourselves to be delivered using onsitea more dynamic, globally integrated organization across our traditional services offerings and offshore resources. to support our goal of expanding beyond niche services and providing full Data Modernization support to a wide range of organizations — from a $10 million start up to a Fortune 100 enterprise. Our mission is a simple one — we help clients put data in front of the people and machines where prudent decisions are made.
Sales and Marketing
Sales and Marketing at our Data and Analytics Services segment is a single, integrated function spanning across four groups in multiple locations: Marketing, Inside Sales, Principals, and Client Partners.
Our Marketing team is responsible for designing inbound and outbound campaigns around data and business value, for dissemination through our omni channels and industry publications. Our Marketing team also works with our experts and thought leaders to create and disseminate data management, data engineering and data science thought leadership articles and white papers.
Our Inside Sales team is responsible for operating integrated email and voice-based outbound marketing campaigns targeted at specific industries and functional populations, on an ongoing basis.
Our onshore team of Principals and Client Partners is responsible for building buyer relationships with prospects and leads, and for converting those conversations into value-positive revenue generating engagements.
| • | Our typical credit terms require our invoices to be paid within 45 to 60-days of receipt by the client. |
In addition to the above, our Partner / Alliance Relationships (such as those we have with IBM, Informatica and Oracle, among others) also provide us with a significant pipeline of opportunities and new business. Furthermore, prospective clients reach us through referrals from our existing client base, our reputation in the data & analytics domain, and through our industry partners.
Once engaged with a prospect, our approach to value-delivery starts with the definition of a discrete business problem. We then master and manage our clients’ data and develop data products and deploy purpose-
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built advanced analytics, machine learning, and artificial intelligence, to deliver greater business velocity, significant cost reduction, and greater corporate resilience.
Our Practices
Mastech InfoTrellis occurs in an integrated way,builds a strong data foundation that delivers significant business value. Our expertise and technology practice stretches across four key domain areas.
Data-in-Motion:
We create connected and modern data systems with seamless data flow through:
Agile engineering: delivering efficient and scalable code through agile development practices;
Trusted data: ensuring data integrity through robust quality assurance processes;
Streamlined integration: enabling seamless data integration with a combination of pull-marketingcomposable architecture and push-marketing methods. Pull-marketing occurs when content is generated in different formsautomation; and marketed digitally to
Data visibility: providing comprehensive data observability for monitoring and validating data ecosystems.
Data-as-an-Asset:
We bridge data acquisition and activation with better data management through MDM, Data Governance, Data Privacy, and Data Warehousing solutions.
Our approach focuses on understanding business use cases and designing technology solutions that directly address the target groups encouraging inquiries from business prospects. Targeted webinars are also conducted on topics that are relevant to our customers’end objectives.
We collaborate with industry-leading data-focused technology providers, offering tailored solutions for unique business and may therefore resulttechnical needs.
Our vast experience in potential business conversations. Outbound or push-based marketing occurs by circulating emailsdeveloping MDM platforms and placing telephone calls to business prospects, thereby soliciting inquires and striking conversations for new business development.
Mastech InfoTrellis’ business leaders, principals and sales personnel establish relationshipsour partnerships withC-level executives and/or technology decision makers within client organizations. Being among the original thought leaders in the Master Data Management space, the executives of Mastech InfoTrellis are situated in an ideal position to solicit business through prospects’ key executives.
Our sales cycle usually commences once data-focused software firms provide us with a prospective customer recognizes there is a challenge around its data management processes. Our sales team then collaborates with the principals in Mastech InfoTrellis and customizes a solution for the prospect. We provide a demonstration of a proposed solution to the prospective customer, after which the customer typically signs a master services agreement to implement the proposed solution. For those technology programs that we deliver, we generally invoice on a monthly basis or based on agreed-upon project milestones.
Projects are usually awarded on a time and material basis or on a fixed-cost basis.
Project Delivery
Mastech InfoTrellis’ project management is implemented using a Global Delivery Model that combines leadership, resourcing and execution across the U.S., Canada and India. Alldeep understanding of the principals and sales personnel of Mastech InfoTrellis are based across the U.S., and Canada. The principals are key leaders at Mastech InfoTrellis who steer clients throughout the data management programs. Our principals have extensive experience in successfully delivering multiple data management projects to differenttechnology landscape.
Data Activation:
We unlock insights for better business verticals. After a project commences, a delivery team is established to execute the program. This delivery team contains a blend of resources from North America and India. All projects follow our proprietary SMART Methodology.
Service Offerings
Mastech InfoTrellis’ technology offerings can be categorized into four major service categories:decision-making through:
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Under these four categories, Mastech InfoTrellis provides the following services:
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Technology Focus
Mastech InfoTrellis has expertise across a broad range of technology skill sets and platforms as part of its four key offerings, including the following:
Master Data Management
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Data Governance & Enterprise Data Integration
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Seamless integrations: Our experts excel at integrating sales, service, marketing, and BI platforms, for seamless data flow and efficient operations.
Empowering expertise: Post implementation, we equip clients with skills to maintain and leverage tools, manage administration, streamline business processes.
Analytics, AI, and Data & AnalyticsSciences:
We drive informed decision-making with modern statistical techniques and analytics with a strong focus on:
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Digital TransformationDomain expertise: With cutting-edge techniques and industry knowledge, we derive valuable insights, predictions, and actionable strategies from client data.
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Mastech InfoTrellis helps customers in strategizing, implementingHolistic data strategy: We develop data strategies that encompass governance, acquisition, quality, and supporting programs across theseintegration, laying a foundation for effective data-driven decision-making.
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Scalable and efficient: Leveraging scalable technologies and platforms.architectures, we handle increasing data volumes and evolving needs while providing high-performance and timely insights.
ROI and business impact: Our data-driven strategies align with client key performance indicators and help unlock cost savings, impact revenue growth, and increase process efficiencies.
Geographic and Vertical Focus
Most of Mastech InfoTrellis’ primary customer geographies are in North America; however, we have customers are locatedand prospects in Europe and the U.S. and Canada. TheAsia-Pacific region. Our target clients are North Americanlargely corporations with revenues exceeding $500 million. The average$1 billion and include Fortune 500 organizations. Our typical project value generally ranges betweensize, excluding our multi-year Center of Excellence contracts, is in the $500,000 to $3$2.5 million range depending on the constructscope and duration of the agreement.engagement. Our Center of Excellence contracts generally range from $4 million to $83 million. From a vertical perspective, customers in the financial services, retail, healthcare, manufacturing and government segments are significant users of our services. Below is a breakdown of customer revenue percentages for each industry vertical in 2017:2023:
| Financial Services | 47% | Manufacturing | 6% | |||||||
| Retail | 16% | Government | 5% | |||||||
| Healthcare | 12% | Other | 14% |
Financial Services | 35 | % | Retail | 16 | % | |||||
Healthcare | 22 | % | Government | 4 | % | |||||
Manufacturing | 18 | % | Other | 5 | % |
IT Staffing Services
In our IT Staffing Services business, we typically negotiate our business relationship by using one of three methods to gain agreement on the services to be provided. We either establish our relationship based on a simple
standard term sheet; create a Statement of Work (“SOW”) specific to a project; or enter into a master service agreement with a client that describes the framework of our relationship. In each case, a client will submit to us positions and / or requirements that they plan on satisfying by using temporary contractors. We propose consultants to the client that we believe satisfy their needs and propose an hourly bill rate for each consultant submitted. The client will select our consultant or a competing firm’s consultant based on their view of quality, fit and pricing. Consultant specific contractual details, such as billable rates, are documented as an annex to the agreement type that is chosen by the client. While we have the ability to deliver our digital transformationDigital Transformation services on a managed solutions basis, the vast majority of our assignments to date have been delivered as staffing assignments.
We generally do not enjoy exclusivity with respect to a client’s contractor needs. Most of our clients use multiple suppliers to satisfy their requirements and to ensure a competitive environment. Our success with any particular client is determined by (a) the quality and fit of our consultant; (b) our ability to deliver a quality consultant on a timely basis; and (c) pricing considerations. We recognize revenue on contract staffing assignments as services are performed (hours worked multiplied by the negotiated hourly bill rate). We invoice our clients on a weekly,bi-weekly or monthly basis, in accordance with the terms of our agreement. Typical credit terms require our invoices to be paid within 30 to 45 days of receipt by the client.
While our primary focus is on contract IT staffing and digital transformationDigital Transformation services, we also provide permanent placement services for our clients when opportunities arise. Permanent placement revenues have historically represented less thanapproximately 1% of our total revenues. In late 2023, we expanded our staffing services to include an engineering service offering. In 2023, engineering revenues were less than 1% of total revenues.
Sales and Marketing
We focustarget much of our marketing efforts on businesses and institutions with significant budgets and recurring IT staffing and digital transformationDigital Transformation needs. We look to develop relationships with new clients. In addition, we work to penetrate our existing client relationships to deeper levels. Most of our strategic relationships are established at the vice president / sales director level.
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Selling is conducted through account executives utilizing a sales model which is desirable to our clients’ needs. For clients with a need to supplement their own abilities to attract highly-qualifiedhighly qualified temporary IT personnel and prefer alow-touch sales model, such as integrator and staffing clients, we generally deploy a centralized telesales model, complemented with client visits. We supplement these domestic sales efforts through our sales organization in India, whose account executives target smaller IT staffing clients utilizing a cost-effective offshore telesales model. Forend-user clients, who typically prefer a higher-touch sales model, we generally utilize a branch service model which deploys sales and recruitment resources locally, or regionally, in select geographies within the U.S. Account executives generally are responsible for a combination of new business development efforts and expanding existing client relationships. Account executives at our branch operations call on, and meet with, potential new customers and are also responsible for maintaining existing client relationships within their geographic territory. These account executives are generally paired with recruiters and both receive incentive compensation based on revenue generation activities using a localized sales and recruitment model.
Many largeend-users of IT staffing services retain a third party to provide vendor management services to centralize the consultant hiring process and reduce costs. Under this arrangement, the third-party managed service provider (“MSP”) retains control of the vendor selection and vendor evaluation process, which somewhat weakens the relationship built with the client. Our lower-cost centralized telesales model and highly efficient offshore recruiting model have better positioned us to respond to the growing use of MSPs.
Permanent placement activities are largelyby-products of conducting our core contract staffing business. During 2017, permanent placement fees continued to represent less than 1% of total revenues.
Recruiting
We operate sevenseveral small recruiting centers located in the U.S. and one significantly larger facility in NOIDA, India, that deliver a full range of recruiting and sourcing services. Our centers employ approximately 170200 recruiters and sourcers thatwho focus on recruiting U.S.-based candidates to service a geographically diverse client base in the U.S. Our ability to respond to client requests faster than the competition is critical for success in our industry as most staffing firms access the same candidate pool via job boards and websites. OurThe combination of our offshore recruiting capabilities, with investment in sourcing and recruiting processes, expanded search coverage,around-the-clock sourcing, and frequentextensive candidate contact,pool, gives us the ability to deliver high-quality candidates to our clients in a timely fashion.
We continue to invest in leading technologies and recruitment tools to enhance efficiencies. For example, we use artificial intelligence and web-based tools to expand the reach of our candidate searches. We also employ astate-of-the-art applicant tracking system that has recently been enhanced with proprietary tool-kits and job board / internet interfacing capabilities, resulting in further operational efficiencies.
In 2016, we closed our offshore recruitment office in Bangalore, India and concentrated all of our offshore recruitment efforts exclusively in NOIDA, a town near New Delhi. In late 2014,2018, we significantly expanded our offshore recruitment offices in NOIDA which gave us the ability to nearly double our recruiter seats. This facility provides our offshore organization withstate-of-the-art infrastructure and workforce amenities to attracttop-quality recruiters and sourcers. This centralized offshore facility also affords us the ability to improve operational efficiencies compared to operating two offshore facilities.
We have access to a large and differentiated recruiting pool due to our brand recognition with bothW-2 hourly U.S. citizens andH1-B visa holders in the U.S. Unlike most staffing firms that have a high concentration of eitherH1-B workers orW-2 hourly U.S. citizens, we have historically maintained a balance ofH1-B andW-2 hourly employees. We believe that this balanced mix allows us to access a broader candidate pool than our primary competition.
Technology and Client Focus of our IT Staffing and Digital Transformation Services
Our staffing delivery teams, spread across the U.S. and India, are segmented 1) by technology,technologies, allowing us to reach deep and wide in our understanding of technology domains.domains; and 2) by client relationships which gives us a keen understanding of our clients’ needs and preferences. The delivery teams work in an integrated manner to
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provide quality IT talent with a faster turnaround time than many of our competitors. We have long-standing engagements with marquee brands such as Saleforce.com, Inc. (“Salesforce.com”), Oracle Corporation, Accenture PLC and other premier global enterprises across various industries.
IT Staffing—Mainstream Technologies
A large part of our business today comes from IT staffing services around mainstream technologies. We provide services and have strategic relationships in many high-demand mainstream technology areas including mobile and cloud-based applications. Our IT professionals help design, develop, integrate, maintain and support mainstream technologies in the following areas:
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IT Staffing—Staffing — Digital Technologies
Recognizing that a new breed of IT professionals who are adept in digital technologies areis in high demand, we enhanced our recruitment capabilities to focus on digital technology skill sets. Today, Mastech Digital provides its clients with the ability to secure skill sets that encompass social, mobile, analytics, cloud-based technologies and artificial intelligence.automation. IT staffing for digital technologies is growing much faster than mainstream technologies, a trend that is expected to continue into the future. Digital technologies include the following areas:
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Digital Transformation Services
Our stack of Digital Transformation Services focuses on providing solutions for CRM on the cloud through Salesforce.com, driving IT efficiencies through SAP HANA and using digital methods to enhance organizational learning.Staffing — Mainstream Technologies
Salesforce.com: Mastech Digital has experience and exposure in building the most efficient roadmap for implementation, integration and upgrades of Salesforce.com solutions. Our expertise across the Salesforce.com product suite delivers value that contributes to the digital transformationA large part of our client’s enterprise—including deployment of Sales Cloud, Service Cloud, Marketing Cloud, Force.com based applicationsbusiness today comes from IT staffing services around mainstream technologies. We provide services and integration with ourhave strategic relationships in many high-demand mainstream technology areas. Our IT professionals help design, develop, integrate, maintain and ERP systems. We were recently recognized as a registered consulting partner of Salesforce.com, lending more credibility to our practice.support mainstream technologies in the following areas:
SAP HANA: For SAP HANA customers, the challenge in implementing or migrating to SAP HANA is in deriving strategic business benefits that improve the enterprise bottom line. To aid our customers, we have partnered with a team of experts with vast experience in SAP
Digital Learning Services: Our Digital Learning Services provide a
Our digital learning practice provides custom training programprograms for different organizational needs. With rich experience and proven success in handling several learning and performance engagements across industries, Mastech Digital’s team combines digital and physical modes of learning methods to ensure unified organizational behavior and augmented performance across teams. Mastech Digital’s Learning Paradigmlearning paradigm consists ofWeb-based Learning, Mobile Learning, Social Learning, Hybrid Learningweb-based learning, mobile learning, social learning, hybrid learning and Virtual Learning.virtual learning.
Geographic Presence & Industry Verticals
All of our IT staffing services revenues are generated from services provided in the U.S. We market our services on a national basis and have the ability to provide services in all 50 U.S. States. Our geographical concentration tends to track major client locations, such as California, Texas, Pennsylvania Florida and Massachusetts,Virginia, and in large metropolitan areas such as Chicago and New York City and Washington, D.C.City.
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We provide these services across a broad spectrum of industry verticals, including: financial services, government, healthcare, manufacturing, retail, technology, telecommunications consumer products,
transportation and education.transportation. Below is a breakdown of our IT Staffing billable consultant base by industries that represented at least 5% of our billable consultants as of December 31, 2017:2023:
| Financial Services | 36% | Technology | 9% | |||||||
| Healthcare | 12% | Government | 5% | |||||||
| Telecom | 11% | Manufacturing | 5% | |||||||
| Other | 22% |
Financial Services | 48 | % | Telecom | 6 | % | |||||
Technology | 10 | % | Retail | 4 | % | |||||
Healthcare | 9 | % | Other | 15 | % | |||||
Government | 8 | % |
Mastech Digital, Inc.
Employees
At December 31, 2017,2023, we had approximately 1,000841 North American employees and 400556 employees offshore, in addition to over 130251 subcontracted professionals. None of our employees are subject to collective bargaining agreements governing their employment with our Company. We employ our consultants on both an hourly and salary basis. A large portion of our salaried employees areis H1-B visa holders. We believe that we enjoy a good reputation within theH1-B visa community, which allows us to access a very broad candidate pool. The majority of our hourly employees are U.S. citizens. On average, we maintain a balanced composition of salaried and hourly employees. We believe that our employee relations are good.
Intellectual Property Rights
Our intellectual property consists primarily of proprietary processes; client, employee and candidate information; and proprietary rights of third parties from whom we license intellectual property. We also own proprietary knowledge of the frameworks and products that we have built in our Mastech InfoTrellis business segment.business. We rely upon a combination of nondisclosure and other arrangements to protect our intellectual property.
Seasonality
Our operations are generally not affected by seasonal fluctuations. However, our consultants’ billable hours are affected by national holidays and vacation practices.trends. Accordingly, we typically have lower utilization rates during the fourth quarter. Additionally, assignment completions tend to be higher near the end of the calendar year, which largely impactsimpact our revenue and gross profit performance during the subsequent quarter.
Our Competitive Position
We operate in highly competitive and fragmented industries, with largely low barriers to entry.entry in our IT Staffing Services segment. In our Data and Analytics Services segment, we primarily compete with Cognizant, Tata Consultancy Services, Deloitte, Accenture, as well as with smaller boutique data and analytics firms. Many competitors are significantly larger and have greater financial resources in comparison to us. Our IT staffing servicesStaffing Services segment competes for potential clients with providers of outsourcing services, systems integrators, computer systems consultants, other staffing services firms and, to a lesser extent, temporary personnel agencies. In our data and analytics services segment, we primarily compete with IBM Services, Cognizant, Tata Consultancy Services, Deloitte, and Accenture. Many competitors are significantly larger and have greater financial resources in comparison to us.
We believe that the principal competitive factors for securing and building client relationships are driven by the ability to precisely comprehend client requirements and by providing highly-qualifiedhighly qualified personnel who are motivated to meet or exceed a client’s expectations. We must be able to do this efficiently to provide speed to market with pricing that is competitive and represents value to our clients. The principal competitive factors in attracting qualified personnel are compensation, availability, location, and quality of projects and schedule flexibility. We believe that many of the professionals included in our database may also pursue other employment opportunities. Therefore, our responsiveness to the needs of these professionals is an important factor in our ability to be successful.
Our Strengths
We believe our strengths compared to industry peers include:
Established client baseclient-base
Our client base consists of large,medium-sized and small companies that span across multiple industry verticals. Long-standing relationships with corporate clients, blue-chip IT integrators and MSPs are a core component of our future growth strategy for our staffing business, while good relationships with customer influencers and C-leveldecision makers drives our Mastech InfoTrellis business. These relationships, exemplified by our consistently low customer attrition rate, reflect our focus and commitment to our customers.
Operational excellence
In our Data and Analytics Services business, our global delivery model is designed to ensure operational excellence by delivering higher value to our customers on project-based Mastech InfoTrellis engagements. Projects are delivered using our proprietary SMART Implementation Methodology — a multi-phased approach based on parts of the Rational Unified Process (RUP) and Agile development methodologies.
In the staffing servicesIT Staffing Services business, operational excellence largely relates to a firm’s ability to effectively recruit high quality talent. Our offshore recruitment operation gives us the ability to respond to clients’ staffing needs in a timely and cost-effective manner. Investments in sourcing and recruiting processes and leading technologies and recruitment tools have resulted in a highly scalable offshore recruiting model, which has delivered value to our clients.
Additionally, we employ a human resource management model, featuring portal technology as well as immigration support services, for our widely dispersed consultant base. This model enables us to maintain attrition rates that are much lower than the industry averages for our salaried workforce.
In our data and analytics services business, our global delivery model is designed to ensure operational excellence by delivering higher value to our customers on project-based Mastech InfoTrellis engagements. Projects are delivered using our proprietary SMART Implementation Methodology—a multi-phased approach based on parts of the Rational Unified Process (RUP) and Agile development methodologies.
Minority-owned status
Our businesses benefit with some clients from the fact that we are a large minority-owned staffing firm. We have received multiple awards for our commitment to diversity. We have been certified as a minority-owned business by the National Minority Supplier Development Council (“NMSDC”). This certification is attractive to many of ourcertain existing and potential clients particularly in the U.S. government and public-sector segments, where project dollars are specifically earmarked for diversity spending.
Attractive financial profile
We have historically enjoyed a lower operating cost structure than our industry peers due to our low cost telesales in our IT Staffing Services segment and our offshore delivery models.models in both of our operating segments. These business models are cost-effective and allow us to quickly adjust our costscost structure to changes in our business environment. Our blue-chip client base has ensuredresulted in high quality accounts receivable and a strong and predictable cash flow conversion metric. Additionally, we have an existing credit facility to support our organic and inorganic growth aspirations.
Expertise in high-demand Digital Transformation IT skills
In our Data and digital transformation skillsAnalytics Services segment, we have strong expertise in data management, data engineering, analytics and customer experience consulting — both in North America as well as offshore. Additionally, we have considerable industry experience by serving some of the world’s most-respected brands in financial services, manufacturing, retail and healthcare.
We
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In our IT Staffing Services segment, we have substantial expertise in certain advanced technology IT skills, including: ERP and CRM; SOA and web services; business intelligence andcloud, mobile, data warehousing;e-Business solutions; Salesforce.com; SAP HANA& analytics, social media, artificial intelligence/machine learning and digital learning. We also have the capacity in both of our business segments to take advantage of our technical expertise in these high demand growth in these sectors,areas, as we are well positioned in terms of scale, technical capabilities, and a blue-chip client base.
Experienced management team
Several senior managers of our Data and Analytics Services business were part of the original thought leaders in the Master Data Management space, which lends significant credibility to this segment’s Master Data service offerings. Our IT staffing management team is comprised of business leaders with deep industry experience, is a unique blend of executives with significant Mastech Digital experience and others who have held leadership roles in other
companies. We believe this talent, together with combined experience across a variety of industries, allows us to capitalize on the positives of our existing business models and, at the same time, improve our service offerings, internal processes and long-term strategy for future growth.
Business leaders of our data and analytics services business were part of the original thought leaders in Master Data Management space, which lends significant credibility to this segment’s service offerings.
Reportable Financial Segments
The Company has two reportable segments in accordance with Accounting Standards Codification (“ASC”) Topic 280 “Disclosures about Segments of an Enterprise and Related Information”. Refer to Note 1716 “Business Segments and Geographic Information” to our Consolidated Financial Statements included in Item 8 herein for information about our two reportable segments.
Government Regulation
We recruit IT professionals on a global basis from time to time and, therefore, must comply with the immigration laws in the countries in which we operate. As of December 31, 2017,2023, approximately 40%37% of our employee workforce was working under Mastech Digital sponsoredH1-B temporary work permits.visa. Statutory law limits the number of newH1-B petitions that may be approved in a fiscal year.year to enter the U.S. Legislation could be enacted limitingH1-B visa holders’ employment with staffing companies. In recent years, the vast majority of ourH1-B hires were not subject to the annual quota limitingH1-B visas because they were already in the U.S. underH1-B visa status with other employers. Additionally, the U.S. Congress has recently considered, and may consider in the future, extensive changes to U.S. immigration laws regarding the admission of high-skilled temporary and permanent workers.workers and increases in prevailing wage related to H1-B employees. Such changes, if enacted, may impact the types ofH1-B temporary work visas that could be granted, the number of available H1-B temporary work permits, that may be granted or the number of availablerequired prevailing wage that we are required to pay our H1-B temporary work permits, employees, which in turn may have a negative impact on our revenues and profits.
Available Information
Our headquarters are located at 1305 Cherrington Parkway, Building 210, Suite 400, Moon Township, Pennsylvania 15108, and our telephone number is (412)787-2100. The Company’s website iswww.mastechdigital.com. Our Annual Reportannual reports on Form10-K, quarterly reports on Form10-Q, current reports on Form8-K, and other Securities and Exchange Commission (the “SEC”) filings, including any amendments to thesethe foregoing reports, are available free of charge by accessing the Investors page of the Company’s website as soon as reasonably practical after such reports are filed with, or furnished to, the Securities and Exchange Commission (the “SEC”).SEC.
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| ITEM 1A. | RISK FACTORS |
You should carefully consider each of the following risk factors and all of the other information set forth in this Annual Report on Form10-K or incorporated by reference herein. Based on the information currently known to us, we believe that the following information identifies the most significant risk factors affecting our company. However, additional risks and uncertainties not currently known to us or that we currently believe to be immaterial may also adversely impact our business.
If any of the following risks and uncertainties develop into actual events, these events could have a material adverse effect on our business, financial condition or results of operations.
Our industriesRisks Related to the Company’s Business and Operation
We are highly competitiveunable to predict the extent to which the global COVID-19 pandemic may adversely impact our business operations, financial performance and fragmented, which may limit our ability to increase our prices for services.results of operations.
The IT staffingCOVID-19 pandemic and efforts to control its spread significantly curtailed the movement of people and goods and services worldwide in regions where we sell our services and data analyticsconduct our business operations. The pandemic resulted in a global slowdown of economic activity, including travel restrictions and prohibitions of non-essential activities in some cases. Our revenues and operations were affected by a range of external factors related to the COVID-19 pandemic in 2020 and to a lesser extent in 2021, 2022 and 2023. Although we believe the immediate impact of the COVID-19 pandemic has been assessed and largely reflected in our 2023 financial results, the long-term magnitude and duration of the disruption and resulting decline in business activity is still highly uncertain and cannot be predicted. Furthermore, COVID-19 variants and efforts to control their spread could still continue to adversely affect our business, impact the demand for our services industries are highly competitive and served by numerous global, national, regionalalter the way we conduct our business, and local firms. Primary competitors include participants from a variety of
market segments, includingwe cannot predict the major consulting firms, systems consulting and implementation firms, U.S.-based staffing services companies, data and analytics service companies, applications software firms, service groups of computer equipment companies, specialized consulting firms, programming companies and temporary staffing firms. Manymagnitude or duration of these competitorseffects.
To the extent the COVID-19 pandemic or the efforts taken to control its spread or the spread of COVID-19 variants adversely affects our business and financial results, it may also have substantially greater financial, technical and marketing resources and greater name recognition than we have. There are relatively few barriers to entry intothe effect of heightening many of our markets,the other risks described in this “Risk Factors” section. Because developments concerning the COVID-19 pandemic and as suchthe spread of COVID-19 variants have been and continue to be constantly evolving, additional impacts and risks may arise that we are not aware of or that we may face additional competition from new entrants into our markets. In addition, there is a risk that clients may electnot be able to increase their internal resources to satisfy their staffing and data and analytics needs. There can be no assurance that we will compete successfully with existingappropriately or new competitors in the staffing and data analytics services markets.timely address.
Lack of success in recruitment and retention of IT and Datadata and Analyticsanalytics professionals may decrease our revenues and increase the costs needed to maintain our workforce.
Our business involves the delivery of professional services and is labor-intensive. Our success depends upon our ability to attract, develop, motivate and retain highly skilled professionals who possess the skills and experience necessary to deliver our services. Qualified IT and data and analytics professionals are in demand worldwide and are likely to remain a limited resource for the foreseeable future. There can be no assurance that these qualified professionals will be available to us in sufficient numbers, or that we will be successful in retaining current or future employees. Failure to attract and retain qualified professionals in sufficient numbers may have a material adverse effect on our business, operating results and financial condition. Historically, we have done much of our recruiting from outside of the country where the client work is performed. Accordingly, any perception among our IT professionals, whether or not well founded, that our ability to assist them in obtaining temporary work visasvisa and permanent residency status has been diminished, could lead to significant employee attrition. Any significant employee attrition will increase expenses necessary to replace and retrain our professionals and could decrease our revenues if we are not able to provide sufficient numbers of these resources to our clients.
Government regulation ofH-1B visas may materially affect our workforce and limit our supply of qualified IT professionals, or increase our cost of securing workers.
We recruit IT professionals on a global basis and, therefore, must comply with the immigration laws in the countries in which we operate, particularly the U.S. As of December 31, 2017, approximately 40% of our workforce was working under Mastech Digital sponsoredH1-B temporary work permits. Statutory law limits the number of newH1-B petitions that may be approved in a fiscal year, and if we are unable to obtainH1-B visas for our employees in sufficient quantities or at a sufficient rate for a significant period of time, our business, operating results and financial condition could be adversely affected. Additionally, legislation could be enacted limitingH1-B visa holders’ employment with staffing and data analytics companies, which could result in reduced revenues and/or a higher cost of recruiting.
In recent years, the vast majority of ourH1-B hires were not subject to the annual quota limitingH1-B visas because they were already in the U.S. underH1-B visa status with other employers. As a result, the negative impact on recruiting due to the exhaustion of recentH1-B quotas was not substantial. However, the subject ofH1-B visas has recently become a major political discussion point and there are indications that the entireH1-B visa program may be significantly overhauled. If a new or revisedH1-B visa program is implemented, there could be elements of the new/revisedH1-B visa program that may not be advantageous to our business model thus adversely impacting our business, operating results or financial condition.
