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Mastech Digital, Inc. - Quarter Report: 2022 March (Form 10-Q)

Table of Contents
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number
001-34099
 
 
MASTECH DIGITAL, INC.
(Exact name of registrant as specified in its charter)
 
 
 
PENNSYLVANIA
 
26-2753540
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
1305 Cherrington Parkway, Building 210, Suite 400
Moon Township, Pennsylvania
 
15108
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code:
(412) 787-2100
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Trading
Symbol(s)
 
Name of each exchange
on which registered
Common Stock, par value $.01 per share
 
MHH
 
NYSE American
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”, and “emerging growth company” in
Rule 12b-2
of the Exchange Act.    
 
Large accelerated filer
 
  
Accelerated filer
 
Non-accelerated filer
 
  
Smaller reporting company
 
    
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2
of the Exchange Act).    Yes  ☐    No  ☒
The number of shares of the registrant’s Common Stock, par value $.01 per share, outstanding as of April 30, 2022 was 11,599,334.
 
 
 

Table of Contents
MASTECH DIGITAL, INC.
QUARTERLY REPORT ON FORM
10-Q
FOR THE QUARTER ENDED MARCH 31, 2022
TABLE OF CONTENTS
 
   
Page
 
PART 1
      3  
Item 1.
      3  
 
(a)
       3  
 
(b)
       4  
 
(c)
       5  
 
(d)
       6  
 
(e)
       7  
 
(f)
       8  
Item 2.
      17  
Item 3.
      22  
Item 4.
      22  
PART II
      23  
Item 1.
      23  
Item 1A.
      23  
Item 2.
      23  
Item 6.
      24  
      25  
 
2

Table of Contents
PART I. FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS
MASTECH DIGITAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
(Unaudited)

                 
    
Three Months Ended

March 31,
 
    
2022
   
2021
 
Revenues
   $ 59,755     $ 49,775  
Cost of revenues
     43,823       36,971  
    
 
 
   
 
 
 
Gross profit
     15,932       12,804  
Selling, general and administrative expenses
     12,625       10,935  
    
 
 
   
 
 
 
Income from operations
     3,307       1,869  
Interest income (expense), net
     (114     (195
Other income (expense), net
     54       (37
    
 
 
   
 
 
 
Income before income taxes
     3,247       1,637  
Income tax expense
     915       443  
    
 
 
   
 
 
 
Net income
   $ 2,332     $ 1,194  
    
 
 
   
 
 
 
Earnings Per Share:
        
Basic
   $ .20     $ .10  
    
 
 
   
 
 
 
Diluted
   $ .19     $ .10  
    
 
 
   
 
 
 
Weighted average common shares outstanding:
                
Basic
     11,509       11,415  
    
 
 
   
 
 
 
Diluted
     12,035       11,997  
    
 
 
   
 
 
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
 
3

Table of Contents
MASTECH DIGITAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
(Unaudited)

                 
    
Three Months Ended

March 31,
 
    
2022
   
2021
 
Net income
   $ 2,332     $ 1,194  
Other comprehensive income (loss):
                
Net unrealized gain on interest-rate swap contracts
     —         35  
Foreign currency translation adjustments
     (147     (19
    
 
 
   
 
 
 
Total pretax net unrealized gain (loss)
     (147     16  
Income tax expense
     —         9  
    
 
 
   
 
 
 
Total other comprehensive gain (loss), net of taxes
     (147     7  
    
 
 
   
 
 
 
Total comprehensive income
   $ 2,185     $ 1,201  
    
 
 
   
 
 
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
 
4

Table of Contents
MASTECH DIGITAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share data)
(Unaudited)

                 
    
March 31,

2022
   
December 31,

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

MASTECH DIGITAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Amounts in thousands)
(Unaudited)

                                                 
    
Common

Stock
    
Additional

Paid-in

Capital
    
Accumulated

Retained

Earnings
    
Treasury

Stock
   
Accumulated

Other

Comprehensive

Income (Loss)
   
Total

Shareholders’

Equity
 
Balances, December 31, 2021
   $ 131      $ 28,250      $ 50,841      $ (4,187   $ (607   $ 74,428  
Net income
     —          —          2,332        —         —         2,332  
Other comprehensive (loss), net of taxes
     —          —          —          —         (147     (147
Stock-based compensation expense
     —          526        —          —         —         526  
Stock options exercised
     2        891        —          —         —         893  
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balances, March 31, 2022
   $ 133      $ 29,667      $ 53,173      $ (4,187   $ (754   $ 78,032  
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
                                                 
    
Common

Stock
    
Additional

Paid-in

Capital
    
Accumulated

Retained

Earnings
    
Treasury

Stock
   
Accumulated

Other

Comprehensive

Income (Loss)
   
Total

Shareholders’

Equity
 
Balances, December 31, 2020
   $ 130      $ 25,509      $ 38,620      $ (4,187   $ (539   $ 59,533  
Net income
     —          —          1,194        —         —         1,194  
Other comprehensive gain, net of taxes
     —          —          —          —         7       7  
Stock-based compensation expense
     —          621        —          —         —         621  
Stock options exercised
     —          101        —          —         —         101  
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balances, March 31, 2021
   $ 130      $ 26,231      $ 39,814      $ (4,187   $ (532   $ 61,456  
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
 
6

MASTECH DIGITAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)

                 
    
Three Months Ended

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

MASTECH DIGITAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022 AND 2021
(Unaudited)
 
1.
Description of Business and Basis of Presentation:
Basis of Presentation
References in this Quarterly Report on Form
10-Q
to “we”, “our”, “Mastech Digital”, “Mastech” or “the Company” refer collectively to Mastech Digital, Inc. and its wholly-owned operating subsidiaries, which are included in these Condensed Consolidated Financial Statements (the “Financial Statements”).
Description of Business
We are a provider of Digital Transformation IT Services to mostly large and
medium-sized
organizations.
Our portfolio of offerings includes data management and analytics services; digital learning services; and IT staffing services.
In our 2017 acquisition of the services division of Canada-based InfoTrellis, Inc., we added specialized capabilities in delivering data and analytics services to our customers globally, which became our Data and Analytics Services segment. This segment offers project-based consulting services in the areas of data management, data engineering and data science, with such services delivered using
on-site
and offshore resources. In October 2020, we acquired AmberLeaf Partners, Inc. (“AmberLeaf”), a Chicago-based customer experience consulting firm. This acquisition expanded our Data and Analytics Services segment’s capabilities in customer experience strategy and managed services offering for a variety of Cloud-based enterprise applications across sales, marketing and customer services organizations.
Our IT Staffing Services segment combines technical expertise with business process experience to deliver a broad range of staffing services in digital and mainstream technologies. Our digital technologies include data management, analytics, cloud, mobility, social and artificial intelligence. We work with businesses and institutions with significant IT spending and recurring staffing service needs. We also support smaller organizations with their “project focused” temporary IT staffing requirements.
The
COVID-19
pandemic had a material impact on activity levels in both of our business segments in 2020. This impact was reduced in 2021 as a result of the global
roll-out
of vaccination programs and signs of improving economic conditions. As we enter 2022, we are hopeful that
COVID-19
related concerns will be less impactful on our business. The proliferation of
COVID-19
variants, however, have caused some uncertainty and may continue to disrupt global markets during 2022.
Accounting Principles
The accompanying Financial Statements have been prepared by management in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and applicable rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and disclosures required by U.S. GAAP for complete consolidated financial statements. In the opinion of management, all adjustments, consisting principally of normal recurring adjustments, considered necessary for a fair presentation have been included. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the Financial Statements and the accompanying notes. Actual results could differ from these estimates. These Financial Statements should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes for the year ended December 31, 2021, included in our Annual Report on Form
10-K
filed with the SEC on March 14, 2022. Additionally, our operating results for the three months ended March 31, 2022, are not necessarily indicative of the results that can be expected for the year ending December 31, 2022 or for any other period.
Principles of Consolidation
The Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation.
Critical Accounting Policies
Please refer to Note 1 “Summary of Significant Accounting Policies” of the Consolidated Financial Statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations–Critical Accounting Policies and Estimates” in our Annual Report on Form
10-K
for the year ended December 31, 2021, for a more detailed discussion of our significant accounting policies and critical accounting estimates. There were no material changes to these critical accounting policies during the three months ended March 31, 2022.
 
