10-Q

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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 June 30, 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.

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 July 29, 2022 was 11,614,674.

Table of Contents

MASTECH DIGITAL, INC.

QUARTERLY REPORT ON FORM

10-Q

FOR THE QUARTER ENDED JUNE 30, 2022

TABLE OF CONTENTS


			Page
PART 1	FINANCIAL INFORMATION			3

Item 1.	Financial Statements:			3

	(a)	Condensed Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended June 30, 2022 and 2021		3

	(b)	Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Six Months Ended June 30, 2022 and 2021		4

	(c)	Condensed Consolidated Balance Sheets (Unaudited) as of June 30, 2022 and December 31, 2021		5

	(d)	Condensed Consolidated Statements of Shareholders’ Equity (Unaudited) for the Three and Six Months Ended June 30, 2022 and 2021		6

	(e)	Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2022 and 2021		7

	(f)	Notes to Condensed Consolidated Financial Statements (Unaudited)		8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			19

Item 3.	Quantitative and Qualitative Disclosures About Market Risk			26

Item 4.	Controls and Procedures			26

PART II	OTHER INFORMATION			27

Item 1.	Legal Proceedings			27

Item 1A.	Risk Factors			27

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds			27

Item 6.	Exhibits			28

	SIGNATURES			29

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 June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
Revenues	$	62,117		$	53,658		$	121,872		$	103,433
Cost of revenues		45,371			39,343			89,194			76,314

Gross profit		16,746			14,315			32,678			27,119
Selling, general and administrative expenses:
Operating expenses		13,198			10,986			25,823			21,921
Revaluation of contingent consideration liability		—			(1,982	)		—			(1,982	)

Total selling, general and administrative expenses		13,198			9,004			25,823			19,939

Income from operations		3,548			5,311			6,855			7,180
Interest income (expense), net		(127	)		(159	)		(241	)		(354	)
Other income (expense), net		195			15			249			(22	)

Income before income taxes		3,616			5,167			6,863			6,804
Income tax expense		1,180			1,429			2,095			1,872

Net income	$	2,436		$	3,738		$	4,768		$	4,932

Earnings per share:
Basic	$	.21		$	.33		$	.41		$	.43

Diluted	$	.20		$	.31		$	.39		$	.41

Weighted average common shares outstanding:
Basic		11,607			11,442			11,558			11,425

Diluted		12,110			12,002			12,079			11,999

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

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MASTECH DIGITAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

(Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
Net income	$	2,436		$	3,738		$	4,768		$	4,932
Other comprehensive income (loss):
Net unrealized gain on interest-rate swap contracts		—			—			—			35
Foreign currency translation adjustments		(319	)		(95	)		(466	)		(114	)

Total pretax net unrealized (loss)		(319	)		(95	)		(466	)		(79	)
Income tax expense		—			—			—			9

Total other comprehensive (loss), net of taxes		(319	)		(95	)		(466	)		(88	)

Total comprehensive income	$	2,117		$	3,643		$	4,302		$	4,844

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

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MASTECH DIGITAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share and per share data)

(Unaudited)


	June 30, 2022			December 31, 2021
ASSETS
Current assets:
Cash and cash equivalents	$	6,722		$	6,622
Accounts receivable, net of allowance for uncollectible accounts of $375 in 2022 and $375 in 2021		37,730			34,153
Unbilled receivables		13,478			9,240
Prepaid and other current assets		3,102			3,890

Total current assets		61,032			53,905
Equipment, enterprise software, and leasehold improvements, at cost:
Equipment		2,788			2,356
Enterprise software		4,172			3,753
Leasehold improvements		749			842

		7,709			6,951
Less – accumulated depreciation and amortization		(4,418	)		(3,913	)

Net equipment, enterprise software, and leasehold improvements		3,291			3,038
Operating lease right-of-use assets		4,641			4,894
Non-current deposits		491			595
Goodwill, net of impairment		32,510			32,510
Intangible assets, net of amortization		17,176			18,760

Total assets	$	119,141		$	113,702

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	4,400		$	4,400
Accounts payable		6,724			4,954
Accrued payroll and related costs		13,250			14,240
Current portion of operating lease liability		1,530			1,479
Other accrued liabilities		948			1,227
Deferred revenue		469			544