Restrictions on immigration or increased enforcement of immigration laws could increase our cost of doing business, cause us to change the way we conduct our business or otherwise disrupt our operations.
The success of our business is dependent on our ability to recruit IT and data and analytics professionals and to mobilize them to meet our clients’ needs. Immigration laws in the countries in which we operate are subject to
legislative changes, as well as variations in the standards of application and enforcement due to political forces and economic conditions. It is difficult to predict the political and economic events that could affect immigration laws, or the restrictive impact they could have on obtaining or renewing work visas for our professionals.
Immigration reform continues to attract significant attention in the public arena and in the current U.S. administration and Congress. If new immigration legislation is enacted in the U.S. or in the other jurisdictions in which we do business, such legislation may contain provisions that could make it more difficult or costly for us to recruit and retain IT professionals, and to a lesser extent data and analytics professionals. Additionally, there is uncertainty as to the position the U.S. will take with respect to immigration under the new administration of President Trump. As a result, we may incur additional costs to run our business or may have to change the way we conduct our operations, either of which could have a material adverse effect on our business, operating results and financial condition. Also, we cannot be assured that the enforcement of immigration laws by governmental authorities will not disrupt our workforce.
The U.S. Congress and Trump administration may make substantial changes to fiscal, tax, and other federal policies that may adversely affect our business.
In 2017, U.S. Congress and the Trump administration has made substantial changes to U.S. policies, which included comprehensive corporate and individual tax reform. In addition, the Trump administration has called for significant changes to U.S. trade, healthcare, immigration and government regulatory policy. Some of thecalled-for changes would require Congressional approval, while others have already been, and may in the future be carried out unilaterally by the executive branch of the U.S. government. To the extent the U.S. Congress or Trump administration implements changes to U.S. policy, those changes may impact, among other things, the U.S. and global economy, international trade relations, unemployment, immigration, healthcare, the U.S. regulatory environment, inflation and other areas. Although we cannot predict the impact, if any, of these changes to our business, they could adversely affect our business. Until we know what policy changes are made and how those changes impact our business and the business of our competitors over the long term, we will not know if, overall, we will benefit from them or be negatively affected by them.
Negative economic conditions in North America. may adversely affect demand for our services.
Approximately 99% of our revenues are generated from clients located in North America. Our business depends on the overall demand for IT and data and analytics professionals and on the economic health of our clients. Weak economic conditions may force companies to reduce their staffing and data and analytics budgets and adversely affect demand for our services, thus reducing our revenues.
We may have difficulty maintaining client relationships if the trend towards utilizing Managed Service Providers (“MSPs”) continues.
Within our IT staffingStaffing Services segment, many large users of staffing services are employing MSP’s to manage their contractor expenses in an effort to drive down overall costs. MSP clients represented approximately
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32% of our overall 2023 revenues and has been largely flat in recent years. The general impact of this shift towards the MSP model has been to lower our gross margins. Should this trend towards utilizing the MSP model continue, it is likely that our gross margins will be pressured in the future. In addition, if large users of staffing services continue to employ MSPs, the relationship between us and those large users may be primarily conducted through MSPs, in which case we may have difficulty maintaining those client relationships because the MSP model uses the MSP as an intermediary between the staffing service provider and theend-user, and reduces our direct contact with theend-user.
We are dependent upon our Indian operations and there can be no assurance that our Indian operations will support our growth strategy and historical cost structure.
Our Indian recruitment and delivery centers depend greatly upon business and technology transfer laws in India, and upon the continued development of technology infrastructure. There can be no assurance that our Indian operations will support our growth strategy. The risks inherent in our Indian business activities include:
unexpected changes in regulatory environments;
foreign currency fluctuations;
tariffs and other trade barriers;
difficulties in managing international operations; and
the burden of complying with a wide variety of foreign laws and regulations.
Our failure to manage growth or attract and retain personnel, or a significant interruption in our ability to transmit data and voice efficiently, could have a material adverse impact on our ability to successfully maintain and develop our global recruitment and delivery centers and could have a material adverse effect on our business, operating results and financial condition.
The Indian rupee may increase in value relative to the dollar, increasing our costs. Although, we receive the vast majority of our revenues in U.S. dollars, we maintain a significant portion of our recruiting and delivery workforces in India, and those employees are paid in rupees. Therefore, any increase in the value of the rupee versus the dollar would increase our expenses, which could have a material adverse effect on our business, operating results and financial condition.
Regional conflicts in South Asia could adversely affect the Indian economy, disrupt our operations and cause our business to suffer.
South Asia has, from time to time, experienced instances of civil unrest and hostilities among neighboring countries, such as between India and Pakistan and even within India. There have been military confrontations along the India-Pakistan border from time to time. The potential for hostilities between the two countries is high due to past terrorist incidents in India, troop mobilizations along the border, and the geopolitical situation in the region. Military activity or terrorist attacks in the future could influence the Indian economy by disrupting communications and making travel more difficult. This, in turn, could have a material adverse effect on our business, operating results and financial condition.
Wage costs in India may increase, which may reduce our operating margins and reduce a competitive advantage of ours.
Our wage costs in India have historically been significantly lower than wage costs in the U.S. for comparably skilled professionals, and this has been one of our competitive advantages with respect to the costs of our Indian recruiting and delivery offices. However, wage increases in India may prevent us from sustaining this competitive advantage and may negatively affect our operating margins. We may need to increase the levels of our employee compensation more rapidly than in the past to retain talent. Unless we are able to continue to increase the efficiency and productivity of our employees, wage increases in the long term may reduce our overall margins.
Our quarterly operating results may be subject to significant variations.
Our revenues and operating results have historically been subject to significant variations from quarter to quarter depending on a number of factors, including the timing and number of client projects commenced and completed during the quarter, the number of working days in a quarter, employee hiring and attrition, and utilization rates during the quarter.
Our acquisitionmulti-year Center of Hudson ITExcellence service offering may not provide usbe early terminated with a short notice from the long-term business advantages that we expectedclient, which may result in the slower growth ofcould materially impact our backlog and adversely affect our business and reduced operating margins.future revenues.
Our June 15, 2015 acquisitionData and Analytics Services segment markets a multi-year service offering known as a Center of Hudson ITExcellence. This service provides our clients with a virtual extension of their internal team to assist with their data and analytics business strategies and objectives. These engagements are generally multi-year and provide added flexibility to the purchase price of such was basedclient by adjusting dedicated readily-available and appropriately skilled resources on an as needed basis. While these engagements provide opportunities to partner with and deeply understand a series of long-term assumptionsclient’s data management and estimates. Thereanalytics longer-term objectives, these contracts generally can be no assurance that these expectations will be completely realizedearly terminated by the client with a short-term notice. Should a client terminate an engagement early, this termination could materially impact our backlog of orders and could result in a material adverse effect on our business, operating results and financial condition.
Our acquisition of InfoTrellis, Inc. may not provide us with the long-term business advantages that we expected which may result in the slower growth ofadversely affect our business and reduced operating margins.future revenues.
Our July 13, 2017 acquisition of the service division of InfoTrellis, Inc. and the purchase price of such was based on a series of long-term assumptions and estimates. There can be no assurance that these expectations will be completely realized and could result in a material adverse effect on our business, operating results and financial condition.
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Our strategy of expansion through the acquisition of additional companies may not be successful and may result in slower growth of our business and reduced operating margins.
We plan to gradually expand our operations through the acquisition of, or investment in, additional businesses and companies. We may be unable to identify businesses that complement our strategy for growth. If we do succeed in identifying a company with such a business, we may not be able to acquire the company, its relevant business or an interest in the company for many reasons, including:
a failure to agree on the terms of the acquisition or investment;
incompatibility between us and the management of the company that we wish to acquire or invest;
competition from other potential acquirers;
a lack of capital to make the acquisition or investment; or
the unwillingness of the company to partner with us.
If we are unable to acquire and invest in attractive businesses, our strategy for growth may be impaired. Even if we are able to complete one or more acquisitions, there can be no assurance that those completed acquisitions will result in successful growth, and the costs of completing an acquisition may reduce our margins.
We have made in the past, and may make in the future, acquisitions which could require significant management attention, disrupt our existing business, result in dilution to our shareholders, deplete our cash reserves, increase our debt levels and adversely affect our financial results.
Acquisitions, such as our recent acquisitions of Hudson IT, and the services division of InfoTrellis, Inc., and AmberLeaf Partners, Inc., involve numerous risks, including the possibility that:
we do not successfully integrate the operations, systems, technologies, products, offerings and personnel of the acquired company or companies;
we do not generate sufficient revenues to offset increased expenses associated with our acquisitions;
our management’s attention is diverted from normal daily operations of our business and the challenges with managing larger and more widespread operations resulting from our acquisitions;
we experience difficulties entering markets in which we have no or limited direct prior experience and where competitors in such markets have stronger market positions; and
we lose key employees, customers, distributors, vendors and other business partners of the companies we acquire following and continuing after announcement of acquisition plans.
In addition to the foregoing, acquisitions may also cause us to:
use a substantial portion of our cash reserves or incur debt;
issue equity securities or grant equity incentives that dilute our current shareholders’ percentage ownership;
assume liabilities, including potentially unknown liabilities;
record goodwill and amortizable intangible assets that are subject to impairment testing on a regular basis and potential periodic impairment charges;
incur amortization expenses related to certain intangible assets;
incur large and immediate write-offs and restructuring and other related expenses; and
become subject to intellectual property litigation or other litigation.
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Acquisitions of technology companies and assets are inherently risky and subject to many factors outside of our control, and no assurance can be given that our recently completedprior or future acquisitions will be successful and will not materially adversely affect our business, operating results, or financial condition. Failure to manage and successfully integrate acquisitions could materially harm our business and operating results.
Changes in the inputs used to calculate our acquisition-related contingent consideration liabilities could have a material adverse impact on our financial results.
In connection with the InfoTrellis acquisition, we may be required to pay future consideration that is contingent upon the achievement of specified EBIT objectives (“earnings before interest and taxes”). As of the acquisition date, we recorded a contingent consideration liability representing the estimated fair value of the contingent consideration that is expected to be paid. This estimated fair value is based upon assumptions we believe to be reasonable but which are uncertain and involve significant judgments by management. Changes in business conditions or other events could materially change the inputs used in this fair value calculation, which could cause us to record a change in the contingent consideration liability. Any such adjustment could have a material effect on our results of operations.
Our revenues are highly concentrated, and the loss of a significant client would adversely affect our business and revenues.
Our revenues are highly dependent on clients located in North America.,America, as well as clients concentrated in certain industries. Economic slowdowns, changes in law and other restrictions or factors that affect the economic health of these industries may affect our business. For the year ended December 31, 2017,2023, approximately 47%53% of our revenues were derived from our top ten clients and approximately 50% of revenues came from financial services clients. Consequently, if our clients reduce or postpone their spending significantly, this may lower the demand for our services and negatively affect our revenues and profitability. Further, any significant decrease in the rate of economic growth may reduce the demand for our services and negatively affect our revenues and profitability.
We have in the past, and may in the future, derive a significant portion of our revenues from a relatively limited number of clients. These contracts are terminable without penalty, as are most of our contracts. The loss of any significant client or major project, or an unanticipated termination of a major project, could result in the loss of substantial anticipated revenues.
Our leverage could materially and adversely affect our financial condition or operating flexibility and prevent us from fulfilling our obligations under our Credit Agreement.
At December 31, 2017,2023, we had no outstanding borrowings of $38.5 million under our Credit Agreement with PNC Bank and certain other financial institution lenders (the “Credit Agreement”), which amount consists and unused borrowing capacity of
$29.5 $22.5 million of outstanding borrowings under the term loan thereunder and $9.0 million of outstanding borrowings under the revolving credit facility thereunder.established by the Credit Agreement. Our level of indebtedness (which may increase) could have important consequences on our future operations, including the following:
increasing the risk that we cannot satisfy our payment or other obligations under our outstanding debt, which may result in defaults;
subjecting us to increased sensitivity to interest rate increases on our outstanding indebtedness, which could cause our debt service obligations to increase significantly;
reducing the availability of our cash flows to fund working capital, capital expenditures, acquisitions and other general corporate purposes, and limiting our ability to obtain additional financing for these purposes;
limiting our flexibility in planning for, or reacting to, and increasing our vulnerability to, changes in our business, the industry in which we operate and general economic conditions;
placing us at a competitive disadvantage compared to our competitors that have less debt or are less leveraged; and
increasing our vulnerability to the impact of adverse economic and industry conditions.conditions; and
limiting our ability to execute on our existing share repurchase program.
In addition, we may incur additional indebtedness in the future and, if we incur new debt or other liabilities, the related risks that we face could intensify.
Our ability to make required payments or to refinance our indebtedness depends on our future performance, which will be affected by financial, business and economic conditions and other factors, many of which are not inwithin our control. If our cash flows and capital resources are insufficient to fund our debt service obligations, we
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may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital, or restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In addition, the terms of existing or future debt agreements and other factors may restrict us from pursuing any of these alternatives.
If we are in default under ourthe Credit Agreement due to our inability to make the required payments, or if we otherwise fail to comply with the financial and other covenants contained therein, all of our debt thereunder could be accelerated and the lenders under our Credit Agreement could be permitted to foreclose on our assets securing such debt.
The covenants in our Credit Agreement impose restrictions that may limit our operating and financial flexibility.
The Credit Agreement contains 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 and contingent liabilities, loans and investments, distributions, leases, asset sales, stock repurchases and mergers and acquisitions. These covenants and limitations may limit our ability to, among other things:
create, incur or assume liens;
make investments and loans;
create, incur, assume or guarantee additional indebtedness;
engage in mergers, acquisitions, consolidations, sale-leasebacks and other similar transactions;
pay dividends, or redeem or repurchase our capital stock;
alter the business that we conduct;
prepay, redeem or purchase other indebtedness;
enter into certain agreements; and
make material changes to accounting and reporting practices.
Operating results below current levels or other adverse factors, including increases in interest rates, could result in us being unable to comply with certain covenants contained in our Credit Agreement. If we violate these covenants and are unable to obtain waivers, our debt under the Credit Agreement would be in default, could be accelerated and could permit our lenders to foreclose on our assets securing the debt thereunder. If the indebtedness is accelerated, we may not be able to repay our debt or borrow sufficient funds to refinance it. Even if we are able to obtain new financing, it may not be on commercially reasonable terms or on terms that are acceptable to us. If our debt is in default for any reason, our cash flows, operating results, or financial condition could be materially and adversely affected. In addition, complying with these covenants may also cause us to take actions that may make it more difficult for us to successfully execute our business strategy and compete against companies that are not subject to such restrictions.
We must keep pace with the rapid technological changes that characterize the IT and data and analytics industries and our failure to do so could result in lower demand for services.
The IT staffing and data analytics services industries are characterized by rapid technological change, evolving industry standards, changing client preferences and new product introductions. Our success will depend in part on our ability to keep pace with industry developments. There can be no assurance that we will be successful in addressing these developments on a timely basis or that, if these developments are addressed, we
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will be successful in the marketplace. In addition, there can be no assurance that products or technologies developed by others will not render our services noncompetitive or obsolete. Our failure to address these developments could have a material adverse effect on our business, operating results and financial condition.
A significant number of organizations areis attempting to migrate their IT business applications to advanced technologies.technologies, such as artificial intelligence, cloud services, data scientists, mobility, and social analytics. As a result, our ability to remain competitive depends on several factors, including our ability to develop, train and hire employees with skills in advanced technologies. Our failure to hire, train and retain employees with such skills could have a material adverse impact on our future revenues.
Our “preferred vendor” contracts generally result in lower margins. In addition, we may not be able to maintain “preferred vendor” status with existing clients or obtain that status with new clients, which may lead to a decrease in the volume of business we obtain from these clients.
In our IT staffing segments,Staffing Services segment, we are party to several “preferred vendor” contracts, and we are seeking additional similar contracts in order to obtain new or additional business from large andmedium-sized clients. Clients enter into these contracts to reduce their number of vendors and obtain better pricing in return for a potential increase in the volume of business to the preferred vendor. While these contracts are expected to generate higher volumes, they generally carry lower margins. Although we attempt to lower costs to maintain margins, there can be no assurance that we will be able to sustain margins on such contracts. In addition, the failure to be designated as a preferred vendor, or the loss of such status, may preclude us from providing services to existing or potential clients, except as a subcontractor, which could have a material adverse effect on the volume of business obtained from such clients.
Our success depends upon the maintenance and protection of our intellectual property rights and processes, and any substantial costs incurred protecting such rights and processes may decrease our operating margins.
Our success depends in part upon certain methodologies and tools we use in designing, developing and implementing application systems and other proprietary intellectual property rights. We rely upon a combination
of nondisclosure and other contractual arrangements and trade secrets, copyright and trademark laws to protect our proprietary rights and the proprietary rights of third parties from whom we license intellectual property. We enter into confidentiality agreements with our employees and limit distribution of proprietary information. There can be no assurance that the steps we take in this regard will be adequate to deter misappropriation of proprietary information or that we will be able to detect unauthorized use and take appropriate steps to enforce our intellectual property rights. In the event of an unfavorable resolution of a dispute over our intellectual property rights, we may incur substantial costs or liabilities, which would decrease our operating margins.
Our ownership is highly concentrated in two individuals and the interests of those individual shareholders may not coincide with yours.
Sunil Wadhwani and Ashok Trivedi,co-founders of the Company, own approximate 62% of Mastech Digital’s outstanding common stock. Accordingly, Messrs. Wadhwani and Trivedi together have sufficient voting power to elect all the members of the Board of Directors and to effect transactions without the approval of our other shareholders, except for those limited transactions that require a supermajority vote under our bylaws or articles of incorporation. The interests of Messrs. Wadhwani and Trivedi may from time to time diverge from our interests. Mastech Digital’s Audit Committee consists of independent directors and addresses certain potential conflicts of interest and related party transactions that may arise between us and our directors, officers or our other affiliates. However, there can be no assurance that any conflicts of interest will be resolved in our favor.
Our business is certified as a minority-owned business, and loss of that certification may impact our ability to gain new customers or expand our business with existing customers.
We are a large minority-owned staffing and data analytics services firm and have been certified as minority-owned by the National Minority Supplier Development Council (the “NMSDC”). NMSDC certification has helped us to expand our business with existing clients as well as obtain new customers. While we cannot quantify the effect of the loss of this status, its loss could adversely affect our ability to expand our business or cause us to lose existing business.
Because the NMSDC certification relies in large part upon Messrs. Wadhwani and Trivedi and their affiliates maintaining their positions as the collective majority holders of our common stock, any decrease in their collective ownership may jeopardize our status as a minority-owned business. There can be no assurance that Messrs. Wadhwani and Trivedi and their affiliates will maintain their majority position in the Company.
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Existing and potential customers may consider outsourcing their IT requirements to foreign countries, which could have an adverse effect on our ability to obtain new customers or retain existing customers.
In the past few years, more companiescertain of our existing and potential customers started to uselow-cost offshore outsourcing centers to perform technology-related work. Should this shift towards moving technology-related work to offshore outsourcing centers continue, our business, operating results and financial condition could be adversely effected.affected.
We may be subject to liability to clients arising from our engagements.
Many of our engagements involve projects that are critical to the operations of our clients’ businesses and provide benefits that may be difficult to quantify. Although we attempt to contractually limit our liability for damages arising from errors, mistakes, omissions or negligent acts in rendering our services, there can be no assurance that our attempts to limit liability will be successful. Our failure or inability to meet a client’s expectations in the performance of our services could result in a material adverse change to the client’s operations and, therefore, could give rise to claims against us or damage our reputation, adversely affecting our business, operating results and financial condition.
We may face data protection, data security, and privacy risks in connection with privacy regulation.
RequirementsStrict data privacy laws regulating the collection, transmission, storage and use of employee data and consumers’ personally identifying information are evolving in the Affordable Care Act may continue to increase ourU.S. and other jurisdictions in which we operate. These laws impose compliance obligations for the collection, use, retention, security, processing, transfer and deletion of personally identifiable information of individuals and creates enhanced rights for individuals. These changes in the legal and regulatory environments in the areas of customer and employee benefits costsprivacy, data security, and could negatively affect our operating results, cashcross-border data flows and financial condition if such costs aren’t recovered with increases in client bill rates.
We provide healthcare coverage to our U.S.-based employees that are subject to the Affordable Care Act (“ACA”). Additional provisions of the ACA and the compliance of such may result in higher overall costs to the Company, which could have a negative impactmaterial adverse effect on our operating results, cash flowsbusiness, primarily through the impairment of our marketing and financial condition.transaction processing activities, the limitation on the types of information that we may collect, process and retain, the resulting costs of complying with such legal and regulatory requirements and potential monetary forfeitures and penalties for noncompliance.
Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.
In the ordinary course of our business, we collect and store sensitive data, including intellectual property, our proprietary business information and that of our customers, suppliers and business partners, and personally identifiable information of our customers and employees, in our data center and on our networks. The secure processing, maintenance and transmission of this information is critical to our operations and business strategy. Our hybrid work-from-home business model may heighten risks of security breaches. Despite ourhaving implemented security measures to address risks of security breaches, we experienced a cybersecurity breach in 2022 involving a single employee email account and which indirectly impacted two Mastech InfoTrellis clients. We incurred an expense charge of $450,000 in 2022 related to this event, which included the cost of engaging external advisors. While we adopted certain remedial measures as a result of this incident, our information technology and infrastructure may still be vulnerable to security breaches and other disruptions, including attacks by hackers, or breachedbreaches due to employee error, malfeasance or other disruptions. Any such breach or disruption could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, and regulatory penalties, disrupt our operations and the services we provide to customers, and damage our reputation, and cause a loss of confidence in our services, which could adversely affect our operating results and competitive position. We maintain cyber risk insurance, but this insurance may not be sufficient to cover all of our losses from any breaches of our networks.
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We depend on the proper functioning of our information systems.
We are dependent on the proper functioning of information systems in operating our business. Critical information systems are used in every aspect of our daily operations, perhaps most significantly, in the identification and matching of staffing resources to client assignments and in the client billing and consultant or vendor payment functions. Our information systems may not perform as expected and are vulnerable to damage or interruption including natural disasters, fire or casualty theft, technical failures, terrorist acts, cybersecurity breaches, power outages, telecommunications failures, physical or software intrusions, computer viruses, employee errors or other events. Failure or interruption of our critical information systems may require significant additional capital and management resources to resolve, which could have a material adverse effect on our business. Additionally, many of our information technology systems and networks are cloud-based or managed by third parties, whose future performance and reliability we cannot control. The risk of a cyber-attack or security breach on a third party carries the same risks to us as those associated with our internal systems. There can be no assurance that such parties will not experience cybersecurity breaches that could adversely affect our employees, customers and businesses or that our audit or diligence processes will successfully deter or prevent such breach.
If our clients are subjected to cyber-attacks or data security breaches, it may result in damage to our business and the disclosure of our confidential information.
In addition to cybersecurity threats posed directly against us, our clients’ information systems are also vulnerable to an increasing threat of continually evolving cybersecurity risks. There is no guarantee that our clients have implemented procedures that are adequate to safeguard against all data security breaches. The failure of our clients to adequately safeguard against data security breaches could have a material adverse effect on our business and operations. The theft and/or breach of our clients’ data security could cause the disclosure and/or loss of our confidential information and data and result in significant costs. In addition, any cybersecurity damage to the networks or computer systems used by us or our clients could result in a claim for substantial damages against us and significant reputational harm, regardless of our responsibility for the failure.
Risks posed by climate change may materially increase our compliance costs and adversely impact our profitability.
Climate change vulnerability is posing new threats and opportunities in the global economy. Climate change and measures adopted to address it can affect us, our clients and suppliers in myriad ways, depending on the nature and location of the businesses, the near-term capital expenditure needs, the regulatory environments where they operate and their strategic plans. Generally, climate risks and opportunities for companies and their investors fall into four categories:
Unmitigated climate change is likely to have severe physical impacts on companies with exposed assets or business operations, including Mastech Digital. Major environmental risks and liabilities can significantly impact future earnings. To the extent we are unable to comply with applicable regulations related to climate change, and such failure to comply results in material increases in compliance costs or litigation expenses, those costs or expenses will have an adverse effect on our profitability.
If our clients are adversely affected by climate change or related compliance costs, this may reduce their spending and demand for our services, leading to a decrease in revenue.
In addition to emissions and climate change risks posed directly to Mastech Digital, we also have clients in varied industries such as healthcare, consumer products, manufacturing, technology, and retail, among others. Some of the clients may be significantly affected by the climate change resulting in greater physical risk. This may lead to a reduction of demand and loss of business from such clients, which would impact our business, results of operations and financial condition.
If our insurance costs increase significantly, these incremental costs could negatively affect our financial results.
We purchase various insurance policies to limit or transfer certain risks inherent in our operations. These costs largely relate to obtaining and maintaining professional and general liability insurance policies. If the costs of carrying these insurance policies increase significantly, due to poor claims history or changes in market conditions, this could have an adverse impact on our profitability and financial condition.
We may not have adequate insurance for potential liabilities, including liabilities arising from litigation.
We are exposed to various possible claims relating to our business. In the ordinary course of business, we have, and in the future, may become the subject of various claims, lawsuits, and administrative proceedings seeking damages or other remedies concerning our operations, products, services, employees and other matters. Some of these claims may relate to the activities of businesses that we have acquired, even though these activities may have occurred prior to our acquisition of such businesses. While we maintain insurance to cover certain of our potential losses, we cannot ensure that our insurance will cover all claims or that insurance coverage will be available at economically acceptable rates. Our ability to obtain insurance, and the coverage levels, deductibles and premiums of our insurance, are all dependent on market factors, our loss history and our insurers’ perception of our overall risk profile. Our insurance may also require us to meet a deductible. Significant uninsured liabilities could have a material adverse effect on our business, financial condition and results of operations.
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Any disruption in the supply of power, IT infrastructure and telecommunications lines to our facilities could disrupt our business process or subject us to additional costs.
Any disruption in basic infrastructure, including the supply of power, could negatively impact our ability to provide timely or adequate services to our clients. We rely on a number of telecommunication services and other infrastructure providers to maintain communications between our various facilities and clients. Telecommunications networks are subject to failures and periods of service disruption which can adversely affect our ability to maintain active voice and data communications among our facilities and with our clients. This could disrupt our business process or subject us to additional costs, materially adversely affecting our business, results of operations and financial condition.
The broad provisionsOur inability to successfully recover should we experience a disaster or other business continuity problem could cause material financial loss, loss of human capital, regulatory actions, reputational harm or legal liability.
Should we experience a disaster or other business continuity problem, such as an earthquake, hurricane, terrorist attack, pandemic, security breach, power loss, telecommunications failure or other natural or man-made disaster, our continued success will depend, in part, on the Tax Cutavailability of our personnel, our office facilities, and Jobs Actthe proper functioning of 2017 may negatively impactour computer, telecommunication and other related systems and operations. In such an event, we could experience near-term operational challenges with regard to particular areas of our operations. In particular, our ability to receive tax deductions forrecover from any disaster, pandemic or other business continuity problem will depend on our ability to protect our technology infrastructure against damage from business continuity events that could have a significant disruptive effect on our operations. We could potentially lose client data or experience material adverse interruptions to our operations or delivery of services to our clients in a disaster. A disaster or pandemic, on a significant scale or affecting certain expenses thatof our key operating areas within or across regions, or our inability to successfully recover should we incur, whichexperience a disaster, pandemic or other business continuity problem, could materially interrupt our business operations and cause material financial loss, loss of human capital, regulatory actions, reputational harm, damaged client relationships or legal liability. For example, the COVID-19 pandemic and governmental actions taken to curtail the spread of the virus had an impact on our employees, customers and third-party providers and impacted the level of economic activity. Any such disaster or other business continuity problem could have a material adverse impact on our revenues and profitability.
Risks posed by climate change may materially increase our compliance costs and adversely impact our cash flows, results of operationsprofitability.
Climate change vulnerability is posing new threats and financial condition.
The Tax Cut and Jobs Act of 2017 (the “Tax Cut and Jobs Act”) enacted on December 22, 2017, makes broad and complex changes to the U.S. tax code including, but not limited to, the following, which may impact us: 1) reductionsopportunities in the U.S. federal corporate income tax rate from 35 percentglobal economy. Climate change and measures adopted to 21 percent; 2) new limitationsaddress it can affect us, our clients and suppliers in myriad ways, depending on deductible interest expense; 3) limitationsthe nature and location of the deductibilitybusinesses, the near-term capital expenditure needs, the regulatory environments where they operate and their strategic plans. Generally, climate risks and opportunities for companies and their investors fall into four categories:
Physical risk from climate change;
Regulatory risks and opportunities related to existing or proposed greenhouse gas (“GHG”) emissions limits;
Indirect regulatory risks and opportunities related to products or services from high emitting companies; and
Litigation risks for emitters of certain executive compensation;greenhouse gases.