8

Segment Reporting
The Company has two reportable segments, in accordance with Accounting Standards Committee (“ASC”) Topic 280 “Disclosures About Segments of an Enterprise and Related Information”: Data and Analytics Services; and IT Staffing Services.    
 
2.
Revenue from Contracts with Customers
The Company recognizes revenue on
time-and-material
contracts over time as services are performed and expenses are incurred.
Time-and-material
contracts typically bill at an agreed-upon hourly rate, plus
out-of-pocket
expense reimbursement.
Out-of-pocket
expense reimbursement amounts vary by assignment, but on average represent less than 2% of the total contract revenues. Revenue is earned on a per transaction or labor hour basis, as that amount directly corresponds to the value of the Company’s performance. Revenue recognition is negatively impacted by holidays and consultant vacation and sick days.
The Company recognizes revenue on fixed price contracts over time as services are rendered and uses a cost-based input method to measure progress. Determining a measure of progress requires management to make judgments that affect the timing of revenue recognized. Under the cost-based input method, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues, including estimated fees or profits, are recorded proportionally as costs are incurred. The Company has determined that the cost-based input method provides a faithful depiction of the transfer of goods or services to the customer. Estimated losses are recognized immediately in the period in which current estimates indicate a loss. We record deferred revenues when cash payments are received or due in advance of our performance, including amounts which may be refundable.
The Company’s
time-and-material
and fixed price revenue streams are recognized over time as the customer receives and consumes the benefits of the Company’s performance as the work is performed.
In certain situations related to client direct hire assignments, where the Company’s fee is contingent upon the hired resources continued employment with the client, revenue is not fully recognized until such employment conditions are satisfied.
We do not sell, lease or otherwise market computer software or hardware, and essentially 100% of our revenue is derived from the sale of data and analytics, IT staffing and digital transformation services. We expense sales commissions in the same period in which revenues are realized. These costs are recorded within sales and marketing expenses.
Each contract the Company enters into is assessed to determine the promised services to be performed and includes identification of the performance obligations required by the contract. In substantially all of our contracts, we have identified a single performance obligation for each contract either because the promised services are distinct or the promised services are highly interrelated and interdependent and therefore represent a combined single performance obligation.
Our Data and Analytics Services segment provides specialized capabilities in delivering data management and analytics services to customers globally. This business offers project-based consulting services in the areas of Master Data Management, Enterprise Data Integration, Data Engineering and Analytics, which can be delivered using onsite and offshore resources.
Our IT Staffing Services segment combines technical expertise with business process experience to deliver a broad range of services in digital and mainstream technologies. Our digital technology stack includes data management and analytics, cloud, mobility, social and automation. Our mainstream technologies include business intelligence / data warehousing; web services; enterprise resource planning & customer resource management; and
e-Business
solutions. We work with businesses and institutions with significant IT spend and recurring staffing needs. We also support smaller organizations with their “project focused” temporary IT staffing requirements.
The following table depicts the disaggregation of our revenues by contract type and operating segment:
                 
    
Three Months Ended

March 31,
 
    
2022
    
2021
 
    
(Amounts in thousands)
 
Data and Analytics Services Segment
                 
Time-and-material
Contracts
   $ 6,181      $  5,854  
Fixed-price Contracts
     3,971        2,940  
    
 
 
    
 
 
 
Subtotal Data and Analytics Services
  
$
 10,152
 
  
$
8,794
 
    
 
 
    
 
 
 
 
9

                 
    
Three Months Ended

March 31,
 
    
2022
    
2021
 
    
(Amounts in thousands)
 
IT Staffing Services Segment
                 
Time-and-material
Contracts
   $  49,399      $  40,981  
Fixed-price Contracts
     204        —    
    
 
 
    
 
 
 
Subtotal IT Staffing Services
  
$
49,603
 
  
$
40,981
 
    
 
 
    
 
 
 
Total Revenues
  
$
59,755
 
  
$
49,775
 
    
 
 
    
 
 
 
For the three months ended March 31, 2022, the Company had one client (CGI =17.8%) that exceeded 10% of total revenues. For the three months ended March 31, 2021, the Company had the same one client (CGI = 15.0%) that exceeded 10% of total revenues.
The Company’s top ten clients represented approximately 51% and 47% of total revenues for the three months ended March 31, 2022 and 2021, respectively.
The following table presents our revenue from external customers disaggregated by geography, based on the work location of our customers:
                 
    
Three Months Ended

March 31,
 
    
2022
    
2021
 
    
(Amounts in thousands)
 
United States
   $  58,347      $  47,942  
Canada
     1,019        1,264  
India and other
     389        569  
    
 
 
    
 
 
 
Total
  
$
59,755
 
  
$
49,775
 
    
 
 
    
 
 
 
 
3.
Goodwill and Other Intangible Assets, Net
Goodwill related to our June 15, 2015, acquisition of Hudson Global Resources Management’s U.S. IT staffing business (“Hudson IT”) totaled $8.4 million. Goodwill related to our July 13, 2017, acquisition of the services division of InfoTrellis totaled $27.4 million. During 2018, the Company recorded a goodwill impairment related to the InfoTrellis acquisition of $9.7 million. Goodwill related to our October 1, 2020, acquisition of AmberLeaf totaled $6.4 million.
The Company is amortizing the identifiable intangible assets on a straight-line basis over estimated average lives ranging from 3 to 12 years. Identifiable intangible assets were comprised of the following as of March 31, 2022, and December 31, 2021:
                                 
    
As of March 31, 2022
 
(Amounts in thousands)
  
Amortization

Period (In Years)
    
Gross Carrying

Value
    
Accumulative

Amortization
    
Net Carrying

Value
 
IT Staffing Services:
                                   
