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, ~~2021~~

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)


P~~ENNSYLVANI~~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~~ 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 April 30, ~~2021~~2022 was ~~11,431,052.~~11,599,334.

Table of Contents

MASTECH DIGITAL, INC.

QUARTERLY REPORT ON FORM

10-Q

FOR THE QUARTER ENDED MARCH 31, ~~2021~~2022

TABLE OF CONTENTS

Page

PART 1

FINANCIAL INFORMATION

Item 1.

Financial Statements:

(a)

Condensed Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, ~~2021~~2022 and ~~2020~~2021

(b)

Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months Ended March 31, ~~2021~~2022 and ~~2020~~2021

(c)

Condensed Consolidated Balance Sheets (Unaudited) as of March 31, ~~2021~~2022 and December 31, ~~2020~~2021

(d)

Condensed Consolidated Statements of Shareholders’ Equity (Unaudited) as of March 31, ~~2021~~2022 and March 31, ~~2020~~2021

(e)

Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, ~~2021~~2022 and ~~2020~~2021

(f)

Notes to Condensed Consolidated Financial Statements (Unaudited)

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

2017

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

2522

Item 4.

Controls and Procedures

2522

PART II

OTHER INFORMATION

2623

Item 1.

Legal Proceedings

2623

Item 1A.

Risk Factors

2623

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

2623

Item 6.

Exhibits

2724

SIGNATURES

2825

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,


2021

2020

Revenues
   $ 49,775 $ 50,425
Cost of revenues
   36,971 37,706

Gross profit
   12,804 12,719
Selling, general and administrative expense
   10,935 10,243

Income from operations
   1,869 2,476
Interest income (expense), net
   (195 ) (279 )
Other income (expense), net
   (37 ) 53

Income before income taxes
   1,637 2,250
Income tax expense
   443 381

Net income
   $ 1,194 $ 1,869

Earnings Per Share:

Basic
   $ .10 $ .17

Diluted
   $ .10 $ .16

Weighted average common shares outstanding:

Basic
   11,415 11,127

Diluted
   11,997 11,675


	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.

Table of Contents

MASTECH DIGITAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

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

(Unaudited)

March 31,

2021

December 31,
2020

ASSETS

Current assets:

Cash and cash equivalents
   $ 7,242 $ 7,677
Accounts receivable, net of allowance for uncollectible accounts of $426 in 2021 and $413 in 2020
   23,425 22,036
Unbilled receivables
   12,781 10,098
Prepaid and other current assets
   1,238 1,346

Total current assets
   44,686 41,157
Equipment, enterprise software, and leasehold improvements, at cost:

Equipment
   2,055 1,931
Enterprise software
   2,730 2,730
Leasehold improvements
   563 563

   5,348 5,224
Less – accumulated depreciation and amortization
   (3,453 ) (3,253 )

Net equipment, enterprise software, and leasehold improvements
   1,895 1,971
Operating lease
right-of-use
assets
   3,199 3,286
Deferred income taxes
   804 796
Non-current
deposits
   459 396
Goodwill, net of impairment
   32,510 32,510
Intangible assets, net of amortization
   21,137 21,930

Total assets
   $ 104,690 $ 102,046

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Current portion of long-term debt
   $ 4,400 $ 4,400
Accounts payable
   3,915 2,589
Accrued payroll and related costs
   12,882 12,374
Current portion of operating lease liability
   1,056 1,079
Other accrued liabilities
   1,166 1,051
Deferred revenue
   405 478

Total current liabilities
   23,824 21,971

Long-term liabilities:

Long-term debt, less current portion, net
   11,795 12,875
Contingent consideration liability
   2,882 2,882
Long-term operating lease liability, less current portion
   2,273 2,325
Long-term accrued income taxes
   165 165
Long-term payroll tax liabilities
   2,295 2,295

Total liabilities
   43,234 42,513
Commitments and contingent liabilities (Note 6)
   0 0
Shareholders’ equity:

Preferred Stock, 0 par value; 20,000,000 shares authorized; NaN outstanding
   0—   0—
Common Stock, par value $.01; 250,000,000 shares authorized and 13,076,972 shares issued as of March 31, 2021 and 13,039,893 shares issued as of December 31, 2020
   130 130
Additional
paid-in-capital
   26,231 25,509
Retained earnings
   39,814 38,620
Accumulated other comprehensive income (loss)
   (532 ) (539 )
Treasury stock, at cost; 1,646,420 shares as of March 31, 2021 and as of December 31, 2020
   (4,187 ) (4,187 )

Total shareholders’ equity
   61,456 59,533

Total liabilities and shareholders’ equity
   $ 104,690 $ 102,046


	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)		0			0
Shareholders’ equity:
Preferred Stock, 0 par value; 20,000,000 shares authorized; 0ne outstanding		0—			0—
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.