Unmitigated climate change is likely to have severe physical impacts on companies with exposed assets or business operations, including Mastech Digital. Major environmental risks and 4) limitsliabilities can significantly impact future earnings. To the extent we are unable to comply with applicable regulations related to climate change, and such failure to comply results in material increases in compliance costs or litigation expenses, those costs or expenses will have an adverse effect on certain other typesour profitability.
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Our success depends upon retaining the services of deductions. While we continue to evaluateour management team and key operating employees.
We are highly dependent on our management team and expect that our success will depend largely upon their efforts, expertise and abilities. Over the effects of this legislation,last several years, we have recorded a $372,000 tax expenseexperienced turnover in 2017 related to the estimatedre-measurementleadership of our deferred tax asset balanceData and an estimatedone-time transition tax applicable to the new dividend exemption rules related to foreign earnings. While we expect that the Tax Cut and Jobs Act will have a favorable impact on us beginning in 2018 due to the reduction in the federal corporate income tax rate, it is possible that other provisions of this ActAnalytics Services segment, and the absenceloss of guidance on various ambiguities in the applicationservices of certain provisions thereunderany of our key executives for any reason could have a material adverse effect on our cash flows,business. To attract and retain executives and other key employees in a competitive marketplace, we must provide a competitive compensation package, including cash-based and equity-based compensation. The loss or any sustained attrition of our key operating employees, or the failure to effectively integrate new members of our management team or key operating employees, could have a material adverse effect on our business, including our ability to establish and maintain client, consultant and candidate, professional and technical relationships.
Risks Related to Governmental Regulations, Laws and Taxation
Government regulation of H1-B visas may materially affect our workforce and limit our supply of qualified IT professionals, or increase our cost of securing workers.
We recruit IT professionals on a global basis and, therefore, must comply with the immigration laws in the countries in which we operate, particularly the U.S. As of December 31, 2023, approximately 37% of our employee workforce was working under Mastech Digital sponsored H1-B temporary work visas. Applicable law limits the number of new H1-B petitions that may be approved in a fiscal year, and if we are unable to obtain H1-B visas for our employees in sufficient quantities or at a sufficient rate for a significant period of time, our business, operating results and financial condition could be adversely affected. Additionally, legislation could be enacted limiting H1-B visa holders’ employment with staffing and data analytics companies, which could result in reduced revenues and/or a higher cost of recruiting.
In recent years, the vast majority of our H1-B hires were not subject to the annual quota limiting H1-B visas because they were already in the U.S. under H1-B visa status with other employers. As a result, the negative impact on recruiting due to the exhaustion of recent H1-B quotas was not substantial. However, the subject of H1-B visas has recently become a major political discussion point and there are indications that the entire H1-B visa program may be significantly overhauled. If a new or revised H1-B visa program is implemented, there could be elements of the new/revised H1-B visa program that may not be advantageous to our business model thus adversely impacting our business, operating results or financial condition.
Reclassification of our independent contractors by tax or regulatory authorities could have a material adverse effect on our business model and/or could require us to pay significant retroactive wages, taxes and penalties.
We utilize individuals to provide certain services in connection with our business as qualified third-party independent contractors rather than as direct employees. As of December 31, 2023, approximately 15% of our workforce were independent contractors. Heightened state and federal scrutiny of independent contractor relationships could adversely affect us given that we utilize independent contractors to perform certain services. An adverse determination related to the independent contractor status of these subcontracted personnel could result in substantial taxes or other liabilities to us, which could result in a material adverse effect upon our business.
Restrictions on immigration or unjustified or discriminatory enforcement of immigration laws could increase our cost of doing business, cause us to change the way we conduct our business or otherwise disrupt our operations.
The success of our business is dependent on our ability to recruit IT and data and analytics professionals and to mobilize them to meet our clients’ needs. Immigration laws in the countries in which we operate are subject to legislative changes, as well as variations in the standards of application and enforcement due to political forces and economic conditions. It is difficult to predict the political and economic events that could affect immigration laws, or the restrictive impact they could have on obtaining or renewing work visas for our professionals.
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Immigration change continues to attract significant attention in the public arena and in the current U.S. administration and Congress. If new immigration legislation is enacted in the U.S. or in the other jurisdictions in which we do business, such legislation may contain provisions that could make it more difficult or costly for us to recruit and retain IT professionals, and to a lesser extent data and analytics professionals. Additionally, there is uncertainty as to the position the U.S. will take with respect to immigration under the Biden administration or any new administration. As a result, we may incur additional costs to run our business or may have to change the way we conduct our operations, either of which could have a material adverse effect on our business, operating results and financial condition. Also, if the enforcement of immigration laws by governmental authorities is unjustified or discriminatory, such enforcement could have the effect of disrupting our workforce.
The U.S. Congress, the Biden administration, or any new administration may make substantial changes to fiscal, tax, and other federal policies that may adversely affect our business.
In 2017, the U.S. Congress and the Trump administration made substantial changes to U.S. policies, which included comprehensive corporate and individual tax reform. In addition, the Trump administration called for significant changes to U.S. trade, healthcare, immigration and government regulatory policy. With the transition to the Biden administration in early 2021, changes to U. S. policy have occurred and further U.S. policy changes are possible, if not likely. Changes to U.S. policy implemented by the U.S. Congress, the Biden administration or any new administration may impact, among other things, the U.S. and global economy, international trade relations, unemployment, immigration, healthcare, taxation, the U.S. regulatory environment, inflation and other areas. Although we cannot predict the impact, if any, of these changes to our business, they could adversely affect our business. Until we know what policy changes are made and how those changes impact our business and the business of our competitors over the long term, we will not know if, overall, we will benefit from them or be negatively affected by them.
Adverse results in tax audits or interpretations of tax laws could have an adverse impact on our business.
We are subject to periodic federal, state and local tax audits for various tax years. We also need to comply with new, evolving or revised tax laws and regulations. The Tax Cuts and Jobs Act of 2017 continues to require interpretation, and a new administration could modify key aspects of the tax code, which could materially affect our tax obligations and effective tax rate. Although we attempt to comply with all taxing authority regulations, adverse findings or assessments made by taxing authorities as the result of an audit could have a material adverse effect on our business, results of operations and financial condition.
Requirements of the Affordable Care Act may continue to increase our employee benefits costs and could negatively affect our operating results, cash flows and financial condition if such costs aren’t recovered with increases in client bill rates.
We provide healthcare coverage to our U.S.-based employees that are subject to the Affordable Care Act (“ACA”). Additional provisions of the ACA and the compliance of such may result in higher overall costs to the Company, which could have a negative impact on our operating results, cash flows and financial condition.
Risks Related to Economic and Financial Conditions
We make estimates and assumptions in connection with the preparation of our consolidated financial statements and any changes to those estimates and assumptions could adversely affect our financial results.
Our financial statements have been prepared in accordance with U.S. generally accepted accounting principles. The application of these principles require us to make estimates and assumptions about certain items and future events that may affect our reported financial statements and our accompanying disclosure with respect to, among other things, revenue recognition, purchase accounting fair value measurements, contingent consideration and taxation related items. We base our estimates on historical experience and on various other
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assumptions that we believe are reasonable at the time they are made. These estimates and assumptions involve the use of judgment and can be subject to uncertainties, some of which are beyond our control. If our estimates or the assumptions underlying such estimates are incorrect, actual results may differ materially from our estimates and we may need to, among other things, revise revenues or recognize additional charges that could adversely impact our results of operations and our financial condition.
Negative or uncertain economic conditions in North America or elsewhere may adversely affect demand for our services.
Approximately 99% of our revenues are generated from clients located in North America. Our business depends on the overall demand for IT and data and analytics professionals and on the economic health of our clients. Weak economic conditions may force companies to reduce their IT staffing and data and analytics budgets and adversely affect demand for our services, thus reducing our revenues. Furthermore, economic uncertainty, including the concerns of our clients and other companies with respect to inflationary conditions in North America and elsewhere, has had and may continue to have an adverse impact on the demand for our services, which in turn could have a material adverse effect on our business, operating results and financial condition.
Our industries are highly competitive and fragmented, which may limit our ability to increase our prices for services.
The IT staffing services and data analytics services industries are highly competitive and served by numerous global, national, regional and local firms. Primary competitors include participants from a variety of market segments, including the major consulting firms, systems consulting and implementation firms, U.S.-based staffing services companies, data and analytics service companies, applications software firms, service groups of computer equipment companies, specialized consulting firms, programming companies and temporary staffing firms. Many of these competitors have substantially greater financial, technical and marketing resources and greater name recognition than we have. There are relatively few barriers to entry into many of our markets, and as such we may face additional competition from new entrants into our markets. In addition, there is a risk that clients may elect to increase their internal resources to satisfy their staffing and data and analytics needs. There can be no assurance that we will compete successfully with existing or new competitors in the staffing and data analytics services markets.
Regional conflicts in South Asia could adversely affect the Indian economy, disrupt our operations and cause our business to suffer.
South Asia has, from time to time, experienced instances of civil unrest and hostilities among neighboring countries, such as between India and Pakistan, India and China, and even within India. There have been military confrontations along the India-Pakistan and India-China borders from time to time. The potential for hostilities between India and Pakistan is high due to past terrorist incidents in India, troop mobilizations along the border, and the geopolitical situation in the region. Military activity or terrorist attacks in the future could influence the Indian economy by disrupting communications and making travel more difficult. This, in turn, could have a material adverse effect on our business, operating results and financial condition.
Wage costs in India may increase, which may reduce our operating margins and reduce a competitive advantage of ours.
Our wage costs in India have historically been significantly lower than wage costs in the U.S. for comparably skilled professionals, and this has been one of our competitive advantages with respect to the costs of our Indian recruiting and delivery offices. However, wage increases in India may prevent us from sustaining this competitive advantage and may negatively affect our operating margins. We may need to increase the levels of our employee compensation more rapidly than in the past to retain talent. Unless we are able to continue to
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increase the efficiency and productivity of our employees, wage increases in the long term may reduce our overall margins.
Negative economic or business conditions brought on by a global health pandemic, epidemic or outbreak may adversely affect demand for our services.
Our business depends on the overall demand for IT and data and analytics professionals and on the economic health of our clients. Our business could be adversely affected by the effects of the COVID-19 virus or another pandemic, epidemic or outbreak on the economic and business climate. For example, the spread of the COVID-19 virus and the efforts taken to control its spread may cause companies to reduce their staffing and data and analytics budgets and adversely affect demand for our services, thus reducing our revenues. Furthermore, the impact of the COVID-19 virus outbreak and the actions taken to curtail the spread of the virus could disrupt or materially impair the ability of our clients to operate their businesses. Any such disruption or impairment could lower the demand for our services, result in collection issues on our outstanding accounts receivable and have a material adverse impact on our revenues and profitability.
If our clients are adversely affected by climate change or related compliance costs, this may reduce their spending and demand for our services, leading to a decrease in revenue.
In addition to emissions and climate change risks posed directly to Mastech Digital, we also have clients in varied industries such as healthcare, consumer products, manufacturing, technology, and retail, among others. Some of the clients may be significantly affected by climate change resulting in greater physical risk. This may lead to a reduction of demand and loss of business from such clients, which would impact our business, results of operations and financial condition.
Risks Related to Our Stock
The price of our common stock may fluctuate substantially, and your investment may decline in value.
The market price of our common stock may be highly volatile and may fluctuate substantially due to many factors, including:
actual or anticipated fluctuations in our results of operations;
variance in our financial performance from the expectations of market analysts;
conditions and trends in the end markets we serve, and changes in the estimation of the size and growth rate of these markets;
our ability to integrate acquisitions;
announcements of significant contracts by us or our competitors;
changes in our pricing policies or the pricing policies of our competitors;
restatements of historical financial results and changes in financial forecasts;
loss of one or more of our significant customers;
legislation;
changes in market valuation or earnings of our competitors;
the trading volume of our common stock;
the trading of our common stock on multiple trading markets, which takes place in different currencies and at different times; and
general economic conditions.
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Evolving expectations around corporate responsibility practices, specifically related to environmental, social and governance (“ESG”) matters, may expose us to reputational and other risks.
Investors, shareholders, customers, suppliers and other third parties are increasingly focusing on ESG and corporate social responsibility endeavors and reporting. Certain institutional investors, investment funds, other influential investors, customers, suppliers and other third parties are also increasingly focused on ESG practices. If we do not adapt to or comply with evolving investor or stakeholder expectations and standards, or are perceived to have not responded appropriately, we may suffer from reputational damage, which could in turn materially and adversely affect our business, financial condition, and/or stock price. Further, this increased focus on ESG and corporate social responsibility may result in new regulations and/or third party requirements that could adversely impact our business, or certain shareholders reducing or eliminating their holdings of our stock. Additionally, an allegation that we have not taken sufficient action in these areas could negatively harm our reputation.
Our ownership is highly concentrated in two individuals and the interests of those individual shareholders may not coincide with yours.
Sunil Wadhwani and Ashok Trivedi, co-founders of the Company, beneficially own approximately 59% of Mastech Digital’s outstanding common stock as of December 31, 2023. Accordingly, Messrs. Wadhwani and Trivedi together have sufficient voting power to elect all the members of the Board of Directors and to effect transactions without the approval of our other shareholders, except for those limited transactions that require a supermajority vote under our bylaws or articles of incorporation. The interests of Messrs. Wadhwani and Trivedi may from time to time diverge from our interests. Mastech Digital’s Audit Committee consists of independent directors and addresses certain potential conflicts of interest and related party transactions that may arise between us and our directors, officers or our other affiliates. However, there can be no assurance that any conflicts of interest will be resolved in our favor.
Our results of operations and share price could be adversely affected if we are unable to maintain effective internal controls.
Internal controls related to the operation of our business are critical to our ability to provide accurate financial statements and an appropriate internal control environment. We are required to provide a report from management on our internal controls over financial reporting that includes an assessment of the effectiveness of these controls. Internal control over financial reporting has inherent limitations, including human error, the possibility that controls could be circumvented or become inadequate because of changing conditions. Because of these limitations, internal control over financial reporting might not prevent or detect all misstatements or fraud. Also, while the Company remediated over the course of the 2021 fiscal year two material weaknesses identified in 2020, the completion of this remediation does not provide assurance that the Company’s remediation or other controls will continue to operate properly. Furthermore, management’s report on the Company’s internal controls over financial reportingwas not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this Annual Report on Form 10-K. If we cannot maintain and execute adequate internal control over financial reporting or implement necessary new or improved controls that provide reasonable assurance of the reliability of our financial reporting and preparation of our financial statements for external use, we could suffer harm of our reputation, fail to meet our public reporting requirements on a timely basis, be unable to properly report our financial results, or be required to restate our financial statements, which could result in the loss of investor confidence and may adversely impact our stock price.
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| ITEM 1C. | CYBERSECURITY |
Risk Management and Strategy
Managing Material Risks & Integrated Overall Risk Management
The Company has strategically integrated cybersecurity risk management into its broader risk management framework to promote a company-wide culture of cybersecurity risk management. This integration ensures that cybersecurity considerations are an integral part of our decision-making processes at every level. In 2022, we improved this integration by hiring a senior executive to assume the responsibilities of both the Chief Information Officer (“CIO”) and Chief Information Security Officer (“CISO”) roles within our organization. Thus, our risk management team is 100% aligned to our IT department to continuously evaluate and address cybersecurity risks within the Company’s business objectives and operational needs.
Engage Third-parties on Risk Management
Recognizing the complexity and evolving nature of cybersecurity threats, Mastech Digital, Inc. engages with a range of external experts, including cybersecurity assessors, consultants, and auditors in evaluating and testing our risk management systems. These partnerships enable us to leverage specialized knowledge and insights, ensuring our cybersecurity strategies and processes remain at the forefront of industry best practices. Our collaboration with these third parties includes regular audits, threat assessments, and consultation on security enhancements. We have recently partnered with a cybersecurity company that specializes in third party-vendor risk management.
Oversee Third-party Risk
Because we are aware of the risks associated with third-party service providers, Mastech Digital, Inc. implements stringent processes to oversee and manage these risks. We conduct thorough security assessments of all third-party providers before engagement and maintain ongoing monitoring to ensure compliance with our cybersecurity standards. The monitoring includes quarterly assessments by our CIO / CISO and on an ongoing basis by our security engineers. This approach is designed to mitigate risks related to data breaches or other security incidents originating from third-parties.
Risks from Cybersecurity Threats
During 2022, we experienced a cybersecurity breach involving a single employee email account which indirectly impacted two Mastech InfoTrellis clients. Our security team identified the point of entry, decommissioned the affected laptop and email address, and changed email logins and passcodes for this email account. As a result of this incident, we engaged external advisors to validate our findings and remedial action steps. As part of this engagement, these advisors assisted us with a forensic analysis to determine whether any personally identifiable information (“PII”) was compromised as a result of this breach. For any such PII data determined to have been compromised, our advisors assisted us in determining the appropriate compliance steps.
Governance
The Board of Directors is acutely aware of the critical nature of managing risks associated with cybersecurity threats. The Board has established robust oversight mechanisms to ensure effective governance in
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managing risks associated with cybersecurity threats because we recognize the significance of these threats to our operational integrity and stakeholder confidence.
Board of Directors Oversight
The Audit Committee is central to the Board’s oversight of cybersecurity risks and bears the primary responsibility for this domain. The Audit Committee is composed of board members with diverse expertise including risk management, technology, and finance, equipping them to oversee cybersecurity risks effectively.
Management’s Role Managing Risk
Our CIO / CISO and the Chief Executive Officer (“CEO”) play a pivotal role in informing the Audit Committee on cybersecurity risks. They provide comprehensive briefings to the Audit Committee on a regular basis, with a minimum frequency of twice per year. These briefings encompass a broad range of topics, including:
Current cybersecurity landscape and emerging threats;
Status of ongoing cybersecurity initiatives and strategies;
Incident reports and learnings from any cybersecurity events; and
Compliance with regulatory requirements and industry standards.
In addition to our scheduled meetings, the Audit Committee, CIO / CISO and CEO maintain an ongoing dialogue regarding emerging or potential cybersecurity risks. Together, they receive updates on any significant developments in the cybersecurity domain, ensuring the Board’s oversight is proactive and responsive. The Audit Committee actively participates in strategic decisions related to cybersecurity, offering guidance and approval for major initiatives. This involvement ensures that cybersecurity considerations are integrated into the broader strategic objectives of Mastech Digital, Inc. The Board of Directors conducts an annual review of the company’s cybersecurity posture and the effectiveness of its risk management strategies. This review helps in identifying areas for improvement and ensuring the alignment of cybersecurity efforts with the overall risk management framework.
Risk Management Personnel
Primary responsibility for assessing, monitoring, and managing our cybersecurity risks rests with our CIO / CISO, Mr. Philippe Bourdon. With over 20 years of experience in the field of cybersecurity, Mr. Bourdon brings a wealth of expertise to his role as the Company’s CIO / CISO. His background includes extensive experience as an enterprise CISO and is well-recognized within the industry. His in-depth knowledge and experience are instrumental in developing and executing our cybersecurity strategies. Our CIO / CISO oversees our governance programs, tests our compliance with standards, remediates known risks, and leads our employee training program.
Monitor Cybersecurity Incidents
The CIO / CISO is continually informed about the latest developments in cybersecurity, including potential threats and innovative risk management techniques. This ongoing knowledge acquisition is crucial for the effective prevention, detection, mitigation, and remediation of cybersecurity incidents. The CIO / CISO implements and oversees processes for the regular monitoring of our information systems. This includes the deployment of advanced security measures and regular system audits to identify potential vulnerabilities. In the event of a cybersecurity incident, the CIO / CISO is equipped with a well-defined incident response plan. This plan includes immediate actions to mitigate the impact and long-term strategies for remediation and prevention of future incidents.
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Reporting to Board of Directors
The CIO / CISO, in his capacity, regularly informs the Chief Financial Officer (CFO); our General Counsel; as well as the Chief Executive Officer (CEO) of all aspects related to cybersecurity risks and incidents. This ensures that the highest levels of management are kept abreast of the cybersecurity posture and potential risks facing Mastech Digital, Inc. Furthermore, significant cybersecurity matters, and strategic risk management decisions are escalated to the Board of Directors, ensuring that they have comprehensive oversight and can provide guidance on critical cybersecurity issues.
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| ITEM 2. | PROPERTIES |
Information regarding the principal properties leased by us and our subsidiaries as of December 31, 20172023 is set forth below:
Location | Principal Use | Occupying Business
| Approximate Square Footage | |||||||||
Moon Township, Pennsylvania | Corporate headquarters, executive, human resources, sales, recruiting, marketing and finance | IT Staffing | 11,500 | |||||||||
| IT Staffing | |||||||||||
| Sales and | |||||||||||
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Toronto, Canada | Data and Analytics | |||||||||||
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NOIDA, India | Sales and recruiting office | IT Staffing | ||||||||||
Chennai, India | Sales and delivery center | Data and Analytics | ||||||||||
| ITEM 3. | LEGAL PROCEEDINGS |
In the ordinary course of our business, we are involved in a number of lawsuits and administrative proceedings. While uncertainties are inherent in the final outcome of these matters, 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.
| ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
| ITEM 5. | MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our common stock is traded on the NYSE American under the symbol “MHH”. We began trading “regular way” on the former American Stock Exchange (“AMEX”) on October 1, 2008.
The following table sets forth, for the periods indicated, the range of high and low closing sale prices of the common stock of Mastech during the calendar quarters indicated.
Common Stock Market Price | High | Low | ||||||
2017: | ||||||||
Fourth Quarter | $ | 13.23 | $ | 9.35 | ||||
Third Quarter | 13.25 | 6.21 | ||||||
Second Quarter | 7.46 | 6.20 | ||||||
First Quarter | 7.35 | 6.12 | ||||||
2016: | ||||||||
Fourth Quarter | $ | 8.18 | $ | 6.71 | ||||
Third Quarter | 8.13 | 6.33 | ||||||
Second Quarter | 7.88 | 6.40 | ||||||
First Quarter | 7.85 | 6.60 | ||||||
On March 15, 2018,1, 2024, we had 89119 registered holders of record of our common stock. This figure excludes an estimate of the indeterminate number of beneficial holders whose shares may be held by brokerage firms and clearing agencies. We currently do not pay recurring dividends on our common stock. However, on October 29, 2013,
On February 8, 2023, the Company declared a cash dividendannounced that the Board of $0.50 per share on common stock, payable on December 20, 2013 to shareholders of record on December 9, 2013. Additionally, on November 29, 2012, the Company declared a specialone-time dividend of $1.60 per share on common stock, payable on December 21, 2012. These dividends should be viewed asnon-recurring.
On December 23, 2010, the Company announcedDirectors had authorized a share repurchase program of up to 937,500500,000 shares of the Company’s common stock over atwo-year period. On October 23, 2012, the program was extended for an additionaltwo-year period and the number of shares subject to the program was increased by 312,500 shares to 1.25 million shares. On October 22, 2014, the Company’s Board of Directors approved the extension of this program through December 22, 2016. Repurchases under the program may be made throughoccur from time to time in the open market, purchases orthrough privately negotiated transactions, in accordance with applicable securities laws. During 2016, we did notthrough block purchases or other purchase techniques, or by any shares under this programcombination of such methods, and elected to let the program expire asmay be modified, suspended or terminated at any time at the discretion of the Board of Directors. During the year ended December 22, 2016.
The31, 2023, the Company purchased 2,067repurchased 67,699 shares in 2017of common stock at an average price of $9.04$9.10 per share under this program. Additionally, we do, from time to time, purchase shares to enable employees to satisfy employeetheir tax obligations related to the vesting of restricted shares,stock, in accordance with the provisions of the Company’s Stock Incentive Plan, provisions. Theseas amended. During 2023 and 2022, the Company did not purchase any shares were not acquired pursuant to any publicly announced purchase program.satisfy such employee tax obligations.
A summary of our common stock repurchased during the quarter ended December 31, 2023 is set forth in the following table:
Period | Total Number of Shares Purchased (1) | Average Price per Share (1) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | Maximum Number of Shares that May Yet Be Purchased Under this Plan or Programs (1) | ||||||||||||
October 1, 2023 — October 31, 2023 | — | $ | — | — | 437,639 | |||||||||||
November 1, 2023 — November 30, 2023 | 5,338 | $ | 8.49 | 5,338 | 432,301 | |||||||||||
December 1, 2023 — December 31, 2023 | — | $ | — | — | 432,301 | |||||||||||
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Total | 5,338 | $ | 8.49 | 5,338 | 432,301 | |||||||||||
| (1) | The Company did not repurchase any shares of its common stock during the quarter ended December 31, 2023, other than through this publicly announced repurchase program. |
In October 2018, the Board of Directors of the Company approved the Mastech Digital, Inc. 2019 Employee Stock Purchase Plan (the “Stock Purchase Plan”). The Company adopted a Stock IncentivePurchase Plan in 2008 which, as amended, provides that upis intended to 1,400,000 sharesmeet the requirements of Section 423 of the Code and required the approval of the Company’s common stock shallshareholders to be allocated for issuance to directors, executive management, and key personnel. The most recent amendment approved by shareholder vote atqualified under Section 423 of the Code. On May 15, 2019, the Company’s Annual Meeting of Shareholders on May 18, 2016 increasedshareholders approved the number ofStock Purchase Plan. Under the Stock Purchase Plan, 600,000 shares of common stock that may be issued pursuant(subject to adjustment upon certain changes in the PlanCompany’s capitalization) are available for purchase by 200,000 shares to a total of 1,400,000. Details of shares issued and outstanding under this plan are disclosedeligible employees who become participants in Note 8 “Stock-Based Compensation” to the Consolidated Financial Statements included in Item 8 herein.
On July 7, 2017, the Company entered into SecuritiesStock Purchase Agreements (the “Securities Purchase Agreements”) with Ashok Trivedi and Sunil Wadhwani, each aco-founder and directorPlan. The purchase price per share is 85% of the Company and who
together own a majority of the outstanding shares of the Company’s Common Stock (each an “Investor” and collectively the “Investors”), pursuant to which the Company agreed to sell to each of the Investors the number of shares of Common Stock equal to $3.0 million divided by the greaterlesser of (i) $7.00the fair market value per share of Common Stock andcommon stock on the first day of the offering period, or (ii) the closingfair market value per share of common stock on the last day of the offering period. For the year ended December 31, 2023 and December 31, 2022, stock purchases under the Stock Purchase Plan totaled 25,646 and 23,789 shares at an average purchase price of $8.03 and $11.53, respectively. At December 31, 2023, there were 466,919 shares available for purchases under the Common Stock on NYSE American on July 10, 2017, which was $6.35 per share. On July 13, 2017, the Company issued and sold an aggregate 857,144 shares (the “Shares”) of Common Stock to the Investors for $6.0 million in aggregate gross proceeds pursuant to the terms of the Securities Purchase Agreements and, in connection therewith, entered into a registration rights agreement with the Investors (collectively, the “Private Placement Transactions”). The Company used the proceeds from the Private Placement Transactions to partially fund the purchase price payable at the July 13, 2017 closing of the Company’s acquisition of the services division of InfoTrellis, Inc. The Shares issued to the Investors in connection with the Private Placement Transactions were made in reliance upon an exemption from the regulation requirements of the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Section 4(a)(2) of the Securities Act and Rule 506 promulgated thereunder. The Company relied on this exemption from registration based in part on representations made by the Investors.Plan.
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| ITEM 6. |
You should read the information set forth below in conjunction with our Consolidated Financial Statements and accompanying Notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Annual Report on Form10-K.
RESERVED
| Years Ended December 31, | ||||||||||||||||||||
| 2017 (a) | 2016 | 2015 (b) | 2014 | 2013 | ||||||||||||||||
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Income Statement Data from Continuing Operations (c): |
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Revenues | $ | 147,882 | $ | 132,008 | $ | 123,470 | $ | 113,523 | $ | 106,901 | ||||||||||
Gross profit | 31,629 | 26,297 | 23,799 | 20,786 | 20,117 | |||||||||||||||
Operating expense | 27,548 | 21,790 | 19,117 | 15,246 | 14,815 | |||||||||||||||
Other income / (expense), net | (1,133 | ) | (487 | ) | (257 | ) | (32 | ) | (77 | ) | ||||||||||
Income before income taxes | 2,948 | 4,020 | 4,425 | 5,508 | 5,225 | |||||||||||||||
Income tax expense | 1,322 | 1,500 | 1,672 | 2,085 | 1,956 | |||||||||||||||
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Net income – continuing operations | $ | 1,626 | $ | 2,520 | $ | 2,753 | $ | 3,423 | $ | 3,269 | ||||||||||
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Earnings per share – continuing operations: | ||||||||||||||||||||
Basic (d) | $ | .33 | $ | .57 | $ | .63 | $ | .79 | $ | .78 | ||||||||||
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Diluted (d) | $ | .33 | $ | .56 | $ | .62 | $ | .77 | $ | .75 | ||||||||||
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Income Statement Data from Discontinued Operations (c): |
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Income before income taxes | $ | — | $ | — | $ | — | $ | — | $ | 162 | ||||||||||
Pre-tax gain on sale of discontinued operations | — | — | — | — | 485 | |||||||||||||||
Income tax expense | — | — | — | — | 111 | |||||||||||||||
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Net income – discontinued operations | $ | — | $ | — | $ | — | $ | — | $ | 536 | ||||||||||
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Earnings per share – discontinued operations: | �� | |||||||||||||||||||
Basic (d) | $ | — | $ | — | $ | — | $ | — | $ | .13 | ||||||||||
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Diluted (d) | $ | — | $ | — | $ | — | $ | — | $ | .12 | ||||||||||
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Weighted average common shares outstanding: | ||||||||||||||||||||
Basic (d) | 4,962 | 4,393 | 4,338 | 4,320 | 4,193 | |||||||||||||||
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Diluted (d) | 4,999 | 4,482 | 4,441 | 4,459 | 4,342 | |||||||||||||||
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Balance Sheet Data: | ||||||||||||||||||||
Cash and cash equivalents | $ | 2,478 | $ | 829 | $ | 848 | $ | 2,568 | $ | 424 | ||||||||||
Operating working capital (e) | 16,089 | 11,398 | 9,858 | 9,096 | 8,397 | |||||||||||||||
Total bank debt | 38,152 | 9,877 | 12,538 | — | 12 | |||||||||||||||
Total liabilities | 71,451 | 20,334 | 22,674 | 7,176 | 7,591 | |||||||||||||||
Total assets | 98,604 | 39,406 | 38,477 | 20,044 | 17,051 | |||||||||||||||
Shareholders’ equity | 27,153 | 19,072 | 15,803 | 12,868 | 9,460 | |||||||||||||||
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This Management’s Discussion and Analysis should be read in conjunction with our Consolidated Financial Statements and accompanying Notes included in this Annual Report on Form 10-K.