Client relationships
     12      $ 7,999      $ 4,528      $ 3,471  
Covenant-not-to-compete
     5        319        319        —    
Trade name
     3        249        249        —    
Data and Analytics Services:
                                   
Client relationships
     12        19,641        6,911        12,730  
Covenant-not-to-compete
     5        1,201        848        353  
Trade name
     5        1,711        1,297        414  
Technology
     7        1,979        979        1,000  
             
 
 
    
 
 
    
 
 
 
Total Intangible Assets
           
$
 33,099
 
  
$
 15,131
 
  
$
 17,968
 
             
 
 
    
 
 
    
 
 
 
 
10

                                 
    
As of December 31, 2021
 
(Amounts in thousands)
  
Amortization

Period (In Years)
    
Gross Carrying

Value
    
Accumulative

Amortization
    
Net Carrying

Value
 
IT Staffing Services:
                                   
Client relationships
     12      $ 7,999      $ 4,361      $ 3,638  
Covenant-not-to-compete
     5        319        319        —    
Trade name
     3        249        249        —    
Data and Analytics Services:
                                   
Client relationships
     12        19,641        6,503        13,138  
Covenant-not-to-compete
     5        1,201        788        413  
Trade name
     5        1,711        1,211        500  
Technology
     7        1,979        908        1,071  
             
 
 
    
 
 
    
 
 
 
Total Intangible Assets
           
$
 33,099
 
  
$
 14,339
 
  
$
 18,760
 
             
 
 
    
 
 
    
 
 
 
Amortization expense for the three months ended March 31, 2022 and 2021 totaled $792,000 and $793,000, respectively, and is included in selling, general and administrative expenses in the Condensed Consolidated Statement of Operations.
The estimated aggregate amortization expense for intangible assets for the years ending December 31, 2022 through 2026 is as follows:
                                         
    
Years Ended December 31,
 
    
2022
    
2023
    
2024
    
2025
    
2026
 
                                    
    
(Amounts in thousands)
 
Amortization expense
   $  2,987      $  2,772      $  2,693      $  2,553      $  2,413  
4. Leases
The Company rents certain office facilities and equipment under noncancelable operating leases. As of March 31, 2022, approximately 97,000 square feet of office space is utilized for our sales and recruiting offices, delivery centers, and corporate headquarters. All of our leases are classified as operating leases. The average initial lease term is four years. Several leases have an option to renew, at our sole discretion, for an additional term. Our present lease terms range from less than one year to 5 years with a weighted average of 3.8 years. Leases with an initial term of twelve months or less are not recorded on the balance sheet.
The following table summarizes the balance sheet classification of the lease assets and related lease liabilities:
                 
    
March 31, 2022
    
December 31, 2021
 
               
    
( in thousands)
 
Assets:
 
Long-term operating lease
right-of-use
assets
   $  5,033      $  4,894  
    
 
 
    
 
 
 
Liabilities:
 
Short-term operating lease liability
   $ 1,571      $ 1,479  
Long-term operating lease liability
     3,677        3,706  
    
 
 
    
 
 
 
Total liabilities
   $ 5,248      $ 5,185  
    
 
 
    
 
 
 
Future minimum rental payments for office facilities and equipment under the Company’s noncancelable operating leases are as follows:
         
    
Amount as of

March 31, 2022
 
    
(in thousands)
 
2022 (For remainder of year)
   $  1,299  
2023
     1,732  
2024
     1,002  
2025
     734  
2026
     717  
 
11

         
    
Amount as of

March 31, 2022
 
    
(in thousands)
 
Thereafter
     171  
    
 
 
 
Total
     5,655  
Less: Imputed interest
     (407
    
 
 
 
Present value of operating lease liabilities
   $  5,248  
    
 
 
 
The weighted average discount rate used to calculate the present value of future lease payments was 4.0%.
We recognize rent expense for these leases on a straight-line basis over the lease term. Rental expense for the three months ended March 31, 2022 and 2021 totaled $0.4 million and $0.4 million, respectively.
Total cash paid for lease liabilities for the three months ended March 31, 2022 and 2021 totaled $0.4 million and $0.4 million, respectively.
New leases entered into during the three months ended March 31, 2022 and 2021 totaled $0.5 million and $0.3 million, respectively, and are considered non cash transactions.
 
5.
Payroll Tax Liability
As allowed under the Coronavirus Aid, Relief and Economic Security (CARES) Act, the Company elected to defer payment of the employer’s share of social security tax. As of March 31, 2022, and December 31, 2021, the balance of this liability is $2.3 million and $2.3 million, respectively. The Company is required to repay the $2.3 million by December 31, 2022, which is reflected as part of current liabilities under the caption accrued payroll and related costs.
 
6.
Commitments and Contingencies
In the ordinary course of our business, the Company is involved in a number of lawsuits and administrative proceedings. While uncertainties are inherent in the final outcome of these matters, the Company’s management believes, after consultation with legal counsel, that the disposition of these proceedings should not have a material adverse effect on our financial position, results of operations or cash flows.
 
7.
Employee Benefit Plan
The Company provides an Employee Retirement Savings Plan (the “Retirement Plan”) under Section 401(k) of the Internal Revenue Code of 1986, as amended (the “Code”), that covers substantially all U.S. based salaried and
W-2
hourly employees. Employees may contribute a percentage of eligible compensation to the Retirement Plan, subject to certain limits under the Code. The Company did not provide for any matching contributions for the three months ended March 31, 2022 and 2021.
 
8.
Stock-Based Compensation
In 2008, the Company adopted a Stock Incentive Plan (the “Plan”) which, as amended, provides that up to 4,900,000 shares of the Company’s Common Stock shall be allocated for issuance to directors, officers and key personnel. Grants under the Plan can be made in the form of stock options, stock appreciation rights, performance shares or stock awards. During the three months ended March 31, 2022, the Company granted 11,304 restricted share units and 400,000 stock options at a strike price of $18.41 under the Plan. During the three months ended March 31, 2021, the Company granted restricted share units of 11,955 and 270,000 stock options at an average strike price of $17.65. As of March 31, 2022 there were 244,000 shares available for grants under the Plan.
Stock-based compensation expense for the three months ended March 31, 2022 and 2021 was $526,000 and $621,000, respectively, and is included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.
During the three months ended March 31, 2022 and 2021, the Company issued 90,933 and 29,739 shares, respectively, related to the grant of restricted share units and the exercise of stock options.
In October 2018, the Board of Directors of the Company approved the Mastech Digital, Inc. 2019 Employee Stock Purchase Plan (the “Employee Stock Purchase Plan”). The Employee Stock Purchase Plan is intended to meet the requirements of Section 423 of the Code and was approved by the Company’s shareholders to be qualified. On May 15, 2019, the Company’s shareholders approved the Employee Stock Purchase Plan. Under the Employee Stock Purchase Plan, 600,000 shares of Common Stock (subject to adjustment upon certain changes in the Company’s capitalization) are available for purchase by eligible employees who become participants in the Employee Stock Purchase Plan. The purchase price per share is 85% of the lesser of (i) the fair market value per share of Common Stock on the first day of the offering period, or (ii) the fair market value per share of Common Stock on the last day of the offering period.
 