Table of Contents

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, 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



Common

Stock

Additional

Paid-in

Capital

Accumulated

Retained

Earnings

Treasury

Stock

Accumulated

Other

Comprehensive

Income (Loss)

Total

Shareholders’

Equity

Balances, December 31, 2019    $ 127    $ 21,939    $ 28,759    $ (4,187 ) $ (358 ) $ 46,280
Net income    —      —      1,869    —   —   1,869
Other comprehensive (loss), net of taxes    —      —      —      —   (336 ) (336 )
Stock-based compensation expense    —      456    —      —   —   456
Stock options exercised    1    555    —      —   —   556

Balances, March 31, 2020    $ 128    $ 22,950    $ 30,628    $ (4,187 ) $ (694 ) $ 48,825


	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.

Table of Contents

MASTECH DIGITAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

Three Months Ended

March 31,


2021

2020

OPERATING ACTIVITIES:

Net income
   $ 1,194 $ 1,869
Adjustments to reconcile net income to cash provided by (used in) operating activities:

Depreciation and amortization
   997 873
Interest amortization of deferred financing costs
   20 26
Stock-based compensation expense
   621 456
Deferred income taxes, net
   (8 ) (182 )
Operating lease assets and liabilities, net
   12 (37 )
Loss on disposition of fixed assets
   —   2
Working capital items:

Accounts receivable and unbilled receivables
   (4,072 ) (1,244 )
Prepaid and other current assets
   108 492
Accounts payable
   1,326 (587 )
Accrued payroll and related costs
   508 1,554
Other accrued liabilities
   141 (276 )
Deferred revenue
   (73 ) (151 )

Net cash flows provided by operating activities
   774 2,795

INVESTING ACTIVITIES:

Recovery of (payment for)
non-current
deposits
   (63 ) 17
Capital expenditures
   (128 ) (119 )

Net cash flows (used in) investing activities
   (191 ) (102 )

FINANCING ACTIVITIES:

(Repayments) borrowings on revolving credit facility, net
   —   (2,244 )
(Repayments) on term loan facility
   (1,100 ) (1,144 )
Proceeds from exercise of stock options
   101 556

Net cash flows (used in) financing activities
   (999 ) (2,832 )

Effect of exchange rate changes on cash and cash equivalents
   (19 ) (267 )

Net change in cash and cash equivalents
   (435 ) (406 )
Cash and cash equivalents, beginning of period
   7,677 2,981

Cash and cash equivalents, end of period
   $ 7,242 $ 2,575


	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.

Table of Contents

MASTECH DIGITAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, ~~2021~~2022 AND ~~2020~~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.

~~Reflective of~~In our 2017 acquisition of the services division of Canada-based InfoTrellis, Inc., we ~~have~~ added specialized capabilities in delivering data and analytics services to our customers ~~globally.~~globally, which became our Data and Analytics Services segment. This ~~business~~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 business~~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. ~~During the first quarter~~This impact was reduced in 2021 as a result of ~~2021, we are encouraged by~~ the global

roll-out

of vaccination programs and ~~some~~ signs of ~~economic expansion and~~ improving economic ~~conditions as the impact~~conditions. As we enter 2022, we are hopeful that

COVID-19

related concerns will be less impactful on our business. The proliferation of ~~the pandemic subsides. There is,~~

COVID-19

variants, however, ~~still~~have caused some uncertainty ~~regarding the pace, nature~~ and ~~extent of the recovery of~~may continue to disrupt global markets ~~and particular industries from the pandemic.~~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, ~~2020,~~2021, included in our Annual Report on Form

10-K

filed with the SEC on March ~~16, 2021.~~14, 2022. Additionally, our operating results for the three months ended March 31, ~~2021~~2022, are not necessarily indicative of the results that can be expected for the year ending December 31, ~~2021~~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, ~~2020~~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, ~~2021.~~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~~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.