This Management’s Discussion and Analysis contains forward-looking statements that involve risks, uncertainties, and assumptions as described under the heading “Forward-Looking Statements” included in Part I of this Annual Report on Form 10-K. Our actual results could differ materially from those anticipated by these forward-looking statements as a result of many factors, including those discussed under “Item 1A. Risk Factors” and elsewhere in this Annual Report on Form 10-K.
Overview:
We are a provider of Digital Transformation IT Services to mostly large and medium sizedmedium-sized organizations.
Our portfolio of offerings includes data management and analytics services;services, other digital transformationDigital Transformation services, such as Salesforce.com, SAP HANA, and Digital Learning services;digital learning services, and IT staffing services.
With the July 13, 2017 acquisition of InfoTrellis, we nowWe operate in two reporting segments—segments — Data and Analytics Services;Services and IT Staffing Services. Our data and analytics services are marketed on a global basis under the brand Mastech InfoTrellis“Mastech InfoTrellis” and are delivered largely on a project basis withon-site andoff-shore offshore resources. These capabilities and expertise were acquired through our acquisition of InfoTrellis.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 transformationDigital Transformation services.
Both business segments provide their services across various industry verticals, including: financial services; government; healthcare; manufacturing; retail; technology; telecommunications; education; and transportation. Within each reportingIn 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. In the past, we have disclosed revenues and gross profits by client type (wholesale clients and retail clients). Management’s emphasis on the breakdown of wholesale and retail client types has diminished over the last year as gross margin opportunities within each client type has changed considerably with the Company’s focus on digital technologies. Today, ourThis analysis within both our two reporting segments is multi-purposed and includes technologies employed, client relationships, and sales channel accountability.geographic locations.
Economic Trends and Outlook
Generally, our business outlook is highly correlated to general North American economic conditions.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 domesticglobal economy, demand for our services tends to decline. As the economy slowed during the last half of 2007 and recessionaryWith economic expansion in 2010 through 2019 activity levels improved. However, as economic conditions emerged in 2008 and during much of 2009,strengthened, we experienced less demand for our staffing services. During the second half of 2009, we began to see signs of market stabilization and a modestpick-up in activity levels within certain sales channels and technologies and in 2010, market conditions continued to strengthen over the course of the year. In 2011 through 2013, activity levels continued to trend up in most technologies and sales channels. During 2014 and 2015, we continued to see a steady flow of solid activity in our contract staffing business; however,increased tightness in the supply side (skilled IT professionals) of our business during these years negatively impacted our new assignment successes. Solid activity levels in our contract staffing business continued in 2016businesses. These supply-side challenges pressured resource costs and 2017, however, recruitment challenges remained due to the tightness in the supply of skilled IT professionals.some extent gross margins. As we enter 2018,entered 2020, we viewwere encouraged by continued growth in the domestic job marketmarkets and an expanding domesticU.S. and global economy as positive factors for both our IT staffing services and data and analytics businesses. We expect supply side pressures to persisteconomies. However, with the COVID-19 pandemic surfacing in the first quarter of 2020, we realized that economic growth would quickly turn into recessionary conditions, which had a material impact on activity levels in both of our business segments, particularly continuing withinsegments. In 2021, we were encouraged by the United States.global roll-out of vaccination programs and signs of economic improvement, however, the proliferation of COVID-19 variants have caused some uncertainty and disruption in the global markets. In 2022 and 2023, COVID-19-related concerns seemed to subside, however, increased inflation,
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challenges in the financial sector related to increasing interest rates, and concerns about a possible recession created much uncertainty and impacted demand for our services in the second half of 2022 and the entire year of 2023. Entering 2024, while economic conditions in North American have shown signs of improvement, a level of uncertainty remains with respect to inflation and the potential of escalations of existing conflicts in the Middle East and Ukraine. Currently, it’s difficult to predict how market conditions are going to unfold over the course of 2024 and beyond.
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”). 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 staffingStaffing Services segment, a larger portion of our revenues has come from strategic relationships with systems integrators and other staffing organizations.integrators. Additionally, many large end users of IT staffing services are employing MSP’s to manage their contractor spending. Both of these dynamics may pressure our IT staffing gross margins in the future.
Recent U.S. growth in advanced technologies (social, cloud, analytics, mobility, automation) is providing opportunities withwithin our IT staffingStaffing Services segment. However, supply side challenges arehave proven to be acute with respect to many of these technologies.
Recent Developments
On July 13, 2017, we completed our acquisition of the services division of Canada-based InfoTrellis, Inc., a project-based consulting services company with specialized capabilities in data management and analytics. The acquisition is expected to significantly strengthen our capabilities to offer consulting and project-based delivery of digital transformation services. InfoTrellis, Inc. is headquartered in Toronto, Canada, with offices in Austin, Texas and a global delivery center in Chennai, India.
The purchase agreement for the InfoTrellis acquisition totaled $55 million, with $35.75 million paid in cash at closing (which was reduced by working capital adjustments of $861,000) and $19.25 million deferred over the two years after closing. The deferred purchase price is contingent upon the acquired business generating specified EBIT (earnings before interest and taxes) targets during the first two years following closing.
The funding for the transaction consisted of a combination of debt and equity. A new $65 million credit facility we established on July 13, 2017 with PNC Bank, N.A. (“PNC”) provided debt financing for the transaction, refinancing of our previously existing debt with PNC and additional borrowing capacity. The equity financing was completed through a $6.0 million private placement of newly-issued shares of our common stock to our founders and majority shareholders, Ashok Trivedi and Sunil Wadhwani. Pursuant to the terms of the share purchase agreements executed in connection with the private placement of these shares, we agreed to sell such shares at a price per share equal to the greater of $7.00 or the closing price for our common stock on July 10, 2017 (two business days after the July 7, 2017 announcement of the transaction), which was $6.35 per share. Accordingly, the common stock was sold on July 13, 2017 at a price per share equal to $7.00. The terms of the private placement were negotiated and approved by a Special Committee of our independent directors, which retained counsel and an independent financial advisor.
On July 13, 2017 and July 19, 2017, we filed with the Securities and Exchange Commission Current Reports on Form8-K providing additional details on this acquisition and the financing arrangements. On September 27, 2017, we filed an Amendment to our July 19, 2017 Current Report on Form8-K solely to include the financial statements and financial information required under Item 9.01 of Form8-K, which statements and information were excluded from the original Form8-K in reliance on paragraphs (a) (4) and (b) (2) of Item 9.01 of Form8-K.
Results of Operations
As described above, since the July 13, 2017 closing of the InfoTrellis acquisition, weWe operate and report our business in two reporting segments – Data and Analytics Services; and IT Staffing Services. The 2017 results of operations for our— Data and Analytics Services segment cover the period from the July 13, 2017 closing through December 31, 2017, and all prior periods presented do not include any financial data for this segment.IT Staffing Services.
Below is a tabular presentation of revenues and gross profit margins by segment for the periods discussed:
Revenues & Gross Margin by Segment
(Revenues in millions)
| Years Ended December 31, | Years Ended December 31, | |||||||||||||||||||||||
Revenues | 2017 | 2016 | 2015 | 2023 | 2022 | 2021 | ||||||||||||||||||
Data and Analytics Services | $ | 9.2 | $ | — | $ | — | $ | 34.4 | $ | 40.6 | $ | 38.3 | ||||||||||||
IT Staffing Services | 138.7 | 132.0 | 123.5 | 166.7 | 201.6 | 183.7 | ||||||||||||||||||
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Total Revenues | $ | 147.9 | $ | 132.0 | $ | 123.5 | $ | 201.1 | $ | 242.2 | $ | 222.0 | ||||||||||||
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Data and Analytics Services | 44.8 | % | — | % | — | % | 43.5 | % | 41.5 | % | 48.4 | % | ||||||||||||
IT Staffing Services | 19.8 | % | 19.9 | % | 19.3 | % | 21.6 | % | 23.0 | % | 22.3 | % | ||||||||||||
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Total Gross Margin% | 21.4 | % | 19.9 | % | 19.3 | % | ||||||||||||||||||
Total Gross Margin % | 25.4 | % | 26.1 | % | 26.8 | % | ||||||||||||||||||
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Below is a tabular presentation of operating expenses by sales and marketing, operations, general and administrative, amortization of acquired intangible assets, employment-related claim, net of recoveries, goodwill impairment, severance expense, cybersecurity breach, revaluation of contingent consideration and general and administrativeacquisition transaction expense categories for the periods discussed:
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Selling, General & Administrative (“S,GSG&A”) Expense Details
(Amounts in millions)
| Years Ended December 31, | Years Ended December 31, | |||||||||||||||||||||||
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Data and Analytics Services Segment | ||||||||||||||||||||||||
Sales and Marketing | $ | 0.8 | $ | — | $ | — | $ | 6.5 | $ | 5.9 | $ | 6.2 | ||||||||||||
Operations | 0.1 | — | — | 1.3 | 2.3 | 2.6 | ||||||||||||||||||
Amortization of Acquired Intangible Assets | 0.9 | — | — | |||||||||||||||||||||
General & Administrative | 0.7 | — | — | 8.9 | 5.4 | 4.5 | ||||||||||||||||||
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Subtotal Data and Analytics Services | $ | 2.5 | $ | — | $ | — | $ | 16.7 | $ | 13.6 | $ | 13.3 | ||||||||||||
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Sales and Marketing | $ | 8.3 | $ | 7.4 | $ | 6.1 | $ | 8.3 | $ | 9.5 | $ | 7.8 | ||||||||||||
Operations | 8.2 | 7.0 | 6.2 | 8.6 | 11.0 | 9.1 | ||||||||||||||||||
Amortization of Acquired Intangible Assets | 0.8 | 0.8 | 0.4 | |||||||||||||||||||||
General & Administrative | 7.7 | 6.6 | 6.4 | 13.1 | 12.5 | 11.2 | ||||||||||||||||||
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Subtotal IT Staffing Services | $ | 25.0 | $ | 21.8 | $ | 19.1 | $ | 30.0 | $ | 33.0 | $ | 28.1 | ||||||||||||
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Total S,G&A Expenses | $ | 27.5 | $ | 21.8 | $ | 19.1 | ||||||||||||||||||
Amortization of Acquired Intangible Assets | $ | 2.8 | $ | 3.0 | $ | 3.2 | ||||||||||||||||||
Employment-related Claim, net of Recoveries | 3.1 | — | — | |||||||||||||||||||||
Goodwill Impairment | 5.3 | — | — | |||||||||||||||||||||
Severance Expense | 2.4 | 1.0 | — | |||||||||||||||||||||
Cybersecurity Breach | — | 0.4 | — | |||||||||||||||||||||
Revaluation of Contingent Consideration | — | — | (2.9 | ) | ||||||||||||||||||||
Acquisition Transaction Expenses | — | — | 0.1 | |||||||||||||||||||||
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Total SG&A Expenses | $ | 60.3 | $ | 51.0 | $ | 41.8 | ||||||||||||||||||
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20172023 Compared to 20162022
Revenues
Revenues for the year ended December 31, 20172023 totaled $147.9$201.1 million, compared to $132.0$242.2 million for the year ended December 31, 2016.2022. This 12% increase17% decline in total revenues reflected a $9.2 milliondecrease in revenue contribution fromof 15% in our newly acquired dataData and analytics servicesAnalytics Services segment and 5% organic growth from our IT staffing services segment. The data and analytics services segment was acquired through the July 13, 2017 acquisition of InfoTrellis, Inc. Organica 17% revenue growthdecrease in our IT staffing services businessStaffing Services segment. Both segments were impacted by economic uncertainty during the year.
Our Data and Analytics Services segment’s revenue declines were largely due to client spending reductions on existing projects and assignment delays on new order bookings. Bookings in 2023 totaled $42 million, of which $19 million was secured in the fourth quarter. Order bookings in 2022 approximated $36 million. With respect to 2023 bookings, several orders were multi-year assignments, which generate revenues over multiple reporting periods.
Our IT Staffing Services segment’s revenue decline was due to a102-consultant expansion oflower demand for our billable consultant-base, partially offsetservices as clients took a more conservative posture on spending, largely due to economic headwinds. Accordingly, our consultants-on-billing declined by lower consultant utilization and262-consultants in 2023 compared to a lower average bill rate. Utilization53-consultant decrease in 2017 was impacted by weather-related business disruptions and higher down-time in our
digital learning practice.2022. We ended 2023 with 946 consultants-on billing versus 1,208 consultants-on-billing at year-end 2022. Our average IT staffing bill rate decreased from $75.35for 2023 totaled $78.84 per hour compared to $80.64 per hour in 2016 to $73.55 per hour in 2017.2022. This bill rate decline was due to lower bill rates on new assignments during 2017 and iswas reflective of the typestype of skill-setsskill sets that we deployed on such new assignments during the year.deployed. Permanent placement / fee revenues totaled $0.8 million in 2023 compared to $2.1 million a year ago.
In 2017,both 2023 and 2022, we had two clientsone client that exceeded 10% of total revenues (CGI = 12.6%22.5% in 2023 and Accenture PLC = 10.7%)22.2% in 2022, respectively). In 2016, we had no clients that represented more than 10% of total revenues. Our top ten clients represented 47%53% of total revenues in 2017 compared to 44%both 2023 and 2022. Additionally, our largest industry vertical, financial services, represented approximately 50% of total revenues in 2016.2023 and 2022.
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Gross Margin
Gross profit increaseddecreased to $31.6$51.0 million in 20172023, compared to $26.3$63.2 million in 2016.2022, a decrease of 19% on a year-over-basis. Gross profit as a percentage of revenue totaled 21.4%25.4% in 20172023, compared to 19.9%one-year earlier. The increase26.1% in 2022.
Gross margins from our Data and Analytics Services segment were 43.5%, which was 200-basis points better than the 41.5% gross profit dollars reflected our higher revenuesmargins that we experienced in 2017.2022. The improvement largely reflected better utilization in our gross margin percentage was due to the higher gross margin profile of our data and analytics services segment, which segment’s gross profit as a percentage of revenue totaled 44.8% for the period beginning on the July 13, 2017 closing of the InfoTrellis acquisition and ending December 31, 2017. 2023 period.
Gross margins in our IT staffing servicesStaffing Services segment were 21.6% in 2017 were essentially flat2023 compared to 2016.23.0% in 2022. This 140-basis point decline was due to lower permanent placement revenues in 2023 (80-basis point impact on gross margins) and higher medical claims related to our self-insured program in 2023 compared to 2022.
Selling, General and Administrative (“S,GSG&A”) Expenses
S,GSG&A expenses in 20172023 totaled $27.5$60.3 million and represented 18.6%30.0% of total revenues, compared to $21.8$51.0 million or 16.5%21.1% of revenues in 2016. Excluding $2.0 million2022. When excluding the amortization of acquisition-related transactionacquired intangible assets, employment-related claim, net of recoveries, goodwill impairment and severance expenses incurred in 20172023, and $0.8 millionthe amortization of acquired intangible assets, the cybersecurity breach and severance costs incurredexpenses in 2016, S,G2022, the adjusted SG&A expenses related to operations, as a percentage of revenues would have been 17.3% and 15.9% for 2017 and 2016, respectively. Thiswas 23.2% in 2023 versus 19.2% in 2022. The increase in S,GSG&A as a percentage of revenues, excluding these items mentioned above, was largely due to higher sales and executive staff expenses in the consolidation of the dataData and analytics servicesAnalytics Services segment, which has an operating cost structure that is higher thanoffset by lower variable expenses in our IT staffing services business.Staffing Services segment.
Fluctuations within S,GSG&A expense components during 20172023 compared to 20162022 included the following:
Sales expense increased by $1.7was $0.6 million lower in 2023 compared to the previous year. Approximately $0.8 million was related to our new data and analytics services segment. In the IT staffingData and Analytics Services segment, compensationsales expense increased by $0.7$0.6 million due to an increase in sales staff and higher compensation expense in 2023. IT staffing sales expense decreased by $1.2 million and related to lower variable compensation and other variable expense items due to declining activity levels.
Operations expense decreased by $3.4 million compared to 2022. In our Data and Analytics Services segment, operations expense decreased by $1.0 million due to lower staff headcount. Operations expense in our IT Staffing Services segment decreased by $2.4 million in 2023, due to recruitment staff reductions and lower compensation and other variable expenses — both reflective of staff expansion, and marketinglower activity levels in 2023.
General & administrative expenses increased by $0.2 million.
Amortization of acquired intangible assets was $1.7$2.8 million in 20172023 versus $3.0 million in 2022. The decline reflected certain intangible assets being fully amortized prior to 2023.
An employment-related claim expense, net of recoveries, totaled $3.1 million in 2023, compared to $0.8no expense in 2022.
A goodwill impairment charge totaled $5.3 million in 2016.2023, compared to no impairment charge in 2022. The increase was due2023 charge pertained to the acquisition of the dataour Data and analytics business.Analytics Services segment.
Severance expense totaled $2.4 million in 2017 net of $0.82023, compared to $1.0 million of severance costs incurred in 2016, essentially represented the balance of2022. Severance in both years largely related to executive leadership departures in our generalData and administrativeAnalytics Services segment.
Cybersecurity breach totaled $0.4 million in 2022, compared to no expense variance in 2017.2023.
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Other Income / (Expense) Components
In 2017,2023, other income / (expense) consisted of net interest income of $319,000 and foreign exchange losses of ($75,000). In 2022, other income / (expense) consisted of interest expense of ($1.1 million);358,000) and foreign exchange gains of $2,000$650,000. The decline in interest expense and increase in interest income was largely due to no outstanding borrowings in 2023 and a ($4,000) losshigher balance of cash on hand in 2023. Net foreign exchange gains (losses) in 2023 compared to 2022 reflected exchange rate variations between the dispositionIndian rupee and the Canadian dollar compared to the U.S. dollar.
Income Tax Expense
Income tax expense (benefit) for 2023 was ($1.9 million) and represented an effective tax rate on pre-tax (loss) of fixed assets.(21.0%) compared to $3.8 million in 2022, which represented an effective tax rate on pre-tax income of 30.3%. The unfavorable 2023 effective tax rate was largely due to shortfalls in expected tax benefits on stock options and state income taxes.
2022 Compared to 2021
Revenues
Revenues for the year ended December 31, 2022 totaled $242.2 million, compared to $222.0 million for the year ended December 31, 2021. This 9% increase in total revenues reflected revenue growth of 6% in our Data and Analytics Services segment and a 10% revenue increase in our IT Staffing Services segment. In 2016,our Data and Analytics Services segment, revenues declined in the second half of the year due to the lack of new client activity. Bookings in 2022 approximated $36 million, a marked decline over 2021. Our IT Staffing Services segment had 10% revenue growth, despite a 53-consultant decrease during the year compared to a 198-consultant increase in 2021. The 2022 consultant decline largely occurred during the fourth quarter. We ended 2022 with 1,208 consultants-on-billing versus 1,261 consultants-on-billing at year-end 2021. Our average IT staffing bill rate for 2022 totaled $80.64 per hour, a 6.6% increase compared to $75.66 per hour in 2021. This bill rate increase was due to higher rates on new assignments and was reflective of the type of skill sets that we deployed. Permanent placement / fee revenues totaled $2.1 million in 2022, up 75% from a year ago.
In both 2022 and 2021, we had one client that exceeded 10% of total revenues (CGI = 22.2% in 2022 and 15.0% in 2021, respectively). Our top ten clients represented 53% of total revenues in 2022 compared to 48% of total revenues in 2021.
Gross Margin
Gross profit increased to $63.2 million in 2022, compared to $59.4 million in 2021, an increase of 6% on a year-over-basis. Gross profit as a percentage of revenue totaled 26.1% in 2022, compared to 26.8% in 2021. The decrease in our gross margin percentage was entirely related to our Data and Analytics Services segment as gross margins declined by 690-basis points largely due to poor utilization and lower margins on several longer-term assignments related to compensation increases. Gross margins in our IT Staffing Services segment were 23.0% in 2022, compared to 22.3% in 2021. This 70-basis point improvement was due to better margins on new assignments and higher permanent placement revenues in 2022.
Selling, General and Administrative (“SG&A”) Expenses
SG&A expenses in 2022 totaled $51.0 million and represented 21.1% of total revenues, compared to $41.8 million or 18.8% of revenues in 2021. When excluding the amortization of acquired intangible assets, severance expense, cybersecurity breach, revaluation of contingent consideration, and acquisition transaction expenses, the adjusted SG&A expenses related to operations, as a percentage of revenues was 19.2% in 2022 versus 18.6% in 2021. The increase in SG&A as a percentage of revenues, excluding these items mentioned above, was largely due to higher compensation and other variable expense increases in both of our business segments.
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Fluctuations within SG&A expense components during 2022 compared to 2021 included the following:
Sales expense was $1.4 million higher in 2022, compared to the previous year. In the Data and Analytics Services segment, sales expense decreased by $0.3 million due to lower variable compensation expense in 2022. IT staffing sales expense increased by $1.7 million and largely related to higher compensation, marketing and business travel expenses.
Operations expense increased by $1.6 million compared to 2021. In our Data and Analytics Services segment, operations expense decreased by $0.3 million due to lower staff headcount. Operations expense in our IT Staffing Services segment increased by $1.9 million in 2022, largely due to higher recruitment staff and higher compensation and other variable expenses — both reflective of higher activity levels in the first half of 2022.
General & administrative expenses increased by $2.2 million in 2022 compared to 2021. Our Data and Analytics Services segment was responsible for $0.9 million of this increase due to higher executive leadership staff headcount and higher compensation expense. The IT Staffing Services segment had higher general and administrative expenses in 2022 of $1.3 million compared to 2021 due to higher compensation expense and increases in travel and facility expenses.
Amortization of acquired intangible assets was $3.0 million in 2022 versus $3.2 million in 2021. The decline reflected certain intangible assets being fully amortized in 2022.
Severance expense totaled $1.0 million in 2022 related to our Data Analytics Services Segment. No severance expense was incurred in 2021.
Cybersecurity breach totaled $0.4 million in 2022. There was no expense in 2021 for this item.
The revaluation of a contingent consideration liability totaled a credit of $2.9 million in 2021 related to the AmberLeaf acquisition. No contingent consideration revaluations occurred in 2022.
Acquisition transaction expense was $0 in 2022 and $0.1 million in 2021. The 2021 expense was related to an acquisition opportunity that was halted by us.
Other Income / (Expense) Components
In 2022, other income / (expense) consisted of interest expense of ($462,000)358,000) and foreign exchange gains of $650,000. In 2021, other income / (expense) consisted of interest expense of ($675,000) and foreign exchange losses of ($25,000)49,000). The increasedecline in interest expense was largely due to higher averagelower outstanding borrowings which was reflective of our debt financing of the InfoTrellis acquisition in July 2017.borrowings. Net foreign exchange gains and losses in 2017 and 2016 largely2022 compared to 2021 reflected exchange rate variations between the Indian rupee and the Canadian dollar compared to the U.S. dollar.
Income Tax Expense
Income tax expense for 20172022 was $1.3$3.8 million and represented an effective tax rate onpre-tax income of 44.8%30.3%, compared to $1.5$4.7 million in 2016,2021, which represented an effective tax rate onpre-tax income of 37.3%27.6%. The higher 2022 effective tax rate was due to an estimated charge related to U.S. tax reform, partially offset by excess tax benefits from stock options / restricted shares in 2017.
2016 Compared to 2015
Revenues
Revenues for the year ended December 31, 2016 totaled $132.0 million, compared to $123.5 million for the year ended December 31, 2015. This 7% increase in revenues was largely due to a higher average billable consultant-base employed during 2016 compared to one year earlier. Additionally, our average hourly bill rate for 2016 was up approximately 1% to $75.35 from $74.68 in 2015. The increase in our average billable consultant-base largely reflected the June 15, 2015 acquisition of Hudson IT. Organically, we increased our billable consultant-base by 35 consultants, or approximately 4%, during 2016, to a total of 881 consultants. Lower revenues from our integrator clients mitigated our organic growth in 2016 due to fewer project opportunities from our integrator partners and a lower new assignment win ratio on such opportunities.
In 2016 and 2015, we had no clients that represented more than 10% of total revenues. Our top ten clients represented 44% of total revenues in 2016 compared to 51% of total revenues in 2015.
Gross Margin
Gross profit increased to $26.3 million in 2016 compared to $23.8 million in 2015. Gross profit as a percentage of revenue totaled 19.9% in 2016 compared to 19.3%one-year earlier. The higher gross profit dollars reflected the June 2015 Hudson IT acquisition. The higher gross margin percentage was due to a combination of higher margins on new assignments in 2016(30-basis point improvement) and a favorable mix ofend-user clients compared to wholesale clients, due to the Hudson IT acquisition(30-basis point improvement).
Selling, General and Administrative (“S,G&A”) Expenses
S,G&A expenses in 2016 totaled $21.8 million and represented 16.5% of total revenues, compared to $19.1 million or 15.5% of revenues in 2015. Excluding severance costs incurred in 2016 of $0.8 million and excluding severance costs and acquisition-related transaction expenses incurred in 2015 of $0.9 million, S,G&A expenses as a percentage of revenues would have been 15.9% and 14.7% for 2016 and 2015, respectively. This increase in S,G&A as a percentage of revenues was largely due to the consolidation of Hudson IT, which employs a branch model that has an operating cost structure that is higher than Mastech Digital’s centralized business model. In the 2015 year, these Hudson IT operating expenses were included in our financial results effective June 15, 2015 and for the year 2016, these expenses were included for the entire year.
Fluctuations within S,G&A expense components during 2016 compared to 2015 included the following:
General and administrative expenses increased by $0.2 million. This increase related to higher severance cost of $0.5 millionUK and higher variable and stock-based compensation expense of
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Other Income / (Expense) Components
In 2016, other income / (expense) consisted of interest expense of ($462,000) and foreign exchange losses of ($25,000). In 2015, other income / (expense) consisted of ($293,000) of interest expense and $36,000 of foreign exchange gains. The increase in interest expense was due to higher average outstanding borrowings reflective of our debt financing of the Hudson IT acquisition in June 2015. Net foreign exchange gains and losses in 2016 and 2015 reflect exchange rate variations between the Indian rupee and U.S. dollar.
Income Tax Expense
Income tax expense for 2016 was $1.5 million and represented an effective tax rate onpre-tax income of 37.3% compared to $1.7 million in 2015, which represented an effective tax rate onpre-tax income of 37.8%. A slightly lower aggregate state income tax rate was responsible for the slight improvement in 2016.taxes.
Liquidity and Capital Resources
Financial Conditions and Liquidity
AtOn December 31, 2017,2023, we had outstanding bank debt, net ofa cash balancesbalance on hand of approximately $36$21.1 million, no bank debt outstanding and approximately $13$22.5 million of borrowing capacity under our existing credit facility. In anticipation of rising interest rates, we elected to prepay term loans in 2022. During 2017,2023, we paid off our outstanding bank debt, netfinal $1.1 million of cash balances on hand, increasedterm loans, in addition to funding $0.3 million of capital expenditures and $0.6 million of common stock repurchases under our 500,000 share repurchase program announced by $27 million and is reflectiveour Board of Directors in the debt financing related to our acquisitionfirst quarter of InfoTrellis which closed on July 13, 2017.2023.
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Historically, we have funded our business needs with cash generation from operating activities. In the data and analytics services and IT staffing services industries, investment in operating working capital levels (defined as current assets excluding cash and cash equivalents minus current liabilities, excluding short-term borrowings) is a significant use of cash. Controlling our operating working capital levels by closely managing our accounts receivable balance is an important element of cash preservation. Our accounts receivable “days sales outstanding” measurement (“DSO”) at year-end 2023 improved to 53-days compared to 59-days at year-end 2022. The improvement in the DSO measurement in 2023 was 58 days atyear-endlargely due to a lower DSO measurement in both 2017our solution-based data and 2016.analytics services business.