12

The Company’s eligible full-time employees are able to contribute up to 15% of their base compensation into the Employee Stock Purchase Plan, subject to an annual limit of $25,000 per person. Employees are able to purchase Company Common Stock at a 15% discount to the lower of the fair market value of the Company’s Common Stock on the initial or final trading dates of each
six-month
offering period. Offering periods begin on January 1 and July 1 of each year. The Company uses the Black-Scholes option pricing model to determine the fair value of Employee Stock Purchase Plan share-based payments. The fair value of the
six-month
“look-back” option in the Company’s Employee Stock Purchase Plan is estimated by adding the fair value of 15% of one share of stock to 85% of the fair value of an option on one share of stock. The Company utilized U.S. Treasury yields as of the grant date for its risk-free interest rate assumption, matching the Treasury yield terms to the
six-month
offering period. The Company utilized historical company data to develop its dividend yield and expected volatility assumptions.
During the three months ended March 31, 2022 and 2021, there were no shares issued under the Employee Stock Purchase Plan. As of March 31, 2022, there were 516,399 shares available for purchases under the Employee Stock Purchase Plan.
 
9.
Credit Facility
On July 13, 2017, the Company entered into a Credit Agreement (the “Credit Agreement”) with PNC Bank, as administrative agent, swing loan lender and issuing lender, PNC Capital Markets LLC, as sole lead arranger and sole book-runner, and certain financial institution parties thereto as lenders (the “Lenders”). The Credit Agreement, as amended, provides for a total aggregate commitment of $53.1 million, consisting of (i) a revolving credit facility (the “Revolver”) in an aggregate principal amount not to exceed $40 million and; (ii) a $13.1 million term loan facility (the “Term Loan), as more fully described in Exhibit 10.1 to the Company’s Form
8-Ks
filed with the SEC on July 19, 2017, April 25, 2018 and October 7, 2020, and Exhibit 10.2 to the Form
8-K/A
filed with the SEC on January 4, 2022. Additionally, the facility includes an accordion feature for additional borrowing of up to $20 million upon satisfaction of certain conditions.
The Revolver expires in December 2026 and includes swing loan and letter of credit
sub-limits
in the aggregate amount not to exceed $6.0 million for swing loans and $5.0 million for letters of credit. Borrowings under the Revolver may be denominated in U.S. dollars or Canadian dollars. The maximum borrowings in U.S. dollars may not exceed the sum of 85% of eligible U.S. accounts receivable and 60% of eligible U.S. unbilled receivables, less a reserve amount established by the administrative agent. The maximum borrowings in Canadian dollars may not exceed the lesser of (i) $10.0 million; and (ii) the sum of 85% of eligible Canadian receivables, plus 60% of eligible Canadian unbilled receivables, less a reserve amount established by the administrative agent.
Amounts borrowed under the Term Loan are required to be repaid in consecutive quarterly installments through and including the maturity date of October 1, 2024. The principal amount of each quarterly installment payable on the Term Loan equals $1.1 million through and including the maturity date, with the maturity date payment equal to the outstanding amount of the loan on that date.
Borrowings under the revolver and the term loan, at the Company’s election, bear interest at either (a) the higher of PNC’s prime rate or the federal funds rate plus 0.50%, plus an applicable margin determined based upon the Company’s senior leverage ratio or (b) the Bloomberg Short-Term Bank Yield Index (“BSBY”), plus an applicable margin determined based upon the Company’s senior leverage ratio. The applicable margin on the base rate is between 0.50% and 1.25% on revolver borrowings and between 1.75% and 2.50% on term loans. The applicable margin on the BSBY is between 1.50% and 2.25% on revolver borrowings and between 2.75% and 3.50% on term loans. A 20 to
30-basis
point per annum commitment fee on the unused portion of the revolver facility is charged and due monthly in arrears. The applicable commitment fee is determined based upon the Company’s senior leverage ratio.
The Company pledged substantially all of its assets in support of the Credit Agreement. The Credit Agreement contains standard financial covenants, including, but not limited to, covenants related to the Company’s senior leverage ratio and fixed charge ratio (as defined under the Credit Agreement) and limitations on liens, indebtedness, guarantees, contingent liabilities, loans and investments, distributions, leases, asset sales, stock repurchases and mergers and acquisitions. As of March 31, 2022, the Company was in compliance with all provisions under the facility.
In connection with securing the commitments under the Credit Agreement and the April 20, 2018, October 1, 2020, and December 29, 2021 amendments to the Credit Agreement, the Company paid a commitment fee and incurred deferred financing costs totaling $975,000, which were capitalized and are being amortized as interest expense over the life of the facility. Deferred financing costs of $348,000 and $366,000 (net of amortization) as of March 31, 2022, and December 31, 2021, respectively, are presented as reductions in long-term debt in the Company’s Consolidated Balance Sheets.
 
13

As of March 31, 2022, and December 31, 2021, the Company’s outstanding borrowings under the Revolver totaled $0 million and $0 million, respectively; and unused borrowing capacity available was approximately $35.5 million and $32.4 million, respectively. The Company’s outstanding borrowings under the term loan were $12.0 million and $13.1 million as of March 31, 2022 and December 31, 2021, respectively. Additionally, under the Term Loan agreement there is a mandatory repayment requirement related to excess cash flows (as defined in the Credit Agreement) generated in a given fiscal year. This provision takes effect in first quarter of 2023 should the Company senior leverage ratio exceeds 1.50x.
 
10.
Income Taxes
The components of income before income taxes, as shown in the accompanying Financial Statements, consisted of the following for the three months ended March 31, 2022, and 2021:
                 
    
Three Months Ended

March 31,
 
    
2022
    
2021
 
               
    
(Amounts in thousands)
 
Income before income taxes:
 
Domestic
   $  3,315      $  1,881  
Foreign
     (68      (244
    
 
 
    
 
 
 
Income before income taxes
   $ 3,247      $ 1,637  
    
 
 
    
 
 
 
The Company has foreign subsidiaries outside the United States, which generate revenues from
non-US
based clients. Additionally, these subsidiaries provide services to the Company’s U.S. parents. Accordingly, the Company allocates a portion of its income to these subsidiaries based on a “transfer pricing” model and reports such income as foreign in the above table.
The provision for income taxes, as shown in the accompanying Financial Statements, consisted of the following for the three months ended March 31, 2022, and 2021:
                 
    
Three Months Ended

March 31,
 
    
2022
    
2021
 
               
    
(Amounts in thousands)
 
Current provision:
                 
Federal
   $ 98      $  358  
State
     25        93  
Foreign
     86        10  
    
 
 
    
 
 
 
Total current provision
     209        461  
    
 
 
    
 
 
 
Deferred provision (benefit):
                 
Federal
     542        (6
State
     137        (2
Foreign
     (56      (42
    
 
 
    
 
 
 
Total deferred provision (benefit)
     623        (50
    
 
 
