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

 

 

 

 

 

 

 

 

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

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

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in of the Exchange Act).    Yes  ☐    No  ☒

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

 

 

 

 

 

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

 

3

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

 

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

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

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

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

1.	Description of Business and Basis of Presentation:

2.	Revenue from Contracts with Customers

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

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

		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

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

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

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

		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

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

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

5.	Payroll Tax Liability

6.	Commitments and Contingencies

7.	Employee Benefit Plan

8.	Stock-Based Compensation

9.	Credit Facility

10.	Income Taxes

		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

		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

		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	%

11.	Derivative Instruments and Hedging Activities

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

•

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

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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.

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

13.	Shareholders’ Equity

14.	Earnings Per Share

15.	Business Segments and Geographic Information

		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

		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

		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

ITEM 2.

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

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

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

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

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

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

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

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

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

 

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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 for the year ended December 31, 2021). Accordingly, our trends and outlook are additionally impacted by the prospects and well-being of these specific clients. This “account concentration” factor may result in our results of operations deviating from the prevailing economic trends from time to time.

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

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

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

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

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

 

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

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

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

 

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

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

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

 

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:

 

 

 

 

20

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 for the three months ended March 31, 2022 totaled $915,000, representing an effective tax rate on 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 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.

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 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 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, 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, charges of $1.6 million, and an increase in operating working capital levels of ($2.0 million).

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 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.

We do not have any sheet arrangements.

 

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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.

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.

Recent accounting pronouncements are described in Note 16 to the accompanying financial statements.

 

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.

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.

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.

 

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 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.

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.

 

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.

 

Form 10-K

 

Not applicable.

 

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(a) Exhibits

 

 

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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.

 

 

 

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