Cash provided by operating activities, our cash and cash equivalent balances on hand at December 31, 20172023 and current availability under our existing credit facility are expected to be adequate to fund our business needs over the next 12 months. months, absent any major acquisition-related activities.
Below is a tabular presentation of cash flow activities for the periods discussed:
| Years Ended December 31, | Years Ended December 31, | |||||||||||||||||||||||
Cash Flows Activities | 2017 | 2016 | 2015 | 2023 | 2022 | 2021 | ||||||||||||||||||
| (Amounts in millions) | (Amounts in millions) | |||||||||||||||||||||||
Operating activities | $ | 3.4 | $ | 2.3 | $ | 3.0 | $ | 16.0 | $ | 12.6 | $ | 5.2 | ||||||||||||
Investing activities | (36.0 | ) | — | (17.1 | ) | (0.2 | ) | (0.8 | ) | (2.1 | ) | |||||||||||||
Financing activities | 34.2 | (2.3 | ) | 12.4 | (1.6 | ) | (10.4 | ) | (4.1 | ) | ||||||||||||||
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Total | $ | 1.6 | $ | 0.0 | $ | (1.7 | ) | |||||||||||||||||
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Operating Activities
Cash provided by (used in) operating activities for the years ended December 31, 2017, 20162023, 2022 and 20152021 totaled $3.4$16.0 million, $2.3$12.6 million and $3.0$5.2 million, respectively. In 2017,2023, cash flows from operating activities included a net (loss) of ($7.1 million), non-cash charges of $10.6 million and decreases in operating working capital of $12.5 million. In 2022, cash flows from operating activities included net income of $1.6$8.7 million, andnon-cash charges of $2.3$6.8 million partially offset by an increaseand increases in operating working capital of $0.5 million.or ($2.9 million). In 2016,2021, cash flows from operating activities included net income of $2.5$12.2 million, andnon-cash charges of $1.6$4.7 million partially offset by anand increases in operating working capital of ($11.7 million). The 2023 reduction in operating working capital was due to lower accounts receivable, reflecting significant revenue declines during the year. The 2022 increase in operating capital largely reflected a $2.3 million repayment of the COVID-19 payroll tax deferment program. The 2021 increase in operating working capital of $1.8 million.
Factors contributing to cash flows from operating activities during the 2015 period included net income of $2.8 million andnon-cash charges of $1.0 million, partially offset by an increase in operating working capital of $0.8 million. The 2017 increase innon-cash charges was largelyreflected higher accounts receivable due to higher revenue levels and a $2.3 million repayment of the amortization of acquired intangible assets related to our InfoTrellis acquisition. Additionally, 2017 operating working capital was favorably impacted by higher levels of accounts payable.COVID-19 payroll tax deferment program.
We would expect operating working capital levels to increase should revenue growth continuegrow in 2018. Similar to prior years, such2024. Accordingly, an increase in operating working capital would result in a reduction in cash generated from operating activities. We believe DSO’sDSOs are currently at the lower range of our expectations and will remain closelikely increase marginally should our data and analytics services revenues grow disproportionately toyear-end 2017 levels. our total revenues.
Investing Activities
Cash used in(used in) investing activities for the years ended December 31, 2017, 20162023, 2022 and 20152021 totaled $36.0 million, $38,000($0.2 million), ($0.8 million) and $17.1 million,($2.1 million), respectively. In 2017, the acquisition2023, cash (used in) investing activities consisted of InfoTrellis was responsible for $34.8 million($0.3 million) of cash usage, with capital expenditures and a $0.1 million recovery of approximately $1.2 million accounting for the balance.non-current office lease deposits. In 2016,2022, cash (used in) investing activities consisted of ($0.8) of capital expenditures. In 2021, cash (used in) investing activities consisted of ($1.9 million) of capital expenditures and ($0.2 million) of $105,000 were partially offset by the recovery ofadditional non-current deposits (office office lease deposits) of $67,000.deposits. In 2015, the acquisition of Hudson IT was responsible for $17.0 million of cash used in investing activities, with capital expenditures accounting for the balance. In 2017,2023, capital expenditures were largely limited to computer equipment. In 2022, capital expenditures related primarily to system upgrade expenditures. In 2021, capital expenditures related primarily to system upgrades and improvements to our data and analytics delivery center in Chennai, India.
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Financing Activities
In 2017,2023, cash provided by(used in) financing activities totaled $34.2 million($1.6 million) and consistedincluded ($1.1 million) of net borrowings under the Company’s credit facilitiesdebt repayments, ($0.6 million) of $28.6 million; $6.0 million ofcommon stock repurchases, partially offset by proceeds from theour issuance of common stock;shares under our employee stock purchase plan. In 2022, cash (used in) financing activities totaled ($10.4 million) and included debt repayments of ($12.0 million) partially offset by proceeds from the exercise of stock options and the issuance of $0.1 million; partially offset bycommon stock related to the Company’s employee stock purchase plan of $1.6 million. In 2021, cash (used in) financing activities totaled ($4.1 million) and included debt repayments of ($4.4 million) and the payment of deferred financing costs and purchase of treasury stock totaling $0.5 million. In 2016, cash used in financing activities totaled $2.3 million and included $2.6 million of debt repayments,($0.2 million) related to our credit facility amendment, partially offset by activities related toproceeds from the exercisingexercise of stock options and the vestingissuance of restricted shares, which collectively generated cash of $0.3 million. In 2015, cash generated from financing activities totaled $12.4 million and included net increases in bank debt of $12.5 million and $0.1 million of excess tax benefitscommon stock related to the exercisingCompany’s employee stock purchase plan of stock options$0.5 million.
2024 Primentor, Inc. Consulting Agreement
On January 12, 2024, the Company entered into a consulting agreement with Primentor, Inc. to provide strategic advisory and management consulting services, as well as any other business and organizational strategy services as the Board of Directors of the Company may reasonably request from time to time. During 2024, the Company will incur consulting expenses of approximately $1.0 million related to these services, which will impact our income from operations and cash flows. See Note 18 “Subsequent Event” to the Notes to the Consolidated Financial Statements, included in Item 8 herein.
2023 Employment-Related Claims Against the Company
As disclosed in Note 8 “Commitment and Contingencies” to the Notes to the Consolidated Financial Statements, included in Item 8 herein, a former employee who resigned from his employment with the Company in November 2022 asserted various employment-related claims against the Company. During the third quarter of 2023, the Company settled this claim for $3.1 million, net of recoveries, under the terms of a confidential settlement agreement. In addition to the settlement amount, we incurred approximately $0.9 million in professional services fees related to this matter during 2023. The settlement amount and the vestingprofessional fees are included in selling, general and administrative expenses in the Consolidated Statements of performance/restricted shares, partially offset by $0.2 millionOperations.
2022 Cybersecurity Breach
During 2022, we experienced a cybersecurity breach involving a single employee email account and which indirectly impacted two Mastech InfoTrellis clients. Our IT team identified the point of stock repurchases.entry, decommissioned the affected laptop and email address, and changed email logins and passcodes for this email account. As a result of this incident, we engaged external advisors to validate our findings and remedial action steps. As part of this engagement, these advisors assisted us with a forensic analysis to determine whether any personally identifiable information (“PII”) was compromised as a result of this breach. For any such PII data determined to have been compromised, these advisors assisted us in determining the appropriate compliance steps. We incurred a pre-tax charge of $450,000 in the third quarter 2022 related to this event, which includes the cost of engaging these external advisors and losses relating to the breach. This expense is included in selling, general and administrative expenses in the Consolidated Statements of Operations.
Off-Balance Sheet Arrangements
We do not have anyoff-balance sheet arrangements.
Inflation
We do not believe that inflation had a significant impact on our results of operations for the periods presented.presented, although economic uncertainty, including the concerns of our clients and other companies with respect
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to inflationary conditions in North America and elsewhere, has had and may continue to have an adverse impact on the demand for our services. On an ongoing basis, we attempt to minimize any effects of inflation on our operating results by controlling operating costs and, whenever possible, seek to ensure that billing rates reflect increases in costs due to inflation.
In addition, refer to “Item 1A. Risk factors” in this annual report on Form 10-K for a discussion about risks that inflation directly or indirectly may pose to our business.
Seasonality
Our operations are generally not affected by seasonal fluctuations. However, our consultants’ billable hours are affected by national holidays and vacation patterns. Accordingly, we typically have lower utilization rates and higher benefit costs during the fourth quarter. Additionally, assignment completions tend to be higher near the end of the calendar year, which largely impacts our revenue and gross profit performance during the subsequent quarter.
Critical Accounting Policies and Estimates
Certain accounting policies are particularly important to the portrayal of our financial position, results of operations and cash flows and require the application of significant judgment by management, and as a result, are subject to an inherent degree of uncertainty. In applying these policies, our management uses judgment to determine the appropriate assumptions to be used in the determination of certain estimates. These estimates are based on our historical experience, terms of existing contracts, observances of industry trends and other available information from outside sources, as appropriate. The following explains our most critical accounting policies. See the Notes to the Consolidated Financial Statements, contained in Item 8, of this Annual Report onForm 10-K for a complete description of our significant accounting policies.
Revenue Recognition
The Company recognizes revenue ontime-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, plusout-of-pocket expense reimbursement.Out-of-pocket expense reimbursement amounts vary by assignment, but historically on average represent less than 2% of the total contract revenues. Revenue is earned whenon a per transaction or labor hour basis, as that amount directly corresponds to the value of the Company’s consultants are working on projects.performance. Revenue recognition is negatively impacted by holidays and consultant vacation and sick days.
The Company recognizes revenue on fixed price contracts usingover 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 percentagetiming of revenue recognized. Under the cost-based input method, the extent of progress towards completion method,is measured based on the relationshipratio of costs incurred to date to the expected total estimated costs at completion of the performance obligation. Revenues, including estimated fees or profits, are recorded proportionally as costs are incurred. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to be incurred under the contract.client. 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.
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Accounts Receivable and Allowance for Uncollectible AccountsCredit Losses
The Company extends credit to clients based upon management’s assessment of their creditworthiness. A substantial portion of the Company’s revenue, and the resulting accounts receivable, are from Fortune 1000 companies, major systems integrators and other staffing organizations. The Company does not generally charge interest on delinquent accounts receivable.
Unbilled receivables represent amounts recognized as revenues based on services performed and, in accordance with the terms of the client contract, will be invoiced in a subsequent period.
Accounts receivable are reviewed periodically to determine the probability of loss. The Company records an allowance for uncollectible accountscredit losses when it is probable that the related receivable balance will not be collected based on historical collection experience, client-specific collection issues, and other matters the Company identifies in its collection monitoring.
Goodwill and Intangible Assets
Identifiable intangible assets are recorded at fair value as of the closing date when acquired in a business combination. Identifiable intangible assets related to our Hudson IT and InfoTrellis acquisitions consisted of client relationships, covenantsnot-to-compete, trade names and in the case of the InfoTrellis acquisition, technology, which are being amortized using the straight-line method over their estimated useful lives ranging from three years to twelve years, as more fully described in Note 2 “Business Combinations”3 “Goodwill and Other Intangible Assets, net” to the Notes to the Consolidated Financial Statements.
Excess purchase price over the fair value of net tangible assets and identifiable intangible assets acquired are recorded as goodwill. Goodwill is not amortized but is tested for impairment at least on an annual basis. If impairment is indicated, a write-down to fair value is recorded based on the excess of the carrying value of the assetreporting unit over its fair market value.
We review goodwill and intangible assets for impairment annually as of October 1st or more frequently if events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. The impairment test is performed at the reporting unit (business segment) level. Determination of recoverability is based on the lowest level of identifiable estimated future undiscounteddiscounted cash flows resulting from use of the assets and their eventual disposition. Measurement of any impairment loss is based on the excess carrying value of the assetsreporting unit over their fair market value.
In conducting our annual impairment testing, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (more than 50%) that the estimated fair value of a reporting unit is less than its carrying amount. If not, no further goodwill impairment testing is required. If it is more likely than not that a reporting unit’s fair value is less than its carrying amount, we are then required to perform a quantitative impairment test. We also may elect not to perform the qualitative assessment, and instead, proceed directly to the quantitative impairment test.
In 2017,2023, 2022 and 2021, we performed a quantitative impairment testtests related to our IT Staffing Services segment, which includes our June 2015 acquisition of Hudson IT.Global Resources Management, Inc.’s U.S. IT staffing business (“Hudson IT”). The results of this testingeach of these testing’s indicated no impairment associated with the carrying amount of goodwill and intangible assets.goodwill.
Additionally in 2017,2023, 2022 and 2021, we performed a qualitative assessmentquantitative impairment tests related to our Data and Analytics Services segment which includes the July 2017 acquisition of InfoTrellis in whichand the October 2020 acquisition of AmberLeaf. The results of the 2022 and 2021 testing’s indicated no impairment associated with the carrying amount of goodwill. On October 1, 2023, our annual impairment testing date, we considered relevant events and circumstances, including changes in customers’ demand outlooks, activity levels, margin trends, general economic conditionsdid not identify an impairment. However, due to a triggering event in the geographies in which we operate and material changes in the competitive landscape of our business. We considered the results and assumptionsfourth quarter related to declining revenue trends and
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lower future revenue projections, our most recent quantitative assessment conducted as of our acquisition date. Based on this qualitative assessment, we believe that there were no indications ofDecember 31, 2023 testing results indicated impairment associated with the carrying amount of goodwill of $5.3 million. Accordingly, this goodwill impairment charge is reflected in selling, general and intangible assets.administrative expenses in the Company’s Consolidated Statements of Operations in Item 8, herein.
Leases
Operating leases right-of-use (“ROU”) assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Since most of the Company’s leases do not have an implicit borrowing rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Our leases may include options allowing us in our sole discretion to extend or terminate the lease, and when it is reasonably certain that we will exercise those options, we will include those periods in our lease term. Variable costs, such as payments for insurance and tax payments, are expensed when the obligation for those payments is incurred.
Business Combinations
The Company accounts for acquisitions in accordance with guidance found in ASC 805,Business Combinations (“ASC 805”). This guidance requires consideration given (including contingent consideration), assets acquired and liabilities assumed to be valued at their fair market values at the acquisition date. The guidance further provides that:(1) in-process research and development will be recorded at fair value as an indefinite-lived intangible asset; (2) acquisition-related transaction costs will generally be expensed as incurred; (3) restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and (4) changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will effect income tax expense.
ASC 805 requires that any excess purchase price over fair value of assets acquired (including identifiable intangibles) and liabilities assumed be recognized as goodwill. Additionally, any excess fair value of acquired net assets over acquisition consideration results in a bargain purchase gain. Prior to recording a gain, the acquiring entity must reassess whether all acquired assets and assumed liabilities have been identified and must performre-measurements to verify that the consideration paid, assets acquired and liabilities assumed have all been properly valued.
The InfoTrellis financial results are included in the Company’s Consolidated Financial Statements from the date of the acquisition of July 13, 2017. The Hudson IT financial results are included in the Company’s Consolidated Financial Statements from the date of the acquisition of June 15, 2015.
Stock-Based Compensation
Effective October 1,In 2008, the Company adopted a Stock Incentive Plan (the(as amended to date, the “Plan”) which, as amended, provides that up to 1,400,0005,400,000 shares of the Company’s common stock shall be allocated for issuance to directors,
executive management and key personnel. Grants under the Plan can be made in the form of stock options, stock appreciation rights, performance shares or stock awards. The Plan is administered by the Compensation Committee of the Board of Directors. Stock options are granted at an exercise price equal to the closing share price of the Company’s common stock at the grant date and generally vest over a three to five yearfive-year period.
In October 2018, the Board of Directors of the Company approved the Mastech Digital, Inc. 2019 Employee Stock Purchase Plan (the “Stock Purchase Plan”). The Stock Purchase Plan is intended to meet the requirements of Section 423 of the Code and required the approval of the Company’s shareholders to be qualified under Section 423 of the Code. On May 15, 2019, the Company’s shareholders approved the Stock Purchase Plan. Under the 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 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.
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The Company accounts for stock-based compensation expense in accordance with ASC Topic 718 “Share-based Payments” which requires us to measure all share-based payments based on their estimated fair value and recognize compensation expense over the requisite service period. The fair value of our stock options and shares issued under the Company’s Stock Purchase Plan is determined at the date of grant using the Black-Scholes option pricing model.
Income Taxes
The Company records an estimated liability for income and other taxes based on what management determines will likely be paid in the various tax jurisdictions in which we operate. Management uses its best judgment in the determination of these amounts. However, the liabilities ultimately realized and paid are dependent on various matters, including the resolution of the tax audits in the various affected tax jurisdictions, and may differ from the amounts recorded. An adjustment to the estimated liability would be recorded through income in the period in which it becomes probable that the amount of the actual liability differs from the amount recorded.
Management determines the Company’s income tax provision using the asset and liability method. Under this method, deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities. The Company measures deferred tax assets and liabilities using enacted tax rates in effect for the year in which we expect to recover or settle the temporary differences. The effect of a change in tax rates on deferred taxes is recognized in the period that the change is enacted. The Company evaluates its deferred tax assets and records a valuation allowance when, in management’s opinion, it is more likely than not that some portion or all of the deferred tax assets will not be realized. ForAs of December 31, 2023 and 2022, the periods presented, noCompany provided a valuation allowance has been provided.
In 2017, the Company incurred an estimatedone-time charge of $372,000$628,000 and $559,000, respectively, related to the enactmentuncertainty of the realization of foreign net operating losses (“NOL”).
The Tax Cut and Jobs Act of 2017. This charge is related to there-measurement of the Company’s deferred tax assets arising from a lower U.S. corporate tax rate of $294,000 and a $78,000 charge related to aone-time transition tax applicable to the new dividend exemption system related to foreign earnings.
We believe that we have made reasonable estimates with respect to each of the above items, however, all of the amounts recorded are provisional as we have not completed our analysis of the complex and far reaching effects of the Tax Cut and Jobs Act of 2017. Under guidance issued by the staff of the SEC, we expect to finalize our accounting related to the tax effects of the Tax CutCuts and Jobs Act of 2017 during 2018created a new requirement that certain income earned by foreign subsidiaries, known as we complete our analysis, computations and assertions. It is possible that others, applying reasonable judgmentglobal intangible low-tax income (“GILTI”), must be included in the gross income of their U.S. shareholder. The Financial Accounting Standards Board (the “FASB” allows an accounting policy election of either recognizing deferred taxes for temporary differences expected to reverse as GILTI in future years or recognizing such taxes as a current-period expense when incurred. We have elected to treat the same facts and circumstances, could develop and supporttax effect of GILTI as a range of alternative estimated amounts. We will revise these estimates during 2018current-period expense as we gather additional information to complete our tax returns and as any interpretation or clarification of the Tax Cut and Jobs Act of 2017 occurs through legislation, U.S. Treasury actions or other means.incurred.
The Company accounts for uncertain tax positions in accordance with ASC Topic740-10, “Accounting for Uncertainty in Income Taxes”. Accordingly, the Company has reported a liability for unrecognized tax benefits resulting from uncertain tax positions taken, or expected to be taken, in a tax return. As of December 31, 20172023 and 2016,2022, the Company provided $95,000 and $128,000$0 for uncertain tax positions, including interest and penalties, related to various federal and state income tax matters.
Contingent Consideration Liability
In connection with the AmberLeaf acquisition, the Company had an obligation to pay consideration that was contingent upon the achievement of specified revenue growth and EBITA margin objectives. As of the acquisition date, the Company recorded a contingent consideration liability of $2.9 million representing the estimated fair value of the contingent consideration that was expected to be paid. The Company’s 2015 federal income tax returnfair value of the contingent consideration liability was estimated by utilizing a probability weighted simulation model to determine the fair value of contingent consideration.
We re-measured this liability and recorded changes in the fair value when it was more likely than not that the future payments had changed. Increases or decreases in the fair value of contingent consideration can result from changes in timing and amounts of revenue and earnings estimates.
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No contingent consideration revaluation was recorded in 2023 and 2022. In 2021, the Company revalued the contingent consideration liability related to the AmberLeaf acquisition after determining that relevant conditions for payment of such liability were likely not to be satisfied. The revaluation resulted in a $2.9 million reduction to the contingent consideration liability. The credit is under audit by the Internal Revenue Service (“IRS”). During 2013,reflected in selling, general and administrative expenses in the Company’s 2011 federal income tax return was audited by the IRS resultingConsolidated Statements of Operations, in no material adjustments to its filed return.
Derivative Instruments and Hedging Activities
— Interest Rate Swap Contracts:Contracts
Concurrent with the Company’s borrowings on July 13, 2017 under its new credit facility, the Company entered into an interest-rate swap to convert the debt’s variable interest rate to a fixed rate of interest. These swap contracts, have beenwhich matured on April 1, 2021, were designated as a cash flow hedging instrument and qualified as effective hedges at inception under ASC Topic 815 “Derivatives and Hedging”. These contracts arewere recognized on the balance sheet at fair value. The effective portion of the changes in fair value on these contracts is recorded in other comprehensive income (loss) and is reclassified into the Consolidated Statements of Operations as interest expense in the same period in which the underlying transaction affects earnings.
With respect to derivatives designated as hedges, the Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking such transactions. The Company evaluates hedge effectiveness at the time a contract is entered into and on an ongoing basis. If a swap contract is deemed ineffective, the change in the fair value of the derivative is recorded in the Consolidated Statement of Operations as interest expense.
During 2023 and 2022, we had no derivative instruments and hedging activities.
Foreign Currency Translation
The reporting currency of the Company and its subsidiaries is the U.S. dollar. The functional currency of the Company’s subsidiary in Canada is the U.S. dollar because the majority of its revenue is denominated in U.S. dollars. The functional currency of the Company’s Indian and European subsidiaries is their local currency. The results of operations of the Company’s Indian and European subsidiaries are translated at the monthly average exchange rates prevailing during the period. The financial position of the Company’s Indian and European subsidiaries is translated at the current exchange rates at the end of the period, and the related translation adjustments are recorded as a component of accumulated other comprehensive income (loss) within Shareholders’ Equity. Gains and losses resulting from foreign currency transactions are included as a component of other income (expense), net in the Consolidated Statements of Operations,Operations. Foreign exchange (losses) of ($0.1 million) in 2023 and have$0.6 million foreign exchange gains in 2022 were primary due to exchange rate variations between the Indian rupee and the U.S. dollar. Foreign exchange losses were not been material for all periods presented.in 2021.
Recently Issued Accounting Standards
Recent accounting pronouncements are described in Note 1 to the Consolidated Financial Statements contained in Item 8, herein.
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| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
CashIn addition to the inherent operational risks, the Company is exposed to certain market risks, primarily related to changes in interest rates and cash equivalents are defined as cashcurrency fluctuations.
Interest Rates
At December 31, 2023, we had no outstanding borrowings under our Credit Agreement with PNC Bank and highly liquid investments with maturities of three months or less when purchased. Cash equivalents are stated at cost, which approximates market value. Our cash flows and earnings are subjectcertain other financial institution lenders (the “Credit Agreement”) — Refer to fluctuations due to exchange rate variations. Foreign currency risk exists by nature of our global recruitment centers. In 2012 through 2015, we attempted to limit our exposure to currency exchange fluctuationsNote 5 — “Credit Facility” in the Indian rupee viaNotes to Consolidated Financial Statements, included in Item 8 herein. A hypothetical 10% increase in interest rates would have no impact on our annual interest expense. As of December 31, 2023, the purchaseCompany has no interest-rate hedge vehicles outstanding.
Currency Fluctuations
The reporting currency of foreign currency forward contracts. Thethe Company elected not to engage in currency hedging activities for 2016 and 2017 given the likelihood of an environment of interest rate expansion in the United States, which management believes should have the impact of mitigating any material appreciation in the Indian rupee againstits subsidiaries is the U.S. dollar. The functional currency of the Company’s subsidiary in Canada is the U.S. dollar because the majority of its revenue is denominated in U.S. dollars. The functional currency of the Company’s Indian and European subsidiaries is their local currency. The results of operations of the Company’s Indian and European subsidiaries are translated at the monthly average exchange rates prevailing during the period. The financial position of the Company’s Indian and European subsidiaries is translated at the current exchange rates at the end of the period, and the related translation adjustments are recorded as a component of accumulated other comprehensive income (loss) within Shareholders’ Equity. Gains and losses resulting from foreign currency transactions are included as a component of other income (expense), net in the Consolidated Statements of Operations. A hypothetical 10% increase or decrease in overall foreign currency rates in 2023 would not have a material impact on our consolidated financial statements. As our international operations grow, we will continue to evaluate and reassess our approach to managing the risks relating to fluctuations in currency rates.