    
 
 
 
Change in valuation allowance
     83        32  
    
 
 
    
 
 
 
Total provision for income taxes
   $  915      $ 443  
    
 
 
    
 
 
 
The reconciliation of income taxes computed using the statutory U.S. income tax rate and the provision for income taxes for the three months ended March 31, 2022, and 2021 were as follows (amounts in thousands):
                                 
    
Three Months Ended

March 31, 2022
   
Three Months Ended

March 31, 2021
 
              
Income taxes computed at the federal statutory rate
   $  682        21.0   $  344        21.0
State income taxes, net of federal tax benefit
     176        5.4       104        6.3  
Excess tax benefits from stock options/restricted shares
     (77      (2.4     (67      (4.1
Difference in tax rate on foreign earnings/other
     51        1.6       30        1.9  
Change in valuation allowance
     83        2.6       32        2.0  
    
 
 
    
 
 
   
 
 
    
 
 
 
     $ 915        28.2   $ 443        27.1
    
 
 
    
 
 
   
 
 
    
 
 
 
 
14

We evaluate deferred income taxes quarterly to determine if valuation allowances are required or should be adjusted. GAAP accounting guidance requires us to assess whether valuation allowances should be established against deferred tax assets based on all available evidence, both positive and negative using a “more likely than not” standard. Our assessment considers, among other things, the nature of cumulative losses; forecasts of future profitability; the duration of statutory carry-forward periods; and tax planning alternatives. As of March 31, 2022, our valuation allowance was comprised of balances within locations of Singapore and the United Kingdom. The valuation allowance balances at these locations totaled $394,000 and $311,000 as of March 31, 2022, and December 31, 2021, respectively, and reflect net operating losses which may not be realizable in the future.
The Company’s Canadian subsidiary are currently under audit by Revenue Canada for the years 2018 and 2019.
 
11.
Derivative Instruments and Hedging Activities
Interest Rate Risk Management
Concurrent with the Company’s July 13, 2017 borrowings under its credit facility, the Company entered into a 44–month interest-rate swap to convert the debt’s variable interest rate to a fixed rate of interest. The swap contracts, which matured on April 1, 2021, were designated as cash flow hedging instruments and qualified as effective hedges at inception under ASC Topic 815, “Derivatives and Hedging”. These contracts were recognized on the balance sheet at fair value. The effective portion of the changes in fair value on these instruments was recorded in other comprehensive income (loss) and was reclassified into the Consolidated Statements of Operations as interest expense in the same period in which the underlying hedge transaction affected earnings. Because the interest-rate swap contracts matured, they had no value as of March 31, 2022, and December 31, 2021, therefore there is no balance reflected in the Consolidated Balance Sheets for these periods.
There was no impact on the Consolidated Statements of Operations and Comprehensive Income (“OCI”) for the three months ended March 31, 2022. The effect of derivative instruments on the Consolidated Statements of Operations and OCI for the three months ended March 31, 2021 are as follows (in thousands):

                     
Derivatives in
ASC Topic 815
Cash Flow
Hedging
Relationships
  
Amount of
Gain
recognized in OCI
on Derivatives
  
Location of
Gain
reclassified from
Accumulated OCI
to Income
  
Amount of
Gain
reclassified from
Accumulated OCI
to Income
  
Location of
Gain
reclassified in
Income on
Derivatives
  
Amount of
Gain
recognized
in
Income on
Derivatives
                          
     (Effective Portion)    (Effective Portion)    (Effective Portion)   
(Ineffective Portion/Amounts excluded
from effectiveness testing)
Interest-Rate Swap Contracts
   $35    Interest Expense    $34    Interest Expense    $—  
 
12.
Fair Value Measurements
The Company has adopted the provisions of ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”), related to certain financial and nonfinancial assets and liabilities. ASC 820 establishes the authoritative definition of fair value; sets out a framework for measuring fair value; and expands the required disclosures about fair value measurements. The valuation techniques required by ASC 820 are based on observable and unobservable inputs using the following three-tier hierarchy:
 
   
Level 1—Inputs are observable quoted prices (unadjusted) in active markets for identical assets and liabilities.
 
   
Level 2—Inputs are observable, other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are directly or indirectly observable in the marketplace.
 
   
Level 3—Inputs are unobservable that are supported by little or no market activity.
In prior periods, the company carried interest-rate swap contracts and contingent consideration liabilities at fair value measured on a recurring basis. As of March 31, 2022, and December 31, 2021, the Company did not have any balances in the financial statements related to these items as the swap matured on April 1, 2021 and the contingent consideration was revalued to zero as of December 31, 2021.    
 
13.
Shareholders’ Equity
The Company purchases shares to satisfy employee tax obligations related to its Stock Incentive Plan. During the three months ended March 31, 2022, and 2021, no purchases were made to satisfy employee tax obligations.
 
15

14.
Earnings Per Share
The computation of basic earnings per share is based on the Company’s net income divided by the weighted average number of common shares outstanding. Diluted earnings per share reflect the potential dilution that could occur if outstanding stock options were exercised. The dilutive effect of stock options was calculated using the treasury stock method.
For the three months ended March 31, 2022, there were 0 anti-dilutive stock options excluded from the computation of diluted earnings per share. For the three months ended March 31, 2021, there were 150,000 anti-dilutive stock options excluded from the computation of diluted earnings per share.
 
15.
Business Segments and Geographic Information
Our reporting segments are: 1) Data and Analytics Services; and 2) IT Staffing Services.
The Data and Analytics Services segment was acquired through the July 13, 2017 acquisition of the services division of Canada-based InfoTrellis, Inc. This segment is a project-based consulting services business with specialized capabilities in data management and analytics. The business is marketed as Mastech InfoTrellis and utilizes a dedicated sales team with deep subject matter expertise. Mastech InfoTrellis has offices in Atlanta, Toronto, London, Dublin and Singapore, and a global delivery center in Chennai, India. Project-based delivery reflects a combination of
on-site
resources and offshore resources. Assignments are secured on both a time and material and fixed price basis. In October 2020, we acquired AmberLeaf, a Chicago-based customer experience consulting firm. This acquisition expanded our capabilities in customer experience strategy and managed services offering for a variety of Cloud-based enterprise application across sales, marketing and customer service organizations.
The IT Staffing Services segment offers staffing services in digital and mainstream technologies and uses digital methods to enhance organizational learning. These services are marketed using a common sales force and delivered via our domestic and global recruitment centers. While the vast majority of our assignments are based on time and materials, we do have the capabilities to deliver our digital transformation services on a fixed price basis.
                 