~~Table of Contents~~

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

Table of Contents


	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		0

Subtotal IT Staffing Services	$	49,603	$	40,981

Total Revenues	$	59,755	$	49,775

For the three months ended March 31, ~~2021,~~2022, the Company had 1 client (CGI ~~= 15%~~=17.8%) that exceeded 10% of total revenues. For the three months ended March 31, ~~2020,~~2021, the Company had the same 1 client (CGI = ~~12.7%~~15.0%) that exceeded 10% of total revenues.

The Company’s top ten clients represented approximately ~~47%~~51% and ~~46%~~47% of total revenues for the three months ended March 31, 2022 and 2021, ~~and 2020,~~ 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

Three Months Ended

March 31,


2021

2020


(Amounts in thousands)

United States
   $ 47,942    $ 49,350
Canada
   1,264    861
India and other
   569    214

Total

$
49,775


$
50,425

3.	~~Business Combinations~~

On October 1, 2020, Mastech Digital, Inc., through its wholly-owned subsidiary Mastech Digital Data, Inc., acquired all of the outstanding shares of AmberLeaf Partners, Inc. (“AmberLeaf”). Under the terms of the Share Purchase Agreement executed in connection with the AmberLeaf acquisition (the “Purchase Agreement”), the Company paid at the closing of the acquisition approximately $9.7 million in cash. The Purchase Agreement also requires the Company to pay to the former shareholders of AmberLeaf up to $4.5 million in deferred cash payments, which payments are contingent upon the AmberLeaf business achieving specific revenue growth and EBITDA margin targets. The amount of these deferred cash payments, if any, is based upon the revenue growth and EBITDA margins of the AmberLeaf business for the

~~12-month~~

~~period beginning on January 1, 2021 and for the~~

~~12-month~~

~~period beginning January 1, 2022, as described more fully in the Purchase Agreement.~~

To fund the acquisition, on October 1, 2020 the Company entered into a Third Amendment (the “Third Amendment”) to its Credit Agreement, as amended and dated April 20, 2018. The Third Amendment amends the Credit Agreement by, among other things, (1) increasing the aggregate commitment amount of the revolving credit facility to $30 million (an increase of $7.5 million); (2) providing for the Term Loan facility in the aggregate amount of $17.5 million (an increase of $10 million); (3) providing for an increase in the total commitment amount to the facility in an aggregate amount not to exceed $15 million, upon the satisfaction of certain conditions; and (4) amending the financial covenant in the Credit Agreement related to the Company’s Fixed Charge Coverage Ratio (as defined in the Credit Agreement) by increasing the minimum permitted Fixed Charge Coverage Ratio for each of the fiscal quarters ending on or after September 30, 2020.

The acquisition was accounted for using the acquisition method of accounting. The acquisition method of accounting requires that the assets acquired and liabilities assumed be measured at their fair value as of the closing date.

~~The following table summarizes the fair value of consideration for the acquired business on the October 1, 2020 closing date:~~

(in thousands)

Amounts

Cash purchase price at closing
   $ 9,664
Working capital adjustments
   0—
Estimated payout of contingent consideration (1)
   2,882

Total Fair Value of Consideration
   $ 12,546

~~(1)~~

~~Based on a valuation conducted by an independent third party, the fair value of contingent consideration at the closing date was determined to be $2,882,000.~~

~~The cash purchase price at closing was paid with funds obtained from the following sources:~~

(in thousands)

Amounts

Cash balances on hand
   $ —
Increase in term loan debt facility
   10,000
Revolving line of credit
   (336 )

Cash Paid at Closing
   $ 9,664

The allocation of the purchase price was based on estimates of the fair value of assets acquired and liabilities assumed as of October 1, 2020, as set forth below. The excess purchase price over the fair values of the net tangible assets and identifiable intangible assets was recorded as goodwill, which includes value associated with the assembled workforce. Goodwill is expected to be largely deductible for tax purposes. The valuation of net assets acquired is as follows:

(in thousands)

Amounts

Cash on hand

$
319

Working capital assets, net of liabilities
   1,153
Identifiable intangible assets:

Client relationships
   2,970
Covenant
not-to-compete
   440
Trade name
   490
Technology
   770

Total identifiable intangible assets


4,670

Goodwill


6,404


Net Assets Acquired

$
12,546

The fair value of identifiable intangible assets has been estimated using the income approach through a discounted cash flow analysis. Specifically, the Company used the income approach through an excess earnings analysis to determine the fair value of client relationships. The value applied to the covenant

~~not-to-compete~~

was based on an income approach using a “with or without” analysis of this covenant in place. The trade name and technology were valued using the income approach—relief from royalty method. All identifiable intangibles are considered level 3 inputs under the fair value measurement and disclosure guidance.

~~The Company incurred $650,000 of transaction expenses related to the acquisition in 2020 inclusive of the~~

~~write-off~~

~~of $185,000 of deferred finance costs. No transaction costs were incurred for the three months ended March 31, 2021 and 2020.~~

Included in the Condensed Statement of Operations for the three months ended March 31, 2021 are revenues of $1.9 million and a net loss of approximately $0.1 million applicable to the AmberLeaf operations acquired on October 1, 2020.

~~The following reflects the Company’s unaudited pro forma results had the results of AmberLeaf been included for all periods presented:~~

Three Months Ended March 31,


2021

Actual

2020

Pro Forma

(Amounts in thousands, except per share data)

Revenue
   $ 49,775    $ 53,634
Net income
   $ 1,194    $ 2,337
Earnings per share—diluted
   $ .10    $ .20

The information above does not reflect all of the operating efficiencies or inefficiencies that may have resulted from the AmberLeaf acquisition in those periods prior to the acquisition. Therefore, the unaudited pro forma information above is not necessarily indicative of results that would have been achieved had the business been combined during all periods presented.

4.	Goodwill and Other Intangible Assets, ~~net~~ 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, ~~2021~~2022, and December 31, ~~2020:~~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		0
Trade name		3		249		249		0
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

Table of Contents

As of March 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    $ 3,861    $ 4,138
Covenant-not-to-compete
   5    319    319    —
Trade name
   3    249    249    —
Data and Analytics Services:

Client relationships
   12    19,641    5,274    14,367
Covenant-not-to-compete
   5    1,201    608    593
Trade name
   5    1,711    956    755
Technology
   7    1,979    695    1,284

Total Intangible Assets

$
33,099


$
11,962


$
21,137




As of December 31, 2020

(Amounts in thousands)

Amortization
Period (In Years)

Gross Carrying
Value

Accumulative
Amortization

Net Carrying
Value

IT Staffing Services:

Client relationships
   12    $ 7,999    $ 3,694    $ 4,305
Covenant-not-to-compete
   5    319    319    —
Trade name
   3    249    249    —
Data and Analytics Services:

Client relationships
   12    19,641    4,866    14,775
Covenant-not-to-compete
   5    1,201    548    653
Trade name
   5    1,711    869    842
Technology
   7    1,979    624    1,355

Total Intangible Assets

$
33,099


$
11,169


$
21,930


	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		0
Trade name		3		249		249		0
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 ~~2020 totaled~~ $793,000, ~~and $673,000,~~ 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, ~~2021~~2022 through ~~2025~~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

Years Ended December 31,


2021

2022

2023

2024

2025


(Amounts in thousands)

Amortization expense
   $ 3,168    $ 2,987    $ 2,772    $ 2,693    $ 2,553

4. Leases

The Company rents certain office facilities and equipment under noncancelable operating leases. As of March 31, ~~2021,~~2022, approximately ~~82,000~~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 ~~5.3~~5 years with ana weighted average of ~~2.1~~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
		March 31, 2021		December 31, 2020
		( in thousands)					( in thousands)
Assets:	Assets:					Assets:
Long-term operating lease right-of-use assets		$	3,199	$	3,286		$	5,033	$	4,894


Liabilities:	Liabilities:					Liabilities:
Short-term operating lease liability		$	1,056	$	1,079		$	1,571	$	1,479
Long-term operating lease liability			2,273		2,325			3,677		3,706

Total liabilities		$	3,329	$	3,404		$	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

On April 1, 2021, the Company entered into a three year operating lease for 35,356 square feet of office space in Chennai, India. This lease replaces the Company’s existing 19,120 square foot lease. Lease payments over the three year period will approximate $1.4 million in the aggregate. The lease is renewable for two additional three-year terms with a 15% increase in rent.