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| At December 31, | ||||||||
| 2017 | 2016 | |||||||
| ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 2,478 | $ | 829 | ||||
Accounts receivable, net of allowance for uncollectible accounts of $398 in 2017 and $388 in 2016 | 22,876 | 17,916 | ||||||
Unbilled receivables | 7,786 | 3,186 | ||||||
Prepaid and other current assets | 1,533 | 701 | ||||||
Prepaid income taxes | — | 52 | ||||||
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Total current assets | 34,673 | 22,684 | ||||||
Equipment, enterprise software, and leasehold improvements, at cost: | ||||||||
Equipment | 1,395 | 1,198 | ||||||
Enterprise software | 1,986 | 645 | ||||||
Leasehold improvements | 365 | 354 | ||||||
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| 3,746 | 2,197 | |||||||
Less – accumulated depreciation and amortization | (1,847 | ) | (1,639 | ) | ||||
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Net equipment, enterprise software, and leasehold improvements | 1,899 | 558 | ||||||
Deferred income taxes | 468 | 254 | ||||||
Non-current deposits | 255 | 170 | ||||||
Goodwill | 35,844 | 8,427 | ||||||
Intangible assets, net | 25,465 | 7,313 | ||||||
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Total assets | $ | 98,604 | $ | 39,406 | ||||
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| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Current portion of long-term debt | $ | 4,003 | $ | 1,800 | ||||
Accounts payable | 5,028 | 1,963 | ||||||
Accrued payroll and related costs | 8,969 | 7,645 | ||||||
Other accrued liabilities | 1,679 | 653 | ||||||
Deferred revenue | 430 | 196 | ||||||
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Total current liabilities | 20,109 | 12,257 | ||||||
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Long-term liabilities: | ||||||||
Long-term debt, less current portion, net | 34,149 | 8,077 | ||||||
Contingent consideration liability | 17,125 | — | ||||||
Long-term accrued income taxes | 68 | — | ||||||
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Total liabilities | 71,451 | 20,334 | ||||||
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; 125,000,000 shares authorized and 6,281,235 shares issued as of December 31, 2017 and 5,317,148 shares issued as of December 31, 2016 | 63 | 53 | ||||||
Additionalpaid-in-capital | 20,304 | 13,863 | ||||||
Retained earnings | 10,923 | 9,297 | ||||||
Accumulated other comprehensive income (loss) | 17 | (7 | ) | |||||
Treasury stock, at cost; 820,636 shares as of December 31, 2017 and 818,569 as of December 31, 2016 | (4,154 | ) | (4,134 | ) | ||||
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Total shareholders’ equity | 27,153 | 19,072 | ||||||
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Total liabilities and shareholders’ equity | $ | 98,604 | $ | 39,406 | ||||
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At December 31, | ||||||||
2023 | 2022 | |||||||
ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 21,147 | $ | 7,057 | ||||
| Accounts receivable, net of allowance for credit losses of $528 in 2023 and $444 in 2022 | 22,556 | 33,603 | ||||||
| Unbilled receivables | 7,259 | 8,719 | ||||||
| Prepaid and other current assets | 5,501 | 3,795 | ||||||
| Total current assets | 56,463 | 53,174 | ||||||
| Equipment, enterprise software, and leasehold improvements, at cost: | ||||||||
| Equipment | 3,012 | 2,790 | ||||||
| Enterprise software | 4,185 | 4,185 | ||||||
| Leasehold improvements | 753 | 732 | ||||||
| 7,950 | 7,707 | |||||||
| Less – accumulated depreciation and amortization | (6,037 | ) | (5,042 | ) | ||||
| Net equipment, enterprise software, and leasehold improvements | 1,913 | 2,665 | ||||||
Operating lease right-of-use | 5,106 | 3,886 | ||||||
| Deferred income taxes | 793 | — | ||||||
| Deferred financing costs, net | 284 | 293 | ||||||
Non-current deposits | 457 | 578 | ||||||
| Goodwill, net of impairment | 27,210 | 32,510 | ||||||
| Intangible assets, net of amortization | 13,001 | 15,773 | ||||||
| Total assets | $ | 105,227 | $ | 108,879 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Current portion of long-term debt | $ | — | $ | 1,100 | ||||
| Accounts payable | 4,659 | 4,475 | ||||||
| Accrued payroll and related costs | 12,354 | 11,085 | ||||||
| Current portion of operating lease liability | 1,236 | 1,504 | ||||||
| Other accrued liabilities | 938 | 1,186 | ||||||
| Deferred revenue | 684 | 207 | ||||||
| Total current liabilities | 19,871 | 19,557 | ||||||
| Long-term liabilities: | ||||||||
| Long-term operating lease liability, less current portion | 3,843 | 2,294 | ||||||
| Long-term accrued income taxes | 69 | 105 | ||||||
| Deferred income taxes | — | 920 | ||||||
| Total liabilities | 23,783 | 22,876 | ||||||
| Commitments and contingent liabilities (Note 8) | ||||||||
| Shareholders’ equity: | ||||||||
| Preferred Stock, no par value; 20,000,000 shares authorized; none outstanding | — | — | ||||||
Common Stock, par value $.01; 100,000,000 shares authorized and 13,312,568 shares issued as of December 31, 2023 and 13,269,118 shares issued as of December 31, 2022 | 133 | 133 | ||||||
Additional paid-in-capital | 35,345 | 32,059 | ||||||
| Retained earnings | 52,415 | 59,553 | ||||||
| Accumulated other comprehensive income (loss) | (1,644 | ) | (1,555 | ) | ||||
| Treasury stock, at cost; 1,714,119 shares as of December 31, 2023 and 1,646,420 as of December 31, 2022 | (4,805 | ) | (4,187 | ) | ||||
| Total shareholders’ equity | 81,444 | 86,003 | ||||||
| Total liabilities and shareholders’ equity | $ | 105,227 | $ | 108,879 | ||||
| Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
Revenues | $ | 147,882 | $ | 132,008 | $ | 123,470 | ||||||
Cost of revenues | 116,253 | 105,711 | 99,671 | |||||||||
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Gross profit | 31,629 | 26,297 | 23,799 | |||||||||
Selling, general and administrative expenses | 27,548 | 21,790 | 19,117 | |||||||||
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Income from operations | 4,081 | 4,507 | 4,682 | |||||||||
Interest income (expense), net | (1,131 | ) | (462 | ) | (293 | ) | ||||||
Other income (expense), net | (2 | ) | (25 | ) | 36 | |||||||
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Income before income taxes | 2,948 | 4,020 | 4,425 | |||||||||
Income tax expense | 1,322 | 1,500 | 1,672 | |||||||||
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Net income | $ | 1,626 | $ | 2,520 | $ | 2,753 | ||||||
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Earnings Per Share: | ||||||||||||
Basic | $ | .33 | $ | .57 | $ | .63 | ||||||
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Diluted | $ | .33 | $ | .56 | $ | .62 | ||||||
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Weighted average common shares outstanding: | ||||||||||||
Basic | 4,962 | 4,393 | 4,338 | |||||||||
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Diluted | 4,999 | 4,482 | 4,441 | |||||||||
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Years Ended December 31, | ||||||||||||
2023 | 2022 | 2021 | ||||||||||
| Revenues | $ | 201,098 | $ | 242,238 | $ | 222,012 | ||||||
| Cost of revenues | 150,062 | 179,055 | 162,568 | |||||||||
| Gross profit | 51,036 | 63,183 | 59,444 | |||||||||
| Selling, general and administrative expenses: | ||||||||||||
| Operating expenses | 51,911 | 50,984 | 44,716 | |||||||||
| Impairment of goodwill | 5,300 | — | — | |||||||||
| Employment-related claim, net of recoveries | 3,100 | — | — | |||||||||
| Revaluation of contingent consideration liability | — | — | (2,882 | ) | ||||||||
| Total selling, general and administrative expenses | 60,311 | 50,984 | 41,834 | |||||||||
| Income (loss) from operations | (9,275 | ) | 12,199 | 17,610 | ||||||||
| Interest income (expense), net | 319 | (358 | ) | (675 | ) | |||||||
| Other income (expense), net | (75 | ) | 650 | (49 | ) | |||||||
| Income (loss) before income taxes | (9,031 | ) | 12,491 | 16,886 | ||||||||
| Income tax expense (benefit) | (1,893 | ) | 3,779 | 4,665 | ||||||||
| Net income (loss) | $ | (7,138 | ) | $ | 8,712 | $ | 12,221 | |||||
| Earnings (Loss) Per Share: | ||||||||||||
| Basic | $ | (.61 | ) | $ | .75 | $ | 1.07 | |||||
| Diluted | $ | (.61 | ) | $ | .72 | $ | 1.02 | |||||
| Weighted average common shares outstanding: | ||||||||||||
| Basic | 11,613 | 11,588 | 11,436 | |||||||||
| Diluted | 11,613 | 12,077 | 12,007 | |||||||||
(LOSS)
| Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
Net income | $ | 1,626 | $ | 2,520 | $ | 2,753 | ||||||
Other comprehensive income (loss): | ||||||||||||
Net unrealized gain on currency forward contracts | — | — | 41 | |||||||||
Net unrealized gain (loss) on interest rate swap contracts | 21 | 19 | (31 | ) | ||||||||
Foreign currency translation adjustments | 10 | — | — | |||||||||
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Total pretax net unrealized gain | 31 | 19 | 10 | |||||||||
Income tax expense | 7 | 7 | 4 | |||||||||
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Total other comprehensive income, net of taxes | $ | 24 | $ | 12 | $ | 6 | ||||||
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Total comprehensive income | $ | 1,650 | $ | 2,532 | $ | 2,759 | ||||||
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The accompanying notes are an integral part of these Consolidated Financial Statements
MASTECH DIGITAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Amounts in thousands)
| Common Stock | Additional Paid-in Capital | Accumulated Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Income (loss) | Total Shareholders’ Equity | |||||||||||||||||||
Balances, December 31, 2014 | $ | 51 | $ | 12,733 | $ | 4,024 | $ | (3,915 | ) | $ | (25 | ) | $ | 12,868 | ||||||||||
Net income | — | — | 2,753 | — | — | 2,753 | ||||||||||||||||||
Other comprehensive income, net of taxes | — | — | — | — | 6 | 6 | ||||||||||||||||||
Increase in excess tax benefits related to stock-based compensation | — | 103 | — | — | — | 103 | ||||||||||||||||||
Stock-based compensation expense | — | 262 | — | — | — | 262 | ||||||||||||||||||
Stock options exercised | 1 | 16 | — | — | — | 17 | ||||||||||||||||||
Purchase of treasury stock | — | — | — | (206 | ) | — | (206 | ) | ||||||||||||||||
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Balances, December 31, 2015 | $ | 52 | $ | 13,114 | $ | 6,777 | $ | (4,121 | ) | $ | (19 | ) | $ | 15,803 | ||||||||||
Net income | — | — | 2,520 | — | — | 2,520 | ||||||||||||||||||
Other comprehensive income, net of taxes | — | — | — | — | 12 | 12 | ||||||||||||||||||
Increase in excess tax benefits related to stock-based compensation | — | 241 | — | — | — | 241 | ||||||||||||||||||
Stock-based compensation expense | — | 408 | — | — | — | 408 | ||||||||||||||||||
Stock options exercised | 1 | 100 | — | — | — | 101 | ||||||||||||||||||
Purchase of treasury stock | — | — | — | (13 | ) | — | (13 | ) | ||||||||||||||||
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Balances, December 31, 2016 | $ | 53 | $ | 13,863 | $ | 9,297 | $ | (4,134 | ) | $ | (7 | ) | $ | 19,072 | ||||||||||
Net income | — | — | 1,626 | — | — | 1,626 | ||||||||||||||||||
Proceeds from issuance of common stock | 9 | 5,991 | — | — | — | 6,000 | ||||||||||||||||||
Other comprehensive income, net of taxes | — | — | — | — | 24 | 24 | ||||||||||||||||||
Stock-based compensation expense | — | 381 | — | — | — | 381 | ||||||||||||||||||
Stock options exercised | 1 | 69 | — | — | — | 70 | ||||||||||||||||||
Purchase of treasury stock | — | — | — | (20 | ) | — | (20 | ) | ||||||||||||||||
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Balances, December 31, 2017 | $ | 63 | $ | 20,304 | $ | 10,923 | $ | (4,154 | ) | $ | 17 | $ | 27,153 | |||||||||||
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Years Ended December 31, | ||||||||||||
2023 | 2022 | 2021 | ||||||||||
| Net income (loss) | $ | (7,138 | ) | $ | 8,712 | $ | 12,221 | |||||
| Other comprehensive income (loss): | ||||||||||||
| Net unrealized gain on interest rate swap contracts | — | — | 35 | |||||||||
| Foreign currency translation adjustments | (89 | ) | (948 | ) | (94 | ) | ||||||
| Total pretax net unrealized (loss) | (89 | ) | (948 | ) | (59 | ) | ||||||
| Income tax expense | — | — | 9 | |||||||||
| Total other comprehensive (loss), net of taxes | (89 | ) | (948 | ) | (68 | ) | ||||||
| Total comprehensive income (loss) | $ | (7,227 | ) | $ | 7,764 | $ | 12,153 | |||||
SHAREHOLDERS’ EQUITY
| Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
OPERATING ACTIVITIES: | ||||||||||||
Net income | $ | 1,626 | $ | 2,520 | $ | 2,753 | ||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||||||
Depreciation and amortization | 1,942 | 1,016 | 660 | |||||||||
Bad debt expense | 10 | 75 | 53 | |||||||||
Interest amortization of deferred financing costs | 99 | 38 | 29 | |||||||||
Stock-based compensation expense | 381 | 408 | 262 | |||||||||
Deferred income taxes, net | (234 | ) | 55 | (1 | ) | |||||||
Loss on derivative contracts | — | — | 3 | |||||||||
Loss on disposition of fixed assets | 4 | — | — | |||||||||
Foreign currency translation adjustments | 10 | — | — | |||||||||
Long-term accrued income taxes | 68 | — | — | |||||||||
Working capital items: | ||||||||||||
Accounts receivable and unbilled receivables | (3,322 | ) | (1,987 | ) | (4,017 | ) | ||||||
Prepaid and other current assets | (618 | ) | (173 | ) | 348 | |||||||
Accounts payable | 1,685 | (250 | ) | 699 | ||||||||
Accrued payroll and related costs | 472 | 1,680 | 953 | |||||||||
Other accrued liabilities | 1,000 | (945 | ) | 1,094 | ||||||||
Deferred revenue | 234 | (145 | ) | 191 | ||||||||
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Net cash flows provided by operating activities | 3,357 | 2,292 | 3,027 | |||||||||
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INVESTING ACTIVITIES: | ||||||||||||
Acquisition of InfoTrellis, Inc. (net of cash acquired and issuance of contingent consideration) | (34,799 | ) | — | — | ||||||||
Acquisition of Hudson IT (net of cash acquired) | — | — | (16,987 | ) | ||||||||
Recovery of (payments for)non-current deposits | (8 | ) | 67 | 31 | ||||||||
Capital expenditures | (1,127 | ) | (105 | ) | (168 | ) | ||||||
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Net cash flows (used in) investing activities | (35,934 | ) | (38 | ) | (17,124 | ) | ||||||
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FINANCING ACTIVITIES: | ||||||||||||
Borrowing (repayments) on revolving credit facility, (net) | 5,364 | (802 | ) | 4,438 | ||||||||
Borrowing on term loan facility | 30,500 | — | 9,000 | |||||||||
(Repayments) on term loan facility | (7,253 | ) | (1,800 | ) | (900 | ) | ||||||
Proceeds from the issuance of common stock | 6,000 | — | — | |||||||||
Payment of deferred financing costs | (435 | ) | — | (75 | ) | |||||||
Purchase of treasury stock | (20 | ) | (13 | ) | (206 | ) | ||||||
Proceeds from the exercise of stock options | 70 | 101 | 17 | |||||||||
Increase in excess tax benefits related to stock options / restricted shares, net | — | 241 | 103 | |||||||||
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Net cash flows provided by (used in) financing activities | 34,226 | (2,273 | ) | 12,377 | ||||||||
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Net change in cash and cash equivalents | 1,649 | (19 | ) | (1,720 | ) | |||||||
Cash and cash equivalents, beginning of period | 829 | 848 | 2,568 | |||||||||
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Cash and cash equivalents, end of period | $ | 2,478 | $ | 829 | $ | 848 | ||||||
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SUPPLEMENTAL DISCLOSURE: | ||||||||||||
Cash payments for interest expense | $ | 925 | $ | 430 | $ | 243 | ||||||
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Cash payments for income taxes | $ | 1,506 | $ | 2,304 | $ | 309 | ||||||
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NON-CASH TRANSACTIONS: | ||||||||||||
Capital expenditures in accounts payable | $ | 312 | $ | — | $ | — | ||||||
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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 | — | — | 12,221 | — | — | 12,221 | ||||||||||||||||||
| Employee common stock purchases | — | 301 | — | — | — | 301 | ||||||||||||||||||
| Other comprehensive (loss), net of taxes | — | — | — | — | (68 | ) | (68 | ) | ||||||||||||||||
| Stock-based compensation expense | — | 2,212 | — | — | — | 2,212 | ||||||||||||||||||
| Stock options exercised | 1 | 228 | — | — | — | 229 | ||||||||||||||||||
| Balances, December 31, 2021 | $ | 131 | $ | 28,250 | $ | 50,841 | $ | (4,187 | ) | $ | (607 | ) | $ | 74,428 | ||||||||||
| Net income | — | — | 8,712 | — | — | 8,712 | ||||||||||||||||||
| Employee common stock purchases | — | 263 | — | — | — | 263 | ||||||||||||||||||
| Other comprehensive (loss), net of taxes | — | — | — | — | (948 | ) | (948 | ) | ||||||||||||||||
| Stock-based compensation expense | — | 2,225 | — | — | — | 2,225 | ||||||||||||||||||
| Stock options exercised | 2 | 1,321 | — | — | — | 1,323 | ||||||||||||||||||
| Balances, December 31, 2022 | $ | 133 | $ | 32,059 | $ | 59,553 | $ | (4,187 | ) | $ | (1,555 | ) | $ | 86,003 | ||||||||||
| Net (loss) | — | — | (7,138 | ) | — | — | (7,138 | ) | ||||||||||||||||
| Employee common stock purchases | — | 204 | — | — | — | 204 | ||||||||||||||||||
| Other comprehensive (loss), net of taxes | — | — | — | — | (89 | ) | (89 | ) | ||||||||||||||||
| Stock-based compensation expense | — | 3,082 | — | — | — | 3,082 | ||||||||||||||||||
| Purchase of treasury stock | — | — | — | (618 | ) | — | (618 | ) | ||||||||||||||||
| Balances, December 31, 2023 | $ | 133 | $ | 35,345 | $ | 52,415 | $ | (4,805 | ) | $ | (1,644 | ) | $ | 81,444 | ||||||||||
Years Ended December 31, | ||||||||||||
2023 | 2022 | 2021 | ||||||||||
| OPERATING ACTIVITIES: | ||||||||||||
| Net income (loss) | $ | (7,138 | ) | $ | 8,712 | $ | 12,221 | |||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||
| Depreciation and amortization | 3,855 | 4,195 | 3,979 | |||||||||
| Bad debt expense | (30 | ) | 50 | 130 | ||||||||
| Interest amortization of deferred financing costs | 73 | 73 | 82 | |||||||||
| Stock-based compensation expense | 3,082 | 2,225 | 2,212 | |||||||||
| Deferred income taxes, net | (1,714 | ) | 655 | 1,061 | ||||||||
| Impairment of goodwill | 5,300 | — | — | |||||||||
| Revaluation of contingent consideration liability | — | — | (2,882 | ) | ||||||||
| Operating lease assets and liabilities, net | 75 | (379 | ) | 173 | ||||||||
| Loss on disposition of fixed assets | 1 | — | 9 | |||||||||
| Long-term accrued income taxes | (36 | ) | (20 | ) | (40 | ) | ||||||
| Working capital items: | ||||||||||||
| Accounts receivable and unbilled receivables | 12,537 | 1,021 | (11,389 | ) | ||||||||
| Prepaid and other current assets | (1,718 | ) | 95 | (2,544 | ) | |||||||
| Accounts payable | 186 | (479 | ) | 2,365 | ||||||||
| Accrued payroll and related costs | 1,276 | (3,155 | ) | (429 | ) | |||||||
| Other accrued liabilities | (248 | ) | (41 | ) | 202 | |||||||
| Deferred revenue | 477 | (337 | ) | 66 | ||||||||
| Net cash flows provided by operating activities | 15,978 | 12,615 | 5,216 | |||||||||
| INVESTING ACTIVITIES: | ||||||||||||
Recovery of (payments for) non-current deposits | 119 | 17 | (199 | ) | ||||||||
| Capital expenditures | (335 | ) | (835 | ) | (1,895 | ) | ||||||
| Proceeds from the sale of fixed assets | — | — | 10 | |||||||||
| Net cash flows (used in) investing activities | (216 | ) | (818 | ) | (2,084 | ) | ||||||
| FINANCING ACTIVITIES: | ||||||||||||
| (Repayments) on term loan facility | (1,100 | ) | (12,000 | ) | (4,400 | ) | ||||||
| Proceeds from the issuance of common stock | 204 | 263 | 301 | |||||||||
| Purchase of treasury stock | (618 | ) | — | — | ||||||||
| Payment of deferred financing costs | (64 | ) | — | (223 | ) | |||||||
| Proceeds from the exercise of stock options | — | 1,323 | 229 | |||||||||
| Net cash flows (used in) financing activities | (1,578 | ) | (10,414 | ) | (4,093 | ) | ||||||
| Effect of exchange rate changes on cash and cash equivalents | (94 | ) | (948 | ) | (94 | ) | ||||||
| Net change in cash and cash equivalents | 14,090 | 435 | (1,055 | ) | ||||||||
| Cash and cash equivalents, beginning of period | 7,057 | 6,622 | 7,677 | |||||||||
| Cash and cash equivalents, end of period | $ | 21,147 | $ | 7,057 | $ | 6,622 | ||||||
| SUPPLEMENTAL DISCLOSURE: | ||||||||||||
| Cash payments for interest expense | $ | 43 | $ | 324 | $ | 623 | ||||||
| Cash payments for income taxes | $ | 1,356 | $ | 2,164 | $ | 3,831 | ||||||
1. | Summary of Significant Accounting Policies: |
Services to mostly large and
Reflective ofservices.
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.
Recent Developments
On July 13, 2017, the Company completed its acquisition
The purchase agreement for the InfoTrellis acquisition totaled $55 million, with $35.75 million paid in cash at closing (which was reduced by working capital adjustments of $861,000) and $19.25 million deferred over the two years after closing. The deferred purchase price is contingent upon the acquired business generating specified EBIT (earnings before interest and taxes) targets during the first two years following closing.
The funding for the transaction consisted of a combination of debt and equity. A new $65 million credit facility the Company established on July 13, 2017 with PNC Bank, N.A. (“PNC”) provided debt financing for the transaction, refinancing of the Company’s previously existing debt with PNC and additional borrowing capacity. The equity financing was completed through a $6.0 million private placement of newly-issued shares of the Company’s common stock to Mastech’s founders and majority shareholders, Ashok Trivedi and Sunil Wadhwani. Pursuant to the terms of the share purchase agreements executed in connection with the private placement of these shares, the Company agreed to sell such shares at a price per share equal to the greater of $7.00 or the closing price for the common stock on July 10, 2017 (two business days after the July 7, 2017
announcement of the transaction), which was $6.35 per share. Accordingly, the common stock was sold on July 13, 2017 at a price per share equal to $7.00. The terms of the private placement were negotiated and approved by a Special Committee of the Company’s independent directors, which retained counsel and an independent financial advisor.
On July 13, 2017 and July 19, 2017, the Company filed with the Securities and Exchange Commission Current Reports on Form8-K providing additional details on this acquisition and the financing arrangements. On September 27, 2017, the Company filed an Amendment to its July 19, 2017 Current Report on Form8-K solely to include the financial statements and financial information required under Item 9.01 of Form8-K, which statements and information were excluded from the original Form8-K in reliance on paragraphs (a)(4) and (b)(2) of Item 9.01 of Form8-K.
Reclassifications
As discussed herein, the Company adopted ASU2015-17, “Balance Sheet Classification
Unbilled receivables represent amounts recognized as revenues based on services performed and, in accordance with the terms of the client contract, will be invoiced in a subsequent period.
Credit Losses
The Allowance
2023 is as follows:
Balance at beginning of period | Charged to expense (credited) | Recoveries/ (Write- offs) | Balance at end of period | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
| Year ended December 31, 2023 | $ | 444 | $ | (30 | ) | $ | 114 | $ | 528 | |||||||
| Year ended December 31, 2022 | 375 | 50 | 19 | 444 | ||||||||||||
| Year ended December 31, 2021 | 413 | 130 | (168 | ) | 375 | |||||||||||
Laptop Computers | 3 -4 years | ||||
Equipment | 3 -5 years | ||||
Enterprise Software | 3 -5 years |
dates.
client relationships, covenants in the case of the InfoTrellis acquisition, technology, which are being amortized using the straight-line method over their estimated useful lives ranging from three years to twelve years, as more fully described in Note 2 “Business Combinations”3 “Goodwill and Other Intangible Assets, net” to the Notes to the Consolidated Financial Statements.
goodwill.
administrative
The InfoTrellis financial results
obligation for those payments is incurred.
In 2017, the Company incurred an estimatedone-time charge of $372,000$628,000,
We believe that we have made reasonable estimates with respect to each of the above items, however, all of the amounts recorded are provisional as we have not completed our analysis of the complex and far reaching effects of the Tax Cut and Jobs Act of 2017. Under guidance issued by the staff of the SEC, we expect to finalize our accounting related to the tax effects of the Tax CutCuts and Jobs Act of 2017 during 2018(“TCJA”) created a new requirement that certain income earned by foreign subsidiaries, known as we complete our analysis, computations and assertions. It is possible that others, applying reasonable judgmentglobal intangible
incurred.
Canadian taxing authorities.
Liability
Operations, in Item 8, herein. No contingent consideration liability remained outstanding as of December 31, 2023 and 2022.
Subsequent to the July 13, 2017 InfoTrellis acquisition, the
We record deferred revenues when cash payments are received or due in advance of our performance, including amounts which may be refundable.
Effective October 1,
The
Directors.
(Loss)
— Interest Rate Swap Contracts:
Contracts
in 2023 and 2021.
For the year ended December 31, 2023, all stock options and restricted shares were anti-dilutive and excluded from the computation of diluted (loss) per share due to the net loss.
to require presentation of deferred tax asset and liabilities asnon-current within a classified balance sheet. This guidance was adopted, on a retrospective basis, at March 31, 2017. Prior periods were adjusted to conform to the current period presentation.
In March, 2016,October 2021, the FASB issued ASU2016-09 “Compensation—Stock Compensation
Recent Accounting Pronouncements not yet adopted
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)2014-09, “Revenue from Contracts with Customers,” which provides for a single five-step model to be applied to all revenue contracts with customers. The new guidance also requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. Entities can use either a retrospective approach or a cumulative effect adjustment approach to implement the guidance. In 2015, the FASB issued a deferral of the effective date of the guidance to 2018, with early adoption permitted in 2017. In 2016, the FASB issued ASU2016-08, ASU2016-10, ASU2016-12 and ASU2016-20 to amend ASU2014-09 for technical corrections and improvements and to clarify the implementation guidance for 1) principal versus agent considerations, 2) identifying performance obligations, 3) the accounting for licenses of intellectual property and 4) narrow scope improvements on assessing collectability, presentation of sales taxes,non-cash consideration and completed contracts and contract modifications at transition. The Company adopted the new guidance on January 1, 2018, using the modified retrospective method, with no impact on its 2017 financial statements. The cumulative effect of initially applying the new guidance had no impact on the opening balance of retained earnings as of January 1, 2018. The Company does not expect the new guidance to have a material impact on its financial statements in future periods. However, additional disclosures will be included in future reportinginterim periods in accordance with requirements of the FASB’s new guidance.
In January 2016, the FASB issued ASU2016-01, “Financial Instruments—Overall (Subtopic825-10)—Recognition and Measurement of Financial Assets and Financial Liabilities”, which amends certain aspects of recognition, measurement, presentation and disclosure of financial instruments. This amendment requires all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under the equity method of accounting or those that result in consolidation of the investee). This standard will be effective forwithin fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We are evaluating the impact the adoption of ASU2016-01 will have on our consolidated financial statements.
In February 2016, the FASB issued ASUNo. 2016-02, “Leases (Topic 842)”. The main difference between the current requirement under GAAP and ASU2016-02 is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases. ASU2016-02 requires that a lessee recognize in the statement of financial position a liability to make lease payments (the lease liability) and aright-of-use asset representing its right to use the underlying asset for the lease term (other than leases that meet the definition of a short-term lease). The liability will be equal to the present value of the lease payment. The lease asset will be based on the liability, subject to adjustment, such as for initial direct costs. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Operating leases will
result in straight-line expense (similar to current operating leases), while finance leases will result in a front-loaded expense pattern (similar to current capital leases). The classification of these leases will be based on the criteria that are largely similar to those applied in current lease accounting. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. ASU2016-02 is effective for annual and interim periods beginning after December 15, 2018 and early2024. Early adoption is permitted. ASU2016-02 must be adopted using a modified retrospective transition and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented. We are currently assessing the potential impact of ASU2016-02 and expect adoption will have a material impact on our consolidated financial condition and results of operations. Contractual obligations on lease arrangements as of December 31, 2017 approximated $3.0 million.
In August 2016, the FASB issued ASU2016-15 “Statement of Cash Flows (Topic 230)—Classification of Certain Cash Receipts and Cash Payments”. Current GAAP either is unclear or does not include specific guidance on eight specific cash flow classification issues included in the amendments in this ASU. The ASU addresses these cash flow issues with the objective of reducing the existing diversity in practice. The amendments in this ASU are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In January 2017, the FASB issued ASU2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment”, which removes the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. Under this ASU, a goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU2017-04 is effective for annual and interim periods beginning January 1, 2020, with early adoption permitted, and applied prospectively. We do not expect ASU2017-04 to have a material impact on our financial statements.
In May 2017, the FASB issued ASU2017-09, “Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting”. Entities have defined the term “modification” in a broad manner resulting in diversity in modification accounting practice. The amendments in this ASU provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendments in this ASU are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In July 2017, the FASB issued ASU2017-11, “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815)”. This ASU addresses I. Accounting for Certain Financial Instruments with Down Round Features and II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. The amendments in Part I of this ASU change the classification analysis of certain equity-linked financial instruments (or embedded features) with down-round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round-feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. The amendments in Part II of this ASU recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect. The amendments in Part I of this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company does not expect this ASU to have a material impact on its financial statements.
In August 2017,December 2023, the FASB issued ASU2017-12, “Derivatives and Hedging
2. | Revenue from Contracts with Customers |
On July 7, 2017, Mastech
Under the terms of the Purchase Agreements, the Company Entities paid at the closing of the acquisition $35.75 million in cash, less certain working capital adjustments which totaled $861,000. The Purchase Agreements also provided for contingent consideration of $19.25 million in deferred cash payments, with up to $8.25 million payable if the EBIT of the Acquired Business for the12-month period beginning on August 1, 2017 (the “Actual Year 1 EBIT”) equals $10.0 million and up to $11.0 million payable if the EBIT of the Acquired Business for the12-month period beginning on August 1, 2018 (the “Actual Year 2 EBIT”) equals $10.7 million. The deferred amount payments are subject to adjustments under the terms of the Purchase Agreements based upon, among other items, the amount of the Actual Year 1 EBIT and the amount of the Actual Year 2 EBIT.
To fund the acquisition, the Company entered into a new credit agreement on July 13, 2017 with PNC Bank, National Association, as administrative agent, swing loan lender and issuing lender, PNC Capital Markets LLC, as sole lead arranger and sole book runner, and certain financial institutions party thereto as lenders. The Credit Agreement provides for a total aggregate commitment of $65.0 million, consisting of (i) a revolving credit facility in an aggregate principal amount not to exceed $27.5 million, subject to increases to an aggregate amount not to exceed $37.5 million upon satisfaction of certain conditions; (ii) a $30.5 million term loan facility; and (iii) a $7.0 million delayed draw term loan facility to be used exclusively toward contingent consideration payments. In addition, the Company entered into Securities Purchase Agreements with Ashok Trivedi and Sunil Wadhwani (collectively, the “Investors”) on July 7, 2017 pursuant to which the Company issued and sold an aggregate 857,144 shares (the “Shares”) of its common stock, par value $0.01 per share (the “Common Stock”), to the Investors on July 13, 2017 for $6.0 million in aggregate gross proceeds (the “Private Placement Transactions”). The Company used the proceeds from the Private Placement Transactions to fund a portion of the cash paid at the closing of the acquisition.
The acquisition was accounted for using the acquisition method of accounting. The acquisition method of accounting requires that the assets acquired and liabilities assumed be measured at their fair value as of the closing date.