    
Three Months Ended

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

2022
    
December 31,

2021
 
    
(Amounts in thousands)
 
Total assets:
                 
Data and Analytics Services
   $ 57,571      $ 56,634  
IT Staffing Services
     59,205        57,068  
    
 
 
    
 
 
 
Total assets
   $  116,776      $  113,702  
    
 
 
    
 
 
 
 
16

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

March 31,
 
    
2022
    
2021
 
    
(Amounts in thousands)
 
United States
   $  58,347      $  47,942  
Canada
     1,019        1,264  
India and Other
     389        569  
    
 
 
    
 
 
 
Total revenues
   $ 59,755      $ 49,775  
    
 
 
    
 
 
 
 
16.
Recently Issued Accounting Standards
Recently Adopted Accounting Pronouncements
In November 2021, the FASB issued ASU
2021-10,
“Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance”. The amendments in this ASU require annual disclosures to increase the transparency of government assistance received by a business entity including information about the nature of the government transactions, related accounting policy, the line items on the balance sheet and income statement that are affected, amounts applicable to each financial statement line item, and significant terms and conditions of the transactions, including commitments and contingencies. The amendments in this ASU are effective for annual periods beginning after December 15, 2021. We adopted this ASU on January 1, 2022, with no material impact on our financial statements.
Recent Accounting Pronouncements not yet adopted
In October 2021, the FASB issued ASU
2021-08,
“Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers”. The amendments in this ASU require that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination, including contract assets and contract liabilities arising from revenue contracts with customers, as if it had originated the contracts as of the acquisition date. The amendments in this ASU are effective for annual and interim periods beginning after December 15, 2022. Early adoption is permitted. The Company does not expect this ASU to have a material impact on its financial statements.
A variety of proposed or otherwise potential accounting standards are currently under consideration by standard-setting organizations and certain regulatory agencies. Because of the tentative and preliminary nature of such proposed standards, management has not yet determined the effect, if any that the implementation of such proposed standards would have on the Company’s consolidated financial statements.
 
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with our audited consolidated financial statements and accompanying notes for the year ended December 31, 2021, included in our Annual Report on Form
10-K,
filed with the Securities and Exchange Commission (“SEC”) on March 14, 2022.
This quarterly report on Form
10-Q
contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements about future events, future performance, plans, strategies, expectations, prospects, competitive environment and regulations. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words, “may”, “will”, “expect”, “anticipate”, “believe”, “estimate”, “plan”, “intend” or the negative of these terms or similar expressions in this quarterly report on Form
10-Q.
We have based these forward-looking statements on our current views with respect to future events and financial performance. Our actual financial performance could differ materially from those projected in the forward-looking statements due to the inherent uncertainty of estimates, forecasts and projections and our financial performance may be better or worse than anticipated. Given these uncertainties, you should not put undue reliance on any forward-looking statements. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed under “Risk Factors”, “Forward-Looking Statements” and elsewhere in our Annual Report on Form
10-K
for the year ended December 31, 2021. Forward-looking statements represent our estimates and assumptions only as of the date that they were made. We do not undertake any duty to update forward-looking statements and the estimates and assumptions associated with them, after the date of this quarterly report on Form
10-Q,
except to the extent required by applicable securities laws.
 
17

Website Access to SEC Reports:
The Company’s website is
www.mastechdigital.com
. The Company’s Annual Report on Form
10-K
for the year ended December 31, 2021, current reports on Form
8-K
and all other reports filed with the SEC, are available free of charge on the Investors page. The website is updated as soon as reasonably practical after such reports are filed electronically with the SEC.
Critical Accounting Policies
Please refer to Note 1 “Summary of Significant Accounting Policies” of the Consolidated Financial Statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations–Critical Accounting Policies and Estimates” in our Annual Report on Form
10-K
for the year ended December 31, 2021 for a more detailed discussion of our significant accounting policies and critical accounting estimates. There were no material changes to these critical accounting policies during the three months ended March 31, 2022.
Overview:
We are a provider of Digital Transformation IT Services to mostly large and
medium-sized
organizations.
Our portfolio of offerings includes data management and analytics services; other digital transformation services such as digital learning services; and IT staffing services.
We operate in two reporting segments – Data and Analytics Services and IT Staffing Services. Our data and analytics services are marketed on a global basis under the brand Mastech InfoTrellis and are delivered largely on a project basis with
on-site
and
off-shore
resources. These capabilities and expertise were acquired through our acquisition of InfoTrellis and enhanced and expanded subsequent to the acquisition. In October 2020, we acquired AmberLeaf Partners, Inc. (“AmberLeaf”), a Chicago-based customer experience consulting firm. This acquisition enhanced our capabilities in customer experience strategy and managed services offerings for a variety of Cloud-based enterprise applications across sales, marketing and customer services organizations. Our IT staffing business combines technical expertise with business process experience to deliver a broad range of staffing services in digital and mainstream technologies, as well as our other digital transformation services.
Both business segments provide their services across various industry verticals, including: financial services; government; healthcare; manufacturing; retail; technology; telecommunications; and transportation. In our Data and Analytics Services segment, we evaluate our revenues and gross profits largely by service line. In our IT Staffing Services segment, we evaluate our revenues and gross profits largely by sales channel responsibility. This analysis within both our reporting segments is multi-purposed and includes technologies employed, client relationships, and geographic locations.
Data and Analytics:
We provide information regarding our new bookings in our Data and Analytics Services segment, which represents the estimated value of client engagements, including those acquired through acquisitions, as well as renewals, extensions and changes to existing contracts, because we believe doing so provides useful trend information regarding changes in the volume of our new business over time. New bookings can vary significantly quarter to quarter depending in part on the timing of the signing of a small number of large engagements. Among other factors, the types of services and solutions to be delivered, the duration of the engagement and the pace and level of client spending impact the timing of the conversion of new bookings to revenues. In addition, substantially all of our contracts are terminable by the client on short notice with little or no termination penalties. Information regarding our new bookings is not comparable to, nor should it be substituted for, an analysis of our revenues over time. New bookings involve estimates and judgments. There are no third-party standards or requirements governing the calculation of bookings. We do not update our new bookings for material subsequent terminations or reductions related to bookings originally provided in prior periods.
Economic Trends and Outlook:
Generally, our business outlook is highly correlated to general North American economic conditions, particularly with respect to our IT Staffing Services segment. During periods of increasing employment and economic expansion, demand for our services tends to increase. Conversely, during periods of contracting employment and / or a slowing global economy, demand for our services tends to decline. As the economy slowed in 2007 and recessionary conditions emerged in 2008 and 2009, we experienced less demand for our IT staffing services. With economic expansion in 2010 through 2019, activity levels improved. However, as the recovery strengthened, we experience increased tightness in the supply-side (skilled IT professionals) of our businesses. These supply-side challenges pressured resource costs and to some extent gross margins. As we entered 2020, we were encouraged by continued growth in the domestic job markets and expanding U.S. and global economies. However, with the
COVID-19
pandemic surfacing in the first quarter of 2020, we realized the economic growth would quickly turn into recessionary conditions, which had a material impact on activity levels in both of our business segments. This impact was reduced in 2021 as a result of the global
roll-out
of vaccination programs and signs of improving economic conditions. As we enter 2022, we are hopeful that
COVID-19
related concerns will be less impactful on our business. The proliferation of
COVID-19
variants, however, have caused some uncertainty and may continue to disrupt global markets during 2022. In addition, we are mindful of inflationary pressures and overall economic concerns regarding the potential for recessionary conditions.
 