Total current liabilities		27,321			26,844

Long-term liabilities:
Long-term debt, less current portion, net		6,170			8,334
Long-term operating lease liability, less current portion		3,179			3,706
Long-term accrued income taxes		125			125
Deferred income taxes		816			265

Total liabilities		37,611			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 13,261,094 shares issued as of June 30, 2022 and 13,112,202 shares issued as of December 31, 2021		133			131
Additional paid-in-capital		31,048			28,250
Retained earnings		55,609			50,841
Accumulated other comprehensive income (loss)		(1,073	)		(607	)
Treasury stock, at cost; 1,646,420 shares as of June 30, 2022 and as of December 31, 2021		(4,187	)		(4,187	)

Total shareholders’ equity		81,530			74,428

Total liabilities and shareholders’ equity	$	119,141		$	113,702

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

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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

Net income		—		—		2,436		—			—			2,436
Employee common stock purchases		—		199		—		—			—			199
Other comprehensive (loss), net of taxes		—		—		—		—			(319	)		(319	)
Stock-based compensation expense		—		752		—		—			—			752
Stock options exercised		—		430		—		—			—			430

Balances, June 30, 2022	$	133	$	31,048	$	55,609	$	(4,187	)	$	(1,073	)	$	81,530


	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

Net income		—		—		3,738		—			—			3,738
Employee common stock purchases		—		181		—		—			—			181
Other comprehensive (loss), net of taxes		—		—		—		—			(95	)		(95	)
Stock-based compensation expense		—		757		—		—			—			757
Stock options exercised		1		3		—		—			—			4

Balances, June 30, 2021	$	131	$	27,172	$	43,552	$	(4,187	)	$	(627	)	$	66,041

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

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MASTECH DIGITAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)


	Six Months Ended June 30,
	2022			2021
OPERATING ACTIVITIES:
Net income	$	4,768		$	4,932
Adjustments to reconcile net income to cash provided by (used in) operating activities:
Depreciation and amortization		2,128			1,996
Interest amortization of deferred financing costs		36			41
Stock-based compensation expense		1,278			1,378
Deferred income taxes, net		551			333
Revaluation of contingent consideration liability		—			(1,982	)
Operating lease assets and liabilities, net		(223	)		141
Working capital items:
Accounts receivable and unbilled receivables		(7,815	)		(6,450	)
Prepaid and other current assets		788			(2,070	)
Accounts payable		1,770			2,049
Accrued payroll and related costs		(990	)		87
Other accrued liabilities		(279	)		(236	)
Deferred revenue		(75	)		(41	)

Net cash flows provided by operating activities		1,937			178

INVESTING ACTIVITIES:
Recovery of (payment for) non-current deposits		104			(199	)
Capital expenditures		(797	)		(326	)

Net cash flows (used in) investing activities		(693	)		(525	)

FINANCING ACTIVITIES:
(Repayments) on term loan facility		(2,200	)		(2,200	)
Proceeds from the issuance of common shares		199			181
Proceeds from the exercise of stock options		1,323			105

Net cash flows (used in) financing activities		(678	)		(1,914	)

Effect of exchange rate changes on cash and cash equivalents		(466	)		(114	)

Net change in cash and cash equivalents		100			(2,375	)
Cash and cash equivalents, beginning of period		6,622			7,677

Cash and cash equivalents, end of period	$	6,722		$	5,302

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

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MASTECH DIGITAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 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, 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. We are hopeful that

COVID-19

related concerns will be less impactful on our business in 2022. 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 and six months ended June 30, 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 six months ended June 30, 2022.

Table of Contents

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 its customers. 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.

Table of Contents

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021

	(Amounts in thousands)				(Amounts in thousands)
Data and Analytics Services Segment
Time-and-material Contracts	$	6,863	$	5,917	$	13,044	$	11,771
Fixed-price Contracts		4,387		3,033		8,358		5,973

Subtotal Data and Analytics Services	$	11,250	$	8,950	$	21,402	$	17,744

IT Staffing Services Segment
Time-and-material Contracts	$	50,867	$	44,708	$	100,470	$	85,689
Fixed-price Contracts		—		—		—		—

Subtotal IT Staffing Services	$	50,867	$	44,708	$	100,470	$	85,689

SEC Form 10-Q filed by Mastech Digital Inc