The following table summarizesdepicts the fair valuedisaggregation of considerationour revenues by contract type and operating segment:
Years Ended December 31, | ||||||||||||
2023 | 2022 | 2021 | ||||||||||
(Amounts in thousands) | ||||||||||||
Data and Analytics Services Segment | ||||||||||||
Time-and-material | $ | 25,307 | $ | 26,911 | $ | 25,224 | ||||||
| Fixed-price Contracts | 9,051 | 13,683 | 13,115 | |||||||||
Subtotal Data and Analytics Services | $ | 34,358 | $ | 40,594 | $ | 38,339 | ||||||
IT Staffing Services Segment | ||||||||||||
Time-and-material | $ | 166,740 | $ | 201,644 | $ | 183,673 | ||||||
| Fixed-price Contracts | — | — | — | |||||||||
Subtotal IT Staffing Services | $ | 166,740 | $ | 201,644 | $ | 183,673 | ||||||
Total Revenues | $ | 201,098 | $ | 242,238 | $ | 222,012 | ||||||
(in thousands) | Amounts | |||
Cash purchase price at closing | $ | 35,750 | ||
Working capital adjustments | (861 | ) | ||
Estimated payout of contingent consideration (1) | 17,125 | |||
|
| |||
Total Fair Value of Consideration | $ | 52,014 | ||
|
| |||
The cash purchase price at closing was paid with funds obtained from the following sources:
(in thousands) | Amounts | |||
Cash balances on hand | $ | 341 | ||
Sale of common stock in a private placement transactions | 6,000 | |||
Term loan debt facility | 30,500 | |||
Revolving line of credit | 9,000 | |||
Payoff of previous credit facility | (10,091 | ) | ||
|
| |||
Cash paid at Closing | $ | 35,750 | ||
|
| |||
The preliminary allocationwork location of the purchase price was based on estimates of the fair value ofour customers:
Years Ended December 31, | ||||||||||||
2023 | 2022 | 2021 | ||||||||||
(Amounts in thousands) | ||||||||||||
| United States | $ | 197,246 | $ | 236,187 | $ | 214,379 | ||||||
| Canada | 2,474 | 4,215 | 4,543 | |||||||||
| India and Other | 1,378 | 1,836 | 3,090 | |||||||||
Total | $ | 201,098 | $ | 242,238 | $ | 222,012 | ||||||
(in thousands) | Amounts | |||
Current Assets | $ | 6,909 | ||
Fixed Assets and Other | 215 | |||
Identifiable intangible assets: | ||||
Client relationships | 16,671 | |||
Covenantnot-to-compete | 761 | |||
Trade name | 1,221 | |||
Technology | 1,209 | |||
|
| |||
Total identifiable intangible assets | 19,862 | |||
Goodwill | 27,417 | |||
Current liabilities | (2,389 | ) | ||
|
| |||
Net Assets Acquired | $ | 52,014 | ||
|
| |||
The fair value of identifiable intangible assets has been estimated using the income approach through a discounted cash flow analysis. Specifically, the Company used the income approach through an excess earnings analysis to determine the fair value of client relationships. The value applied to the covenantnot-to-compete was based on an income approach using a “with or without” analysis of this covenant in place. The trade name and technology were valued using the income approach—relief from royalty method. All identifiable intangibles are considered level 3 inputs under the fair value measurement and disclosure guidance.
The Company incurred $2.0 million of transaction costs related to the acquisition in 2017. These costs are included in selling, general and administrative expenses in the accompanying Consolidated Statement of Operations.
On June 15, 2015, the Company completed the cash acquisition of Hudson IT. The acquisition supports Mastech’s growth strategy as a premier provider of IT staffing services by expanding its existing client base, increasing its domestic recruitment capabilities and strengthening its management talent. The acquisition was structured as an asset purchase and was accounted for using the acquisition method of accounting. The acquisition method of accounting requires that the assets acquired and liabilities assumed be measured at their fair values as of the closing date.
The financial terms of the acquisition included a $16,987,000 cash purchase price and the assumption of $13,000 of net current liabilities, with the seller retaining essentially all working capital.
The cash purchase price at closing was paid with funds obtained from the following sources:
(in thousands) | Amounts | |||
Cash balances on hand | $ | 2,000 | ||
Term loan facility | 9,000 | |||
Revolving line of credit | 5,987 | |||
|
| |||
Cash paid at Closing | $ | 16,987 | ||
|
| |||
The allocation of purchase price was based on estimates of the fair value of assets acquired and liabilities assumed as of June 15, 2015, as set forth below. The excess purchase price over the fair values of the net tangible assets and identifiable intangible assets was recorded as goodwill, which includes value associated with the assembled workforce. All goodwill is expected to be deductible for tax purposes. The valuation of net assets acquired is as follows:
(in thousands) | Amounts | |||
Current Assets | $ | 18 | ||
Fixed Assets | 6 | |||
Identifiable intangible assets: | ||||
Client relationships | 7,999 | |||
Covenantnot-to-compete | 319 | |||
Trade name | 249 | |||
|
| |||
Total identifiable intangible assets | 8,567 | |||
Goodwill | 8,427 | |||
Current liabilities | (31 | ) | ||
|
| |||
Net Assets Acquired | $ | 16,987 | ||
|
| |||
The fair value of identifiable intangible assets has been estimated using the income approach through a discounted cash flow analysis. Specifically, the Company used the income approach through an excess earnings analysis to determine the fair value of client relationships. The value applied to the covenantnot-to-compete was based on an income approach using a “with or without” analysis of this covenant in place. The trade name was valued using the income approach—relief from royalty method. All identifiable intangibles are considered level 3 inputs under the fair value measurement and disclosures guidance.
The Company incurred $624,000 of direct transaction costs related to the acquisition in 2015. These costs are included in selling, general and administrative expenses in the accompanying Consolidated Statement of Operations.
Includedunbilled receivables in the Consolidated Statement of Operations for the twelve month period ended December 31, 2015 are revenues of $15.9 million and net income of approximately $0.8 million applicableBalance Sheets, primarily relate to the Hudson IT operations from our June 15, 2015 acquisitionright to consideration for work completed, but not billed at the reporting date through December 31, 2015. Includedon contracts with customers. The contract assets are transferred to receivables when the rights become unconditional. Contract liabilities, shown as deferred revenue in the Consolidated Statement of Operations for the twelve month period ended December 31, 2017 are revenues of $9.2 millionBalance Sheets, primarily relate to contracts where advance payments or deposits have been received, but performance obligations have not yet been satisfied and net income of approximately $1.1 million applicable to the InfoTrellis operations from our July 13, 2017 acquisition date through December 31, 2017.
revenue has not been recognized.
December 31, | ||||||||
2023 | 2022 | |||||||
(Amounts in thousands) | ||||||||
| Receivables from contracts, beginning of year | $ | 33,603 | $ | 34,153 | ||||
| Receivables from contracts, end of year | $ | 22,556 | $ | 33,603 | ||||
| Contract assets, beginning of year | $ | 8,719 | $ | 9,240 | ||||
| Contract assets, end of year | $ | 7,259 | $ | 8,719 | ||||
| Contract liabilities, beginning of year | $ | 207 | $ | 544 | ||||
| Contract liabilities, end of year | $ | 684 | $ | 207 | ||||
| Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| (Amounts in Thousands, except per share data) | ||||||||||||
Revenue | $ | 158,785 | $ | 157,077 | $ | 157,946 | ||||||
Net income | $ | 2,388 | $ | 6,778 | $ | 6,882 | ||||||
Earnings per share—diluted | $ | .44 | $ | 1.27 | $ | 1.30 | ||||||
The information above does not reflect allcontracts which have original expected durations of the operating efficienciesone year or inefficiencies that may have resulted from the Hudson IT and InfoTrellis acquisitions in those periods prior to such acquisitions. Therefore, the unaudited pro forma information above is not necessarily indicative of results that would have been achieved had the business been combined during all periods presented.
3. | Goodwill and Other Intangible Assets, net |
The Company recorded a $5.3 million goodwill impairment related to the Data and Analytics Services segment in 2023 and a $9.7 million goodwill impairment in 2018. The impairments were primarily attributable to declines in revenue levels and lower future revenue projections.
| Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| (Amounts in thousands) | ||||||||||||
Goodwill, beginning balance | $ | 8,427 | $ | 8,427 | $ | — | ||||||
Addition in current period | 27,417 | — | 8,427 | |||||||||
Reduction in current period | — | — | — | |||||||||
|
|
|
|
|
| |||||||
Goodwill, ending balance | $ | 35,844 | $ | 8,427 | $ | 8,427 | ||||||
|
|
|
|
|
| |||||||
Years Ended December 31, | ||||||||||||
2023 | 2022 | 2021 | ||||||||||
(Amounts in thousands) | ||||||||||||
IT Staffing Services: | ||||||||||||
| Beginning balance | $ | 8,427 | $ | 8,427 | $ | 8,427 | ||||||
| Goodwill recorded | — | — | — | |||||||||
| Impairment | — | — | — | |||||||||
| Ending balance | $ | 8,427 | $ | 8,427 | $ | 8,427 | ||||||
Years Ended December 31, | ||||||||||||
2023 | 2022 | 2021 | ||||||||||
(Amounts in thousands) | ||||||||||||
Data and Analytics Services: | ||||||||||||
| Beginning balance | $ | 24,083 | $ | 24,083 | $ | 24,083 | ||||||
| Goodwill recorded | — | — | — | |||||||||
| Impairment | (5,300 | ) | — | — | ||||||||
| Ending balance | $ | 18,783 | $ | 24,083 | $ | 24,083 | ||||||
| As of December 31, 2017 | ||||||||||||||||
(Amounts in thousands) | Amortization Period (In Years) | Gross Carrying Value | Accumulative Amortization | Net Carrying Value | ||||||||||||
IT Staffing Services: | ||||||||||||||||
Client relationships | 12 | $ | 7,999 | $ | 1,694 | $ | 6,305 | |||||||||
Covenant-not-to-compete | 5 | 319 | 162 | 157 | ||||||||||||
Trade name | 3 | 249 | 211 | 38 | ||||||||||||
Data and Analytics Services: | ||||||||||||||||
Client relationships | 12 | 16,671 | 636 | 16,035 | ||||||||||||
Covenant-not-to-compete | 5 | 761 | 70 | 691 | ||||||||||||
Trade name | 5 | 1,221 | 112 | 1,109 | ||||||||||||
Technology | 7 | 1,209 | 79 | 1,130 | ||||||||||||
|
|
|
|
|
| |||||||||||
Total Intangible Assets | $ | 28,429 | $ | 2,964 | $ | 25,465 | ||||||||||
|
|
|
|
|
| |||||||||||
| As of December 31, 2016 | ||||||||||||||||
(Amounts in thousands) | Amortization Period (In Years) | Gross Carrying Value | Accumulative Amortization | Net Carrying Value | ||||||||||||
IT Staffing Services | ||||||||||||||||
Client relationships | 12 | $ | 7,999 | $ | 1,027 | $ | 6,972 | |||||||||
Covenant-not-to-compete | 5 | 319 | 99 | 220 | ||||||||||||
Trade name | 3 | 249 | 128 | 121 | ||||||||||||
|
|
|
|
|
| |||||||||||
Total Intangible Assets | $ | 8,567 | $ | 1,254 | $ | 7,313 | ||||||||||
|
|
|
|
|
| |||||||||||
2022:
As of December 31, 2023 | ||||||||||||||||
(Amounts in thousands) | Amortization Period (In Years) | Gross Carrying Value | Accumulative Amortization | Net Carrying Value | ||||||||||||
IT Staffing Services: | ||||||||||||||||
| Client relationships | 12 | $ | 7,999 | $ | 5,694 | $ | 2,305 | |||||||||
Covenant-not-to-compete | 5 | 319 | 319 | — | ||||||||||||
| Trade name | 3 | 249 | 249 | — | ||||||||||||
Data and Analytics Services: | ||||||||||||||||
| Client relationships | 12 | 19,641 | 9,776 | 9,865 | ||||||||||||
Covenant-not-to-compete | 5 | 1,201 | 1,047 | 154 | ||||||||||||
| Trade name | 5 | 1,711 | 1,539 | 172 | ||||||||||||
| Technology | 7 | 1,979 | 1,474 | 505 | ||||||||||||
Total Intangible Assets | $ | 33,099 | $ | 20,098 | $ | 13,001 | ||||||||||
As of December 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 | $ | 5,027 | $ | 2,972 | |||||||||
Covenant-not-to-compete | 5 | 319 | 319 | — | ||||||||||||
| Trade name | 3 | 249 | 249 | — | ||||||||||||
Data and Analytics Services: | ||||||||||||||||
| Client relationships | 12 | 19,641 | 8,140 | 11,501 | ||||||||||||
Covenant-not-to-compete | 5 | 1,201 | 959 | 242 | ||||||||||||
| Trade name | 5 | 1,711 | 1,441 | 270 | ||||||||||||
| Technology | 7 | 1,979 | 1,191 | 788 | ||||||||||||
Total Intangible Assets | $ | 33,099 | $ | 17,326 | $ | 15,773 | ||||||||||
| Years Ended December 31, | ||||||||||||||||||||
| 2018 | 2019 | 2020 | 2021 | 2022 | ||||||||||||||||
| (Amounts in thousands) | ||||||||||||||||||||
Amortization expense | $ | 2,727 | $ | 2,689 | $ | 2,654 | $ | 2,625 | $ | 2,443 | ||||||||||
Years Ended December 31, | ||||||||||||||||||||
2024 | 2025 | 2026 | 2027 | 2028 | ||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||
| Amortization expense | $ | 2,693 | $ | 2,553 | $ | 2,413 | $ | 2,025 | $ | 1,637 | ||||||||||
4. | Cash and Cash Equivalents |
5. | Credit Facility |
(the (the “Revolver”) in an aggregate principal amount not to exceed $27.5$40 million (subject to increase by up to an additional $10 million upon satisfaction of certain conditions);and (ii) a $30.5$13.1 million term loan facility (the “Term Loan”); and a (iii) $7.0 million delayed draw term loan facility (the “Delayed Draw Term Loan”)Loan), as more fully described in Exhibit 10.1 to the Company’s Form8-K,
2017, April 25, 2018, and October 7, 2020, Exhibit 10.2 to the Form
balance to
Credit Agreement.
December 31, 2016 previously presented in other assets, have been reclassified to conform to the current period presentation.
At closing, the Company borrowed $9.0 million under the Revolver and $30.5 million under the Term Loan which were used to repay all borrowings under the previous credit facility with PNC and to pay a portion of the acquisition consideration and transaction expenses. As of December 31, 20172023, and 2016December 31, 2022, the Company’s outstanding borrowings under the Revolver totaled $9.0 million and $3.6 million, respectively;zero dollars; and unused borrowing capacity available was approximately $13$22.5 million and $12$31.8 million, respectively. The Company’s outstanding borrowings under the term loanTerm Loan were $29.5 millionzero dollars and $6.3$1.1 million at December 31, 20172023, and 2016, respectively. The Company believes the eligible borrowing base on the revolver will not fall below current outstanding borrowings for a period of time exceeding one year and has classified the $9 million net outstanding debt balance at December 31, 2017 as long-term.
As of December 31, 2017, the annual aggregate maturities of our outstanding debt (exclusive of deferred financing costs amortization) during each of the next five years are as follows:
| Total Amount | ||||
| (Amounts in thousands) | ||||
2018 | $ | 4,003 | ||
2019 | 4,575 | |||
2020 | 4,575 | |||
2021 | 4,956 | |||
2022 | 20,438 | |||
|
| |||
Total | $ | 38,547 | ||
|
| |||
6. | Leases |
Lease Commitments
December 31, 2023 | December 31, 2022 | |||||||
(in thousands) | ||||||||
Assets: | ||||||||
Long-term operating lease right-of-use | $ | 5,106 | $ | 3,886 | ||||
Liabilities: | ||||||||
| Short-term operating lease liability | $ | 1,236 | $ | 1,504 | ||||
| Long-term operating lease liability | 3,843 | 2,294 | ||||||
| Total Liabilities | $ | 5,079 | $ | 3,798 | ||||
Amount as of December 31, 2023 | ||||
(in thousands) | ||||
| 2024 | $ | 1,474 | ||
| 2025 | 1,477 | |||
| 2026 | 1,477 | |||
| 2027 | 791 | |||
| 2028 | 259 | |||
| Thereafter | 196 | |||
| Total | $ | 5,674 | ||
| Less: Imputed interest | (595 | ) | ||
| Present value of operating lease liabilities | $ | 5,079 | ||
| Total Amount | ||||
| (Amounts in thousands) | ||||
2018 | $ | 1,135 | ||
2019 | 1,162 | |||
2020 | 545 | |||
2021 | 197 | |||
2022 | — | |||
Thereafter | — | |||
|
| |||
Total | $ | 3,039 | ||
|
| |||
future lease payments was 5.4%.
Contingencies
7. | Long-Term Payroll Tax Liability |
8. | Commitment and Contingencies |
9. | Employee Benefit Plan |
10. | Stock-Based Compensation |
| Number of Options | Weighted Average Exercise Price | |||||||
Outstanding at December 31, 2014 | 255,000 | $ | 1.00 | |||||
Granted | — | — | ||||||
Exercised | (19,000 | ) | 0.81 | |||||
Cancelled / forfeited | — | — | ||||||
|
| |||||||
Outstanding at December 31, 2015 | 236,000 | 1.01 | ||||||
Granted | 335,000 | 7.04 | ||||||
Exercised | (126,000 | ) | 0.81 | |||||
Cancelled / forfeited | — | — | ||||||
|
| |||||||
Outstanding at December 31, 2016 | 445,000 | 5.61 | ||||||
Granted | — | — | ||||||
Exercised | (90,000 | ) | 0.86 | |||||
Cancelled / forfeited | (18,000 | ) | 5.81 | |||||
|
| |||||||
Outstanding at December 31, 2017 | 337,000 | $ | 6.86 | |||||
|
|
|
| |||||
2023:
Number of Options | Weighted Average Exercise Price | |||||||
| Outstanding at December 31, 2020 | 2,009,000 | $ | 9.40 | |||||
| Granted | 501,000 | 17.58 | ||||||
| Exercised | (31,000 | ) | 7.34 | |||||
| Cancelled / forfeited | (438,000 | ) | 13.04 | |||||
| Outstanding at December 31, 2021 | 2,041,000 | 10.66 | ||||||
| Granted | 1,200,000 | 15.76 | ||||||
| Exercised | (113,000 | ) | 11.73 | |||||
| Cancelled / forfeited | (802,000 | ) | 15.85 | |||||
| Outstanding at December 31, 2022 | 2,326,000 | 11.38 | ||||||
| Granted | 205,000 | 10.14 | ||||||
| Exercised | — | — | ||||||
| Cancelled / forfeited | (434,000 | ) | 13.62 | |||||
Outstanding at December 31, 2023 | 2,097,000 | $ | 10.80 | |||||
value of vested and expected to vest stock options totaled $1,079,000$2.5 million. The total intrinsic value of options exercised during 2017, 20162023, 2022 and 20152021 totaled $522,000, $849,000$0, $777,000 and $183,000,$355,000, respectively. The measurement date fair value of stock options vested during 2017, 20162023, 2022 and 20152021 totaled $198,000, $0$245,000, $653,000 and $69,000,$2.1 million, respectively.
Range of Exercise Prices: | Options Outstanding | Weighted Average Remaining Contractual Life (in years) | Weighted Average Exercise Price | |||||||||
$0.01 to $2.00 | 1,000 | 0.8 | $ | 0.01 | ||||||||
$2.01 to $4.00 | 13,000 | 2.0 | $ | 2.36 | ||||||||
$4.01 to $6.00 | — | — | — | |||||||||
$6.01 to $8.00 | 323,000 | 8.3 | $ | 7.07 | ||||||||
|
| |||||||||||
| 337,000 | 8.0 | $ | 6.86 | |||||||||
|
|
|
|
|
| |||||||
Range of Exercise Prices: | Options Exercisable | Weighted Average Remaining Contractual Life (in years) | Weighted Average Exercise Price | |||||||||
$0.01 to $2.00 | 1,000 | 0.8 | $ | 0.01 | ||||||||
$2.01 to $4.00 | 13,000 | 2.0 | $ | 2.36 | ||||||||
$4.01 to $6.00 | — | — | — | |||||||||
$6.01 to $8.00 | 55,000 | 8.2 | $ | 7.18 | ||||||||
|
| |||||||||||
| 69,000 | 6.9 | $ | 6.17 | |||||||||
|
|
|
|
|
| |||||||
2023:
Range of Exercise Prices: | Options Outstanding | Weighted Average Remaining Contractual Life (in years) | Weighted Average Exercise Price | |||||||||
| $0.01 to $4.00 | 355,000 | 2.3 | $ | 3.56 | ||||||||
| $4.01 to $8.00 | 575,000 | 4.8 | 6.83 | |||||||||
| $8.01 to $12.00 | 105,000 | 9.8 | 8.82 | |||||||||
| $12.01 to $16.00 | 821,000 | 7.5 | 14.99 | |||||||||
| $16.01 to $20.00 | 241,000 | 7.8 | 17.51 | |||||||||
2,097,000 | 6.0 | $ | 10.80 | |||||||||
Range of Exercise Prices: | Options Exercisable | Weighted Average Remaining Contractual Life (in years) | Weighted Average Exercise Price | |||||||||
| $0.01 to $4.00 | 355,000 | 2.3 | $ | 3.56 | ||||||||
| $4.01 to $8.00 | 491,000 | 4.8 | 6.84 | |||||||||
| $8.01 to $12.00 | — | — | — | |||||||||
| $12.01 to $16.00 | 335,000 | 6.4 | 15.42 | |||||||||
| $16.01 to $20.00 | 125,000 | 7.8 | 17.51 | |||||||||
1,306,000 | 4.8 | $ | 9.17 | |||||||||
| Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
Stock option grants: | ||||||||||||
Weighted-average risk-free interest rate | — | 1.34 | % | — | ||||||||
Weighted-average dividend yield | — | 0.0 | % | — | ||||||||
Expected volatility | — | 55.9 | % | — | ||||||||
Expected term (in years) | — | 5.5 | — | |||||||||
Weighted-average fair value | $ | — | $ | 3.52 | $ | — | ||||||
2023, 2022 and 2021.
Years Ended December 31, | ||||||||||||
2023 | 2022 | 2021 | ||||||||||
Stock option grants: | ||||||||||||
| Weighted-average risk-free interest rate | 4.0 | % | 2.7 | % | 0.6 | % | ||||||
| Weighted-average dividend yield | 0.0 | % | 0.0 | % | 0.0 | % | ||||||
| Expected volatility | 63.0 | % | 66.1 | % | 68.3 | % | ||||||
| Expected term (in years) | 3.7 | 3.6 | 3.8 | |||||||||
| Weighted-average fair value | $ | 5.01 | $ | 7.83 | $ | 8.85 | ||||||
Following is a summary of Mastech’s restricted stock activity for the three years ended December 31, 2017:
| Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
Beginning outstanding balance | 32,555 | 67,370 | 72,741 | |||||||||
Awarded | — | — | 18,000 | |||||||||
Released | (17,305 | ) | (22,315 | ) | (23,371 | ) | ||||||
Forfeited | — | (12,500 | ) | — | ||||||||
|
|
|
|
|
| |||||||
Ending outstanding balance | 15,250 | 32,555 | 67,370 | |||||||||
|
|
|
|
|
| |||||||
2023:
Years Ended December 31, | ||||||||||||
2023 | 2022 | 2021 | ||||||||||
| Beginning outstanding balance | 17,804 | 25,059 | 30,843 | |||||||||
| Awarded | 19,924 | 13,979 | 11,955 | |||||||||
| Released | (17,804 | ) | (21,234 | ) | (17,739 | ) | ||||||
| Forfeited | — | — | — | |||||||||
| Ending outstanding balance | 19,924 | 17,804 | 25,059 | |||||||||
Following$232,000.
| Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
Beginning outstanding balance | — | 76,419 | 103,273 | |||||||||
Awarded | — | — | — | |||||||||
Released | — | — | (26,854 | ) | ||||||||
Forfeited | — | (76,419 | ) | — | ||||||||
|
|
|
|
|
| |||||||
Ending outstanding balance | — | — | 76,419 | |||||||||
|
|
|
|
|
| |||||||
2023 and December 31, 2022, the Company issued 25,646 and 23,789 shares under the Stock Purchase Plan at an average share of $8.03 and $11.53, respectively. At December 31, 2023, there were 466,919 shares available for purchases under the Plan.
11. | Income Taxes |
| Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| (Amounts in thousands) | ||||||||||||
Income before income taxes: | ||||||||||||
Domestic | $ | 1,875 | $ | 3,544 | $ | 3,995 | ||||||
Foreign | 1,073 | 476 | 430 | |||||||||
|
|
|
|
|
| |||||||
Income before income taxes | $ | 2,948 | $ | 4,020 | $ | 4,425 | ||||||
|
|
|
|
|
| |||||||
2021:
Years Ended December 31, | ||||||||||||
2023 | 2022 | 2021 | ||||||||||
(Amounts in thousands) | ||||||||||||
| Income (loss) before income taxes: | ||||||||||||
| Domestic | $ | (6,222 | ) | $ | 13,892 | $ | 17,117 | |||||
| Foreign | (2,809 | ) | (1,401 | ) | (231 | ) | ||||||
| Income (loss) before income taxes | $ | (9,031 | ) | $ | 12,491 | $ | 16,886 | |||||
| Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| (Amounts in thousands) | ||||||||||||
Current provision: | ||||||||||||
Federal | $ | 1,101 | $ | 1,189 | $ | 1,375 | ||||||
State | 159 | 101 | 143 | |||||||||
Foreign | 276 | 161 | 143 | |||||||||
|
|
|
|
|
| |||||||
Total current provision | 1,536 | 1,451 | 1,661 | |||||||||
|
|
|
|
|
| |||||||
Deferred provision: | ||||||||||||
Federal | (205 | ) | 43 | 10 | ||||||||
State | (73 | ) | 6 | 1 | ||||||||
Foreign | 64 | — | — | |||||||||
|
|
|
|
|
| |||||||
Total deferred provision | (214 | ) | 49 | 11 | ||||||||
|
|
|
|
|
| |||||||
Total provision for income taxes | $ | 1,322 | $ | 1,500 | $ | 1,672 | ||||||
|
|
|
|
|
| |||||||
2021:
Years Ended December 31, | ||||||||||||
2023 | 2022 | 2021 | ||||||||||
(Amounts in thousands) | ||||||||||||
Current provision (benefit): | ||||||||||||
Federal | $ | (473 | ) | $ | 2,293 | $ | 2,657 | |||||
State | (23 | ) | 653 | 713 | ||||||||
Foreign | 316 | 178 | 234 | |||||||||
Total current provision (benefit) | (180 | ) | 3,124 | 3,604 | ||||||||
Deferred provision (benefit): | ||||||||||||
| Federal | (648 | ) | 678 | 873 | ||||||||
| State | (133 | ) | 162 | 233 | ||||||||
| Foreign | (1,001 | ) | (433 | ) | (177 | ) | ||||||
| Total deferred provision (benefit) | (1,782 | ) | 407 | 929 | ||||||||
| Change in valuation allowance | 69 | 248 | 132 | |||||||||
| Total provision (benefit) for income taxes | $ | (1,893 | ) | $ | 3,779 | $ | 4,665 | |||||
| Years Ended December 31, | ||||||||||||||||||||||||
(Amounts in thousands) | 2017 | 2016 | 2015 | |||||||||||||||||||||
Income taxes computed at the federal statutory rate | $ | 1,002 | 34.0 | % | $ | 1,367 | 34.0 | % | $ | 1,505 | 34.0 | % | ||||||||||||
State income taxes, net of federal tax benefit | 116 | 3.9 | 107 | 2.7 | 144 | 3.3 | ||||||||||||||||||
Excess tax benefits from stock options/restricted shares | (140 | ) | (4.7 | ) | — | — | — | — | ||||||||||||||||
Estimated charge for U.S. tax reform | 372 | 12.6 | — | — | — | — | ||||||||||||||||||
Difference in income taxes on foreign earnings/other | (28 | ) | (1.0 | ) | 26 | 0.6 | 23 | 0.5 | ||||||||||||||||
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| $ | 1,322 | 44.8 | % | $ | 1,500 | 37.3 | % | $ | 1,672 | 37.8 | % | |||||||||||||
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Years Ended December 31, | ||||||||||||||||||||||||
(Amounts in thousands) | 2023 | 2022 | 2021 | |||||||||||||||||||||
Income taxes computed at the federal statutory rate | $ | (1,897 | ) | (21.0 | %) | $ | 2,623 | 21.0 | % | $ | 3,546 | 21.0 | % | |||||||||||
State income taxes, net of federal tax benefit | (198 | ) | (2.2 | ) | 804 | 6.4 | 962 | 5.7 | ||||||||||||||||
Excess tax benefits from stock options/restricted shares | 220 | 2.4 | 56 | 0.5 | (82 | ) | (0.5 | ) | ||||||||||||||||
Difference in tax rate on foreign earnings/other | (87 | ) | (1.0 | ) | 48 | 0.4 | 107 | 0.6 | ||||||||||||||||
Change in valuation allowance | 69 | 0.8 | 248 | 2.0 | 132 | 0.8 | ||||||||||||||||||
| $(1,893) | (21.0%) | $3,779 | 30.3% | $4,665 | 27.6% | |||||||||||||||||||
| At December 31, | ||||||||
| 2017 | 2016 | |||||||
| (Amounts in thousands) | ||||||||
Deferred tax assets: | ||||||||
Allowance for doubtful accounts | $ | 99 | $ | 151 | ||||
Accrued vacation, bonuses and severance | 230 | 334 | ||||||
Stock-based compensation expense | 119 | 164 | ||||||
Acquisition-related transaction costs | 501 | — | ||||||
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Total deferred tax assets | 949 | 649 | ||||||
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Deferred tax liabilities: | ||||||||
Prepaid expenses | 160 | 205 | ||||||
Depreciation, intangibles and other | 321 | 190 | ||||||
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Total deferred tax liabilities | 481 | 395 | ||||||
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Net deferred tax asset | $ | 468 | $ | 254 | ||||
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A reconciliation
At December 31, | ||||||||
2023 | 2022 | |||||||
(Amounts in thousands) | ||||||||
| Deferred tax assets: | ||||||||
| Allowance for credit losses | $ | 150 | $ | 126 | ||||
| Accrued vacation and bonuses | 437 | 342 | ||||||
| Stock-based compensation expense | 2,100 | 1,692 | ||||||
| Acquisition-related transaction costs | 471 | 509 | ||||||
| Net operating losses | 628 | 559 | ||||||
| Total deferred tax assets | 3,786 | 3,228 | ||||||
| Deferred tax liabilities: | ||||||||
| Prepaid expenses | 488 | 441 | ||||||
| Depreciation, intangibles and contingent consideration | 1,877 | 3,148 | ||||||
| Total deferred tax liabilities | 2,365 | 3,589 | ||||||
| Valuation allowance | (628 | ) | (559 | ) | ||||
Net deferred tax asset (liability) | $ | 793 | $ | (920 | ) | |||
| Years Ended December 31, | ||||||||||||
(Amounts in thousands) | 2017 | 2016 | 2015 | |||||||||
Unrecognized tax benefits, beginning balance | $ | 128 | $ | 135 | $ | 138 | ||||||
Additions related to current period | — | 20 | 35 | |||||||||
Additions related to prior periods | — | — | — | |||||||||
Reductions related to prior periods | (33 | ) | (27 | ) | (38 | ) | ||||||
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Unrecognized tax benefits, ending balance | $ | 95 | $ | 128 | $ | 135 | ||||||
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The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense. As of December 31, 2017, 20162023, 2022 and 2015,2021, respectively, and reflect net operating losses which may not be realizable in the future.