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In addition to tracking general economic conditions in the markets that we service, a large portion of our revenues is generated from a limited number of clients (see Item 1A, the Risk Factor entitled “Our revenues are highly concentrated, and the loss of a significant client would adversely affect our business and revenues” in our Annual Report on Form
10-K
for the year ended December 31, 2021). Accordingly, our trends and outlook are additionally impacted by the prospects and well-being of these specific clients. This “account concentration” factor may result in our results of operations deviating from the prevailing economic trends from time to time.
Within our IT Staffing Services segment, a larger portion of our revenues has come from strategic relationships with systems integrators and other staffing organizations. Additionally, many large end users of IT staffing services are employing managed service providers to manage their contractor spending. Both of these dynamics may pressure our IT staffing gross margins in the future.
Recent growth in advanced technologies (social, cloud, analytics, mobility, automation) is providing opportunities within our IT Staffing Services segment. However, supply side challenges have proven to be acute with respect to many of these technologies. We believe these challenges will remain during 2022.
Within our Data and Analytics Services segment many customers are satisfying their D&A needs using a holistic approach. This often results in the customer using one vendor partner rather than with multiple vendors. We have responded to this trend by establishing a service offering called “Center of Excellence” which bundles a customer’s total requirements under a multi-year contract. This concept allows us to better understand the customer’s longer-term strategy with respect to D&A and effectively address such needs.
Results of Operations for the Three Months Ended March 31, 2022 as Compared to the Three Months Ended March 31, 2021:
Revenues:
Revenues for the three months ended March 31, 2022 totaled $59.8 million compared to $49.8 million for the corresponding three-month period in 2021. This 20% year-over-year revenue increase reflected 15% growth in our Data and Analytics Services segment and a 21% increase in our IT Staffing Services segment. For the three months ended March 31, 2022, the Company had one client that had revenues in excess of 10% of total revenues (CGI = 17.8%). For the three months ended March 31, 2021, the Company had one client that had revenues in excess of 10% of total revenues (CGI = 15.0%). The Company’s top ten clients represented approximately 52% and 47% of total revenues for the three months ended March 31, 2022 and 2021, respectively.
Below is a tabular presentation of revenues by reportable segment for the three months ended March 31, 2022 and 2021, respectively:
 
Revenues (Amounts in thousands)
  
Three Months Ended

March 31, 2022
    
Three Months Ended

March 31, 2021
 
Data and Analytics Services
   $ 10,152      $ 8,794  
IT Staffing Services
     49,603        40,981  
  
 
 
    
 
 
 
Total revenues
   $ 59,755      $ 49,775  
  
 
 
    
 
 
 
Revenues from our Data and Analytics Services segment totaled $10.2 million in the quarter ending March 31, 2022, compared to $8.8 million in the corresponding period last year. The year-over-year improvement largely reflected improved backlog in the 2022 period. Bookings in first quarter 2022 totaled $11.8 million compared to first quarter 2021 bookings of $15.8 million. The 2021 quarter included several booking orders that included multi-year durations.
Revenues from our IT Staffing Services segment totaled $49.6 million in the three months ended March 31, 2022 compared to $41.0 million during the corresponding 2021 period. This 21% revenue increase reflected a higher level of billing consultants in the 2022 quarter versus 2021. Billing consultants at March 31, 2021 totaled
1,295-consultants
compared to
1,162-consultants
at March 31, 2021. Our average bill rate in the first quarter of 2022 for the segment was $78.99 / per hour compared to $75.12 / per hour in the first quarter of 2021. The increase in average bill rate was due to higher rates on new assignments and is reflective of the types of skill-sets that we deployed. Permanent placement / fee revenues were approximately $0.6 million during the quarter, which was $0.4 million higher than our permanent placement performance of a year ago.
Gross Margins:
Gross profits in the first quarter of 2022 totaled $15.9 million compared to gross profits of $12.8 million in the first quarter of 2021, a 24% year-over-year increase. Gross profit as a percentage of revenue was 26.7% for the three-month period ending March 31, 2022, compared to 25.7% during the same period of 2021. This
100-basis
point improvement reflected higher revenue levels in our high-margin Data and Analytics Services segment and improved gross margins in our IT Staffing Services segment due to higher permanent placement fees and revenues from our offshore staffing service offering.
 
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Below is a tabular presentation of gross margin by reporting segment for the three months ended March 31, 2022 and 2021, respectively:
 
Gross Margin
  
Three Months Ended

March 31, 2022
   
Three Months Ended

March 31, 2021
 
Data and Analytics Services
     45.2     45.7
IT Staffing Services
     22.9       21.4  
  
 
 
   
 
 
 
Total gross margin
     26.7     25.7
  
 
 
   
 
 
 
Gross margins from our Data and Analytics Services segment were 45.2% of revenues during the first quarter of 2022. This compares to gross margins of 45.7% in the first quarter of 2021, representing a
50-basis
point decrease due to lower utilization in the first half of the 2022 quarter.
Gross margins from our IT Staffing Services segment were 22.9% in the first quarter of 2022 compared to 21.4% during the corresponding quarter of 2021. This
150-basis
point improvement was largely due to higher permanent placement fees, improved utilization and revenues from our higher-margin offshore staffing service offering.
Selling, General and Administrative (“S,G&A”) Expenses:
Below is a tabular presentation of operating expenses by sales, operations, amortization of acquired intangible assets and general and administrative categories for the three months ended March 31, 2022 and 2021, respectively:
 
S,G&A Expenses (Amounts in millions)
  
Three Months Ended

March 31, 2022
    
Three Months Ended

March 31, 2021
 
Data and Analytics Services Segment
     
Sales and Marketing
   $ 1.9      $ 1.8  
Operations
     0.6        0.8  
Amortization of Acquired Intangible Assets
     0.6        0.6  
General & Administrative
     1.1        1.0  
  
 
 
    
 
 
 
Subtotal Data and Analytics Services
   $ 4.2      $ 4.2  
  
 
 
    
 
 
 
IT Staffing Services Segment
     
Sales and Marketing
   $ 2.5      $ 1.8  
Operations
     2.8        2.0  
Amortization of Acquired Intangible Assets
     0.2        0.2  
General & Administrative
     2.9        2.7  
  
 
 
    
 
 
 
Subtotal IT Staffing Services
   $ 8.4      $ 6.7  
  
 
 
    
 
 
 
Total S,G&A Expenses
   $ 12.6      $ 10.9  
  
 
 
    
 
 
 
S,G&A expenses for the three months ended March 31, 2022 totaled $12.6 million or 21.1% of total revenues, compared to $10.9 million or 21.9% of revenues for the three months ended March 31, 2021. Excluding amortization of acquired intangible assets in both periods, S,G&A expense as a percentage of total revenues would have been 19.7% and 20.3%, respectively.
Fluctuations within S,G&A expense components during the first quarter of 2022, compared to the first quarter of 2021, included the following:
 
   
Sales expense increased by $0.8 million in the 2022 period compared to 2021. An increase of $0.1 million related to our Data and Analytics Services segment which reflected additional staff and higher commissions. Sales expense in our IT Staffing Services segment increased by $0.7 million due to staff increases, higher commissions and bonuses, higher travel and other variable expenses.
 