12. | Shareholders’ Equity |
Interest Rate Risk Management
Concurrent withannounced that the Board of Directors authorized a share repurchase program of up to 500,000 shares of the Company’s July 13, 2017 borrowingscommon stock over a
The effect of derivative instruments on the Consolidated Statements of Operations and Comprehensive Income (“OCI”) forDirectors. During the year ended December 31, 2017 (in thousands):
Derivatives in ASC Topic 815 Cash Flow Hedging Relationships | Amount of | Location of Gain / (Loss) reclassified from Accumulated OCI to Income | Amount of Gain / (Loss) reclassified from Accumulated OCI to Income | Location of Gain / (Loss) reclassified in Income on Derivatives | Amount of Gain /(Loss) recognized in Income on Derivatives | |||||||||||||
| (Effective Portion) | (Effective Portion) | (Effective Portion) | (Ineffective Portion/Amounts excluded from effectiveness testing) | |||||||||||||||
Interest-Rate | ||||||||||||||||||
Swap | ||||||||||||||||||
Contracts | $21 | Interest Expense | $(56) | Interest Expense | $— | |||||||||||||
The effect of derivative instruments on the Consolidated Statements of Operations and Comprehensive Income (“OCI”) for the year ended December 31, 2016 (in thousands):
Derivatives in ASC Topic 815 Cash Flow Hedging Relationships | Amount of Gain / (Loss) recognized in OCI on Derivatives | Location of Gain / (Loss) reclassified from Accumulated OCI to Income | Amount of Gain / (Loss) reclassified from Accumulated OCI to Income | Location of Gain / (Loss) reclassified in Income on Derivatives | Amount of Gain / (Loss) recognized in Income on Derivatives | |||||||||||||||
| (Effective Portion) | (Effective Portion) | (Effective Portion) | (Ineffective Portion/Amounts excluded from effectiveness testing) | |||||||||||||||||
Interest-Rate | ||||||||||||||||||||
Swap | ||||||||||||||||||||
Contracts | $19 | Interest Expense | $(41) | Interest Expense | $— | |||||||||||||||
Information on the location and amounts of derivative fair values in the Consolidated Balance Sheets (in thousands):
| December 31, 2017 | December 31, 2016 | |||||||||||||||
Derivative Instruments | Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | ||||||||||||
Interest-Rate Swap Contracts | Other Current Assets | $ | 9 | Other Current Liabilities | $ | 12 | ||||||||||
The estimated amount of pretax (losses) as of December 31, 2017 that is expected to be reclassified from other comprehensive income (loss) into earnings, within the next 12 months is approximately ($50,000).
On July 7, 20172023, the Company entered into Securities Purchase Agreements with Ashok Trivedi and Sunil Wadhwani pursuant to which the Company agreed to sell to each the number ofrepurchased 67,699 shares of Company common stock (“Common Stock”) equal to $3.0 million divided by the greater of (i) $7.00 per share of Common Stock and (ii) the closing price of the Common Stock on the NYSE American on July 10, 2017, which was $6.35 per share. On July 13, 2017, the Closing Date of the Company’s acquisition of InfoTrellis’ services division, the Company issued and sold an aggregate of 857,144 shares of Common Stock to Ashok Trivedi and Sunil Wadhwani for $6.0 million in aggregate gross proceeds. The Company used the proceeds from the private placement to fund a portion of the closing date purchase price of the InfoTrellis acquisition.
On October 22, 2014, the Company’s Board of Directors approved the extension of the Company’s existing Share Repurchase Program for an additionaltwo-year period, through December 22, 2016. Repurchases under the program may be made through open market purchases or privately negotiated transactions in accordance with applicable securities laws. During 2016 and 2015, the Company purchased 0 and 12,654 shares, respectively, under the Share Repurchase Program. These share repurchases were completed at an average share price inclusive of transaction cost of $9.49$9.10 per share for 2015. The Board of Directors elected not to extend the Share Repurchase Program in December 2016, accordingly no share repurchases were made in 2017.
In addition to shares purchased under the Share Repurchase Program,this program. Additionally, the Company makes stock purchases sharesfrom time to time to satisfy employee tax obligations related to its Stock Incentive Plan. In 2017, theThe Company purchased 2,067did not purchase any shares at an average price of $9.04 to satisfy employee tax obligations related toduring the vesting of restricted shares. In 2016, the Company purchased 1,931 shares at an average price of $7.07 to satisfy employee tax obligations related to the vesting of restricted shares.
The Company had two clients that exceeded 10% of total revenues in 2017 (CGI = 12.6% and Accenture PLC = 10.7%). The Company did not have any clients that exceeded 10% of total revenues in 2016 and 2015. Additionally, CGI and Accenture PLC accounted for 7.3% and 5.0% of the Company’s accounts receivable balance atyears ended December 31, 2017,2023 and 2022.
The Company’s top ten clients represented approximately 47%, 44% and 51% of total revenues in 2017, 2016 and 2015, respectively.
13. | Earnings (Loss) per Share |
| Years Ended December 31, | ||||||||||||
(Amounts in thousands): | 2017 | 2016 | 2015 | |||||||||
Weighted-average shares outstanding: | ||||||||||||
Basic | 4,962 | 4,393 | 4,338 | |||||||||
Stock options and restricted share units | 37 | 89 | 103 | |||||||||
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Diluted | 4,999 | 4,482 | 4,441 | |||||||||
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computations:
Years Ended December 31, | ||||||||||||
(Amounts in thousands, except per share data) | 2023 | 2022 | 2021 | |||||||||
| Weighted-average shares outstanding: | ||||||||||||
| Basic | 11,613 | 11,588 | 11,436 | |||||||||
| Stock options and restricted share units | — | 489 | 571 | |||||||||
| Diluted | 11,613 | 12,077 | 12,007 | |||||||||
| Years Ended December 31, | ||||||||||||
(Amounts in thousands, except per share data): | 2017 | 2016 | 2015 | |||||||||
Net income | $ | 1,626 | $ | 2,520 | $ | 2,753 | ||||||
Basic weighted-average shares outstanding | 4,962 | 4,393 | 4,338 | |||||||||
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Basic EPS | $ | .33 | $ | .57 | $ | .63 | ||||||
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Years Ended December 31, | ||||||||||||
(Amounts in thousands, except per share data) | 2023 | 2022 | 2021 | |||||||||
| Net income (loss) | $ | (7,138 | ) | $ | 8,712 | $ | 12,221 | |||||
| Basic weighted-average shares outstanding | 11,613 | 11,588 | 11,436 | |||||||||
| Basic EPS | $ | (.61 | ) | $ | .75 | $ | 1.07 | |||||
| Years Ended December 31, | ||||||||||||
(Amounts in thousands, except per share data): | 2017 | 2016 | 2015 | |||||||||
Net income | $ | 1,626 | $ | 2,520 | $ | 2,753 | ||||||
Diluted weighted-average shares outstanding | 4,999 | 4,482 | 4,441 | |||||||||
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Diluted EPS | $ | .33 | $ | .56 | $ | .62 | ||||||
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Years Ended December 31, | ||||||||||||
(Amounts in thousands, except per share data) | 2023 | 2022 | 2021 | |||||||||
| Net income (loss) | $ | (7,138 | ) | $ | 8,712 | $ | 12,221 | |||||
| Basic weighted-average shares outstanding | 11,613 | 12,077 | 12,007 | |||||||||
| Diluted EPS | $ | (.61 | ) | $ | .72 | $ | 1.02 | |||||
14. | Other Comprehensive Income (Loss) |
Foreign Currency Translation Adjustments | Derivative Financial Instruments Designated as Cash Flow Hedges | Total | ||||||||||
(in thousands) | ||||||||||||
| Balance at December 31, 2020 | $ | (513 | ) | $ | (26 | ) | $ | (539 | ) | |||
| Gain (loss) arising during the period | (94 | ) | 1 | (93 | ) | |||||||
| Reclassification to earnings for gains realized | — | 34 | 34 | |||||||||
| Income tax (expense) | — | (9 | ) | (9 | ) | |||||||
| Net other comprehensive income (loss) — year 2021 | (94 | ) | 26 | (68 | ) | |||||||
| Balance at December 31, 2021 | $ | (607 | ) | $ | — | $ | (607 | ) | ||||
| (Loss) arising during the period | (948 | ) | — | (948 | ) | |||||||
| Net other comprehensive income (loss) — year 2022 | (948 | ) | — | (948 | ) | |||||||
| Balance at December 31, 2022 | $ | (1,555 | ) | $ | — | $ | (1,555 | ) | ||||
| (Loss) arising during the period | (89 | ) | — | (89 | ) | |||||||
| Net other comprehensive income (loss) — year 2023 | (89 | ) | — | (89 | ) | |||||||
| Balance at December 31, 2023 | $ | (1,644 | ) | $ | — | $ | (1,644 | ) | ||||
15. | Fair Value Measurements |
| Years Ended December 31, | ||||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| (Amounts in thousands) | ||||||||||||
| Beginning balance | $ | — | $ | — | $ | 2,882 | ||||||
| Revaluation | — | — | (2,882 | ) | ||||||||
| Ending balance | $ | — | $ | — | $ | — | ||||||
| Fair Value as of December 31, 2017 | ||||||||||||||||
(Amounts in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Interest-Rate Swap Contracts | $ | 0 | $ | 9 | $ | 0 | $ | 9 | ||||||||
Contingent consideration liabilities | $ | 0 | $ | 0 | $ | (17,125 | ) | $ | (17,125 | ) | ||||||
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| Fair Value as of December 31, 2016 | ||||||||||||||||
(Amounts in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Interest-Rate Swap Contracts | $ | 0 | $ | (12 | ) | $ | 0 | $ | (12 | ) | ||||||
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The fair value of interest rate swap contracts are based on quoted prices for similar instruments from
Fair Value as of December 31, 2023 | ||||||||||||||||
(Amounts in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Goodwill | $ | — | $ | — | $ | 27,210 | $ | 27,210 | ||||||||
| Revenues | Gross Profit | Net Income | Earnings Per Share | |||||||||||||||||
Year Ended December 31, 2017 | Basic | Diluted | ||||||||||||||||||
First quarter | $ | 33,100 | $ | 6,209 | $ | 201 | $ | .04 | $ | .04 | ||||||||||
Second quarter | 35,086 | 7,077 | 696 | .15 | .15 | |||||||||||||||
Third quarter | 39,228 | 8,818 | (136 | ) | (.03 | ) | (.03 | ) | ||||||||||||
Fourth quarter | 40,468 | 9,525 | 865 | .16 | .16 | |||||||||||||||
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Annual | $ | 147,882 | $ | 31,629 | $ | 1,626 | $ | .33 | $ | .33 | ||||||||||
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| Revenues | Gross Profit | Net Income | Earnings Per Share | |||||||||||||||||
Year Ended December 31, 2016 | Basic | Diluted | ||||||||||||||||||
First quarter | $ | 31,714 | $ | 6,113 | $ | 11 | $ | .00 | $ | .00 | ||||||||||
Second quarter | 33,629 | 6,889 | 945 | .22 | .21 | |||||||||||||||
Third quarter | 34,263 | 6,897 | 924 | .21 | .21 | |||||||||||||||
Fourth quarter | 32,402 | 6,398 | 640 | .14 | .14 | |||||||||||||||
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Annual | $ | 132,008 | $ | 26,297 | $ | 2,520 | $ | .57 | $ | .56 | ||||||||||
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The Company incurred severance costs of $0, $780,000 and $305,000 in 2017, 2016 and 2015, respectively. Severance costs during 2016goodwill impairment related to changes in the Company’s Presidentits Data and Chief Executive Officer and its Vice PresidentAnalytics Services segment of Technology and Chief Information Officer. Severance costs in 2015 related to a change in executive sales leadership.
16. | Business Segments and Geographic Information |
In October 2020, we acquired AmberLeaf, a Chicago-based customer experience consulting firm. This acquisition expands 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.
| At December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| (Amounts in Thousands) | ||||||||||||
Revenues: | ||||||||||||
Data and analytics services | $ | 9,185 | $ | — | $ | — | ||||||
IT staffing services | 138,697 | 132,008 | 123,470 | |||||||||
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Total revenues | $ | 147,882 | $ | 132,008 | $ | 123,470 | ||||||
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Gross Margin %: | ||||||||||||
Data and analytics services | 44.8 | % | 0.0 | % | 0.0 | % | ||||||
IT staffing services | 19.8 | % | 19.9 | % | 19.3 | % | ||||||
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Total gross margin % | 21.4 | % | 19.9 | % | 19.3 | % | ||||||
Segment operating income: | ||||||||||||
Data and analytics services | $ | 2,531 | $ | — | $ | — | ||||||
IT staffing services | 5,279 | 5,320 | 5,747 | |||||||||
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Subtotal | 7,810 | 5,320 | 5,747 | |||||||||
Amortization of acquired intangible assets | (1,710 | ) | (813 | ) | (441 | ) | ||||||
Acquisition-related transaction expenses | (2,019 | ) | — | (624 | ) | |||||||
Interest expenses and other, net | (1,133 | ) | (487 | ) | (257 | ) | ||||||
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Income before income taxes | $ | 2,948 | $ | 4,020 | $ | 4,425 | ||||||
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Years Ended December 31, | ||||||||||||
2023 | 2022 | 2021 | ||||||||||
(Amounts in thousands) | ||||||||||||
| Revenues: | ||||||||||||
| Data and Analytics Services | $ | 34,358 | $ | 40,594 | $ | 38,339 | ||||||
| IT Staffing Services | 166,740 | 201,644 | 183,673 | |||||||||
| Total revenues | $ | 201,098 | $ | 242,238 | $ | 222,012 | ||||||
| Gross Margin %: | ||||||||||||
| Data and Analytics Services | 43.5 | % | 41.5 | % | 48.4 | % | ||||||
| IT Staffing Services | 21.6 | % | 23.0 | % | 22.3 | % | ||||||
| Total gross margin % | 25.4 | % | 26.1 | % | 26.8 | % | ||||||
| Segment operating income (loss): | ||||||||||||
| Data and Analytics Services | $ | (1,807 | ) | $ | 3,329 | $ | 5,310 | |||||
| IT Staffing Services | 6,054 | 13,297 | 12,728 | |||||||||
| Subtotal | 4,247 | 16,626 | 18,038 | |||||||||
| Amortization of acquired intangible assets | (2,772 | ) | (2,987 | ) | (3,170 | ) | ||||||
| Goodwill impairment | (5,300 | ) | — | — | ||||||||
| Employment-related claim, net of recoveries | (3,100 | ) | — | — | ||||||||
| Cybersecurity breach | — | (450 | ) | — | ||||||||
| Severance expense | (2,350 | ) | (990 | ) | — | |||||||
| Revaluation of contingent consideration liability | — | — | 2,882 | |||||||||
| Acquisition transaction expenses | — | — | (140 | ) | ||||||||
| Interest expense, FX gains/losses and other, net | 244 | 292 | (724 | ) | ||||||||
| Income (loss) before income taxes | $ | (9,031 | ) | $ | 12,491 | $ | 16,886 | |||||
| Total Assets | Depreciation & Amortization | Capital Expenditures | ||||||||||||||||||||||||||||||||||
Amounts in thousands: | 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | |||||||||||||||||||||||||||
Data and Analytics Services | $ | 53,683 | $ | — | $ | — | $ | 925 | $ | — | $ | — | $ | 11 | $ | — | $ | — | ||||||||||||||||||
IT Staffing Services | 44,921 | 39,406 | 38,477 | 1,017 | 1,016 | 660 | 1,428 | 105 | 168 | |||||||||||||||||||||||||||
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Total | $ | 98,604 | $ | 39,406 | $ | 38,477 | $ | 1,942 | $ | 1,016 | $ | 660 | $ | 1,439 | $ | 105 | $ | 168 | ||||||||||||||||||
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Total Assets | Depreciation & Amortization | Capital Expenditures | ||||||||||||||||||||||||||||||||||
(Amounts in thousands) | 2023 | 2022 | 2021 | 2023 | 2022 | 2021 | 2023 | 2022 | 2021 | |||||||||||||||||||||||||||
| Data and Analytics Services | $ | 45,681 | $ | 54,544 | $ | 56,634 | $ | 2,704 | $ | 2,860 | $ | 2,662 | $ | 177 | $ | 756 | $ | 1,692 | ||||||||||||||||||
| IT Staffing Services | 59,546 | 54,335 | 57,434 | 1,151 | 1,335 | 1,317 | 158 | 79 | 203 | |||||||||||||||||||||||||||
| Total | $ | 105,227 | $ | 108,879 | $ | 114,068 | $ | 3,855 | $ | 4,195 | $ | 3,979 | $ | 335 | $ | 835 | $ | 1,895 | ||||||||||||||||||
Revenues | Equipment, Enterprise Software and Leasehold Improvements, net | |||||||||||||||||||||||
Amounts in thousands | 2023 | 2022 | 2021 | 2023 | 2022 | 2021 | ||||||||||||||||||
| United States | $ | 197,246 | $ | 236,187 | $ | 214,379 | $ | 791 | $ | 1,353 | $ | 2,221 | ||||||||||||
| Canada | 2,474 | 4,215 | 4,543 | 332 | 429 | 2 | ||||||||||||||||||
| India and Other | 1,378 | 1,836 | 3,090 | 790 | 883 | 815 | ||||||||||||||||||
| Total | $ | 201,098 | $ | 242,238 | $ | 222,012 | $ | 1,913 | $ | 2,665 | $ | 3,038 | ||||||||||||
17. | Related-Party Transactions |
18. | Subsequent Event |
| 1) | Consulting fees to Primentor of $990,000 in year one; $270,000 in year two; and $120,000 in year three, plus reimbursement for any reasonable and documented out-of-pocket |
| 2) | Stock options to purchase up to 192,500 shares of the Company’s common stock to each, Murthy and Sangupta, at an exercise price of $8.34 per share, with vesting occurring equally on an annual basis over a three-year period; and |
| 3) | Murthy and Sangupta will each receive from the Founders, for no additional consideration, an aggregate number of shares of common stock of the Company held by the Founders that is equal to 1.1% of the total number of shares of common stock of the Company outstanding at the time of a triggering event, as defined in the consulting services agreement. |
| Revenues | Equipment, Enterprise Software and Leasehold Improvements, net | |||||||||||||||||||||||
Amounts in thousands: | 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | ||||||||||||||||||
United States | $ | 145,513 | $ | 132,008 | $ | 123,470 | $ | 1,730 | $ | 494 | $ | 578 | ||||||||||||
Canada | 1,729 | — | — | 19 | — | — | ||||||||||||||||||
India | 640 | — | — | 150 | 64 | 78 | ||||||||||||||||||
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Total | $ | 147,882 | $ | 132,008 | $ | 123,470 | $ | 1,899 | $ | 558 | $ | 656 | ||||||||||||
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| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
| ITEM 9A. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
On July 13, 2017, the Company completed the acquisition of the services division of InfoTrellis, Inc. (the “InfoTrellis Acquisition”). As permitted by SEC guidance, management has excluded this business segment from its assessment of the effectiveness of the Company’s internal controls over financial reporting as of December 31, 2017.
As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of Company management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (exclusive of the business segment acquired in the InfoTrellis Acquisition) pursuant to Exchange Act Rules13a-15(b) and15d-15(b). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective. The resultseffective as of management’s assessment were reviewed with the Company’s Audit Committee.this date.
The certifications required by Section 302 of the Sarbanes-Oxley Act of 2002 are filed as exhibits 31.1 and 31.2, respectively, to this Annual Report on Form10-K.
Management’s Report on Internal Controls Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; providing reasonable assurance that receipts and expenditures of Company assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use, or disposition of company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become ineffective because of changes in conditions or that the degree of compliance with established policies or procedures may deteriorate.
The Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017.2023. In making its assessment of internal control over financial reporting, management used the criteria described in theInternal Control-Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO-2013”). Based upon this assessment, management has concluded and hereby reports that the Company’s internal control over financial reporting was effective as of December 31, 2017.
The Company acquired the services division of Canada-based InfoTrellis, Inc. (the “InfoTrellis Acquisition”) on July 13, 2017. As permitted by SEC guidance, management has excluded this business segment from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017. The net revenues attributable to the business segment acquired in the InfoTrellis Acquisition were approximately $9.2 million from the July 13, 2017 acquisition date through December 31, 2017, representing approximately 6.2% of our consolidated revenues for the year ended December 31, 2017. Total assets of this business segment (excluding goodwill and intangible assets) at December 31, 2017 were approximately $7.3 million, representing approximately 19.6% of our consolidated total assets (excluding goodwill and intangible assets) as of December 31, 2017.2023.
This Annual Report on Form10-K does not include an attestation report of the Company’sour independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this Annual Report on Form10-K.
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| ITEM 9B. | OTHER INFORMATION |
Disclosure of 10b5-1 plans
During the fiscal quarter ended December 31, 2023, none of our directors or officers informed us of the adoption, modification or termination of a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as those terms are defined in Regulation S-K, Item 408.
| ITEM 9C. | DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS |
None.
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Information required by this Item, not set forth below, is incorporated herein by reference from the Company’s definitive proxy statement relating to the Annual Meeting of Shareholders scheduled for May 16, 2018,15, 2024, which will be filed with the Commission within 120 days after the close of the Company’s fiscal year ended December 31, 20172023 (the “Proxy Statement”) under the headings “Proposal No. 1 –— Election of Directors”, “Executive Officers”, “Section 16(a) Beneficial Ownership Reporting Compliance”“Delinquent Section 16(A) Reports” and “Board Committees and Meetings”.
We have adopted a code of ethics applicable to all of our employees, including our principal executive officer, principal financial officer and principal accounting officer, titled Code of Conduct Policy. The Code of Conduct Policy is posted on the Company’s website,www.mastechdigital.com (under the “Corporate Governance” caption of the Investor Relations page). The Company intends to satisfy the disclosure requirement regarding certain amendments to, or waivers from, provisions of its code of ethics by posting such information on the Company’s website.
| ITEM 11. | EXECUTIVE COMPENSATION |
The information required by this Item is incorporated by reference to the Proxy Statement under the headings “Compensation Discussion And Analysis”, “Summary Compensation Table”, “Grants Of Plan-Based Awards”, “Outstanding Equity Awards At FiscalYear-End”, “Potential Payments Upon Termination Or Change In Control”, “Option Exercises And Stock Vested” and “Director Compensation”.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS |
Securities Authorized for Issuance Under Equity Compensation Plans
The information required by this item is hereby incorporated by reference to the Proxy Statement under the heading “Equity Compensation Plan Information”.
Security Ownership of Certain Beneficial Owners and Management
The information required by this item is hereby incorporated by reference to the Proxy Statement under the headings “Security Ownership of Certain Beneficial Owners and Management”.
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required by this item is hereby incorporated by reference to the Proxy Statement under the headings “Board Committees and Meetings” and “Policies and Procedures for Approving Related Person Transactions”.
| ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information required by this item is hereby incorporated by reference to the Proxy Statement under the heading “Independent Registered Public Accountants”.
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
1.Financial Statements
The following Consolidated Financial Statements of the registrant and its subsidiaries are included on pages 4050 to 7079 and the reportreports of Independent Registered Public Accounting Firm isare included on page 39pages 48 and 49 in this Annual Report on Form10-K.
ReportReports of Independent Registered Public Accounting Firm.
Consolidated Balance Sheets –— December 31, 20172023 and 2016.2022.
Consolidated Statements of Operations –— Years ended December 31, 2017, 20162023, 2022 and 2015.2021.
Consolidated Statements of Comprehensive Income –(Loss) — Years ended December 31, 2017, 20162023, 2022 and 2015.2021.
Consolidated Statements of Shareholders’ Equity –— Years ended December 31, 2017, 20162023, 2022 and 2015.2021.
Consolidated Statements of Cash Flows –— Years ended December 31, 2017, 20162023, 2022 and 2015.2021.
Notes to Consolidated Financial Statements
2.Consolidated Financial Statement Schedules
The following Consolidated Financial Statement schedules shown below should be read in conjunction with the Consolidated Financial Statements on pages 40__ to 70__ in this Annual Report on Form10-K. All other schedules are omitted because they are not applicable or not required or the required information is shown in the Consolidated Financial Statements or notes thereto.
The following items appear immediately on the following page:
Financial Statement Schedules:
Schedule II –— Valuation and Qualifying Accounts for the years ended December 31, 2017, 20162023, 2022 and 2015.2021.
3.Exhibits
Exhibits required by Item 601 of RegulationS-K are listed in the Exhibit Index, which is incorporated herein by reference.
MASTECH DIGITAL, INC.
SCHEDULE II—II — VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 20162023, 2022 AND 20152021
(Amounts in thousands)
| Balance at beginning of period | Charged to expense (credited) | Recoveries/ (Write-offs) | Balance at end of period | |||||||||||||
Allowance for Doubtful Accounts: | ||||||||||||||||
Year ended December 31, 2017 | $ | 388 | $ | 10 | $ | — | $ | 398 | ||||||||
Year ended December 31, 2016 | 313 | 75 | — | 388 | ||||||||||||
Year ended December 31, 2015 | 260 | 53 | — | 313 | ||||||||||||
| Balance at beginning of period | Charged to expense (credited) | Recoveries/ (Write- offs) | Balance at end of period | |||||||||||||
Allowance for Credit Losses: | ||||||||||||||||
Year ended December 31, 2023 | $ | 444 | $ | (30 | ) | $ | 114 | $ | 528 | |||||||
Year ended December 31, 2022 | 375 | 50 | 19 | 444 | ||||||||||||
Year ended December 31, 2021 | 413 | 130 | (168 | ) | 375 | |||||||||||
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| ||
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document | ||
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | ||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | ||
| † | Designates the Company’s management contracts or compensation plans or arrangements for its executive officers. |
| * | XBRL (eXtensible Business Reporting Language) information is furnished and not filed herewith. |
Pursuant to the requirements of Section 13 or 15(d) 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, on this 23rd15th day of March, 2018.2024.
| MASTECH DIGITAL, INC. | ||||
| / | ||||
Vivek Gupta President and Chief Executive Officer | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated and on this 23rd15th day of March, 2018.2024.
| /s/ VIVEK GUPTA | ||||
Vivek Gupta President, Chief Executive Officer and Director (Principal Executive Officer) | ||||
| /s/ JOHN J. CRONIN, JR. | ||||
John J. Cronin, Jr. Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | ||||
| /s/ SUNIL WADHWANI | ||||
Sunil Wadhwani Co-Chairman of the Board of Directors, and Director | ||||
| /s/ ASHOK TRIVEDI | ||||
Ashok Trivedi Co-Chairman of the Board of Directors, and Director | ||||
| / | ||||
Gerhard Watzinger Director | ||||
| /s/ JOHN AUSURA | ||||
John Ausura Director | ||||
| /s/ BRENDA GALILEE | ||||
Brenda Galilee Director | ||||
/s/ VLADIMIR RAK | ||||
Vladimir Rak Director | ||||
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