   
Operations expense increased by $0.6 million in the 2022 period compared to 2021. In our Data and Analytics Services segment operations expense decrease by increased $0.2 million due to lower staff. In our IT Staffing Services segment operations expense increased by $0.8 million related to staff increases and higher variable expense to support revenue growth.
 
   
Amortization of acquired intangible assets was $0.8 million in both the 2022 and 2021 periods.
 
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General and administrative expense increased by $0.3 million in the 2022 period compared to 2021. Approximately $0.1 million was related to our Data and Analytics Services segment and $0.2 million was related to our IT Staffing Services segment. Executive search fees were largely responsible for the increases in the Data and Analytics Services segment. The increase in the IT Staffing Services segment was due to higher rents and travel expenses.
Other Income / (Expense) Components:
Other Income / (Expense) for the three months ended March 31, 2022 consisted of interest expense of ($114,000) and foreign exchange gains of $54,000. For the three months ended March 31, 2021, Other Income / (Expense) consisted of interest expense of ($195,000) and foreign exchange losses of ($37,000). The lower level of interest expense was reflective of debt repayments in 2021 and the first quarter of 2022.
Income Tax Expense:
Income tax expense for the three months ended March 31, 2022 totaled $915,000, representing an effective tax rate on
pre-tax
income of 28.2% compared to $443,000 for the three months ended March 31, 2021, which represented a 27.1% effective tax rate on
pre-tax
income. The higher effective tax rate in the 2022 period largely reflected an increase in our tax valuation allowance related to foreign net operating losses (“NOLs”) in Singapore and the UK.
Liquidity and Capital Resources:
Financial Conditions and Liquidity:
As of March 31, 2022, we had bank debt, net of cash balances on hand, of $4.8 million and approximately $35.5 million of borrowing capacity under our existing credit facility.
Historically, we have funded our organic business needs with cash generated from operating activities. Controlling our operating working capital levels by closely managing our accounts receivable balance is an important element of cash generation. As of March 31, 2022, our accounts receivable “days sales outstanding” (“DSOs”) measurement was
64-days,
which was one day lower than at the end of the first quarter 2021.
We believe that cash provided by operating activities, cash balances on hand and current availability under our credit facility will be adequate to fund our business needs and debt service obligations over the next twelve months, absent any acquisition-related activities.
Cash flows provided by (used in) operating activities:    
Cash provided by operating activities for the three months ended March 31, 2022 totaled $1.6 million compared to $0.8 million during the three months ended March 31, 2021. Elements of cash flows in the 2022 period were net income of $2.3 million,
non-cash
charges of $2.1 million, and an increase in operating working capital levels of ($2.8 million). During the three months ended March 31, 2021, elements of cash flow were net income of $1.2 million,
non-cash
charges of $1.6 million, and an increase in operating working capital levels of ($2.0 million).
Cash flows (used in) investing activities:
Cash (used in) investing activities for the three months ended March 31, 2022 was ($646,000) compared to ($191,000) for the three months ended March 31, 2021. The increase in capital expenditures in 2022 compared to 2021 reflects expenditures related to the Chennai delivery center in India and the implementation of Oracle Cloud for the Data and Analytics Services segment.
Cash flows provided by (used in) financing activities:
Cash provided by (used in) financing activities for the three months ended March 31, 2022 totaled ($0.2 million) and consisted of debt repayments of ($1.1 million), partially offset by proceeds from the exercise of stock options of $0.9 million. Cash provided by (used in) financing activities for the three months ended March 31, 2021 totaled ($1.0 million) and consisted of debt repayments of ($1.1 million), partially offset by proceeds from the exercise of stock options of $0.1 million.
Off-Balance
Sheet Arrangements
We do not have any
off-balance
sheet arrangements.
 
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Inflation:
We do not believe that inflation had a significant impact on our results of operations for the periods presented. On an ongoing basis, we attempt to minimize any effects of inflation on our operating results by controlling operating costs and, whenever possible, seeking to ensure that billing rates are adjusted periodically to reflect increases in costs due to inflation. However, high levels of inflation may result in higher interest rates which would increase out cost of borrowings.
Seasonality:
Our operations are generally not affected by seasonal fluctuations. However, our consultants’ billable hours are affected by national holidays and vacation policies. Accordingly, we generally 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.
Recently Issued Accounting Standards:
Recent accounting pronouncements are described in Note 16 to the accompanying financial statements.
 
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In addition to the inherent operational risks, the Company is exposed to certain market risks, primarily related to changes in interest rates and currency fluctuations.
Interest Rates
As of March 31, 2022, we had outstanding borrowings of $12.0 million under our Credit Agreement with PNC Bank and certain other financial institution lenders — Refer to Note 9 – “Credit Facility” in the Notes to Condensed Consolidated Financial Statements, included herein. A hypothetical 10% increase in interest rates on our variable debt outstanding at March 31, 2022 would have an increase in our annual interest expense of approximately $36,000. As of March 31, 2022, the Company has no interest-rate hedge vehicles outstanding.
Currency Fluctuations
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 currencies of the Company’s Indian and European subsidiaries are the local currency of the location of such subsidiary. 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, and have not been material for all periods presented. A hypothetical 10% increase or decrease in overall foreign currency rates would not have had 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.
 
ITEM 4.
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.
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 pursuant to Exchange Act Rules
13a-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.
 
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We do not expect that our disclosure controls and procedures will prevent all errors and all instances of fraud. Disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits must be considered relative to their costs. Because of the inherent limitations in all disclosure controls and procedures, no evaluation of disclosure controls and procedures can provide absolute assurance that we have detected all our control deficiencies and instances of fraud, if any. The design of disclosure controls and procedures also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
 
ITEM 1.
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 1A.
RISK FACTORS
There have been no material changes from the risk factors as previously disclosed in our Annual Report on
Form 10-K
for the year ended December 31, 2021, filed with the SEC on March 14, 2022.
 
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
 
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ITEM 6.
EXHIBITS
(a) Exhibits
 
  31.1    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer is filed herewith.
  31.2    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer is filed herewith.
  32.1    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by the Chief Executive Officer is furnished herewith.
  32.2    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by the Chief Financial Officer is furnished herewith.
101.INS    XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH    Inline XBRL Taxonomy Extension Schema Document.
101.CAL    Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF    Inline XBRL Taxonomy Extension Definition Linkbase Document.
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)
 
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SIGNATURES
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 11th day of May, 2022.
 
    MASTECH DIGITAL, INC.
May 11, 2022
   
/s/    VIVEK GUPTA        
   
Vivek Gupta
Chief Executive Officer
   
/s/    JOHN J. CRONIN, JR.        
   
John J. Cronin, Jr.
   
Chief Financial Officer
   
(Principal Financial Officer)
 
 
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