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 0t provide for any matching contributions for the three months ended March 31, ~~2021~~2022 and ~~2020.~~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 ~~option grants~~options at an average strike price of $17.65. ~~During the three months ended March 31, 2020, the Company granted 11,475 restricted share units and 800,000 stock options at a strike price of $15.49 under the Plan.~~ As of March 31, ~~2021~~2022 there were ~~339,000~~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 ~~2020 was~~ $621,000, ~~and $456,000,~~ respectively, and is included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.

During the three months ended March 31, ~~2021~~2022 and ~~2020,~~2021, the Company issued ~~29,739~~90,933 and ~~141,066~~29,739 shares, respectively, related to the ~~vesting~~grant of restricted ~~shares~~share units and the ~~exercising~~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 ~~“Stock~~“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.

Table of Contents

The Company’s eligible full-time employees are able to contribute up to 15% of their base compensation into the ~~employee stock purchase plan,~~Employee Stock Purchase Plan, subject to an annual limit of $25,000 per person. Employees are able to purchase Company ~~common stock~~Common Stock at a

% 15% discount to the lower of the fair market value of the Company’s ~~common stock~~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~~Employee Stock Purchase Plan share-based payments. The fair value of the

six-month ~~“look-back”~~

“look-back” option in the Company’s ~~employee stock purchase plans~~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, ~~2021~~2022 and ~~2020,~~2021, there were 0no shares issued under the Employee Stock Purchase Plan. AtAs of March 31, ~~2021,~~2022, there were ~~539,041~~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 ~~$47.5~~$53.1 million, consisting of (i) a revolving credit facility (the “Revolver”) in an aggregate principal amount not to exceed ~~$30~~$40 million ~~(subject to increase by up to an additional $15 million upon satisfaction of certain conditions)~~ and; (ii) a ~~$17.5~~$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, ~~and~~ April 25, 2018 and October 7, 2020, and Exhibit 10.2 to the Form

8-K/A

filed with the SEC on ~~October 7, 2020.~~

~~Table~~January 4, 2022. Additionally, the facility includes an accordion feature for additional borrowing of ~~Contents~~up to $20 million upon satisfaction of certain conditions.

The Revolver expires in ~~October 2023~~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, ~~2023.~~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) ~~an adjusted London Interbank Offered Rate~~the Bloomberg Short-Term Bank Yield Index (“~~LIBOR”~~BSBY”)~~, with a floor of 0.50%~~, 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 ~~adjusted LIBOR~~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~~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)~~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, ~~2021,~~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, ~~and~~ October 1, 2020, and December 29, 2021 amendments to the Credit Agreement, the Company paid a commitment fee and incurred deferred financing costs totaling ~~$752,000,~~$975,000, which were capitalized and are being amortized as interest expense over the life of the facility. Deferred financing costs of ~~$205,000~~$348,000 and ~~$225,000~~$366,000 (net of amortization) as of March 31, ~~2021~~2022, and December 31, ~~2020,~~2021, respectively, are presented as reductions in long-term debt in the Company’s ~~Condensed~~ Consolidated Balance Sheets.

Table of Contents

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; ~~forecast~~forecasts of future profitability; the duration of statutory carry-forward ~~periods~~periods; and tax planning alternatives. AtAs of March 31, ~~2021,~~2022, our valuation allowance was comprised of balances within locations of Singapore and the United Kingdom. The valuation allowance balances at these locations totaled ~~$211,000~~$394,000 and ~~$179,000~~$311,000 as of March 31, ~~2021~~2022, and December 31, ~~2020,~~2021, respectively, and reflect net operating losses which may not be realizable in the future.

The ~~Company is~~Company’s Canadian subsidiary are currently ~~in the initial stages of an~~under audit by ~~the IRS of our 2018 tax return. Additionally, we have been notified by~~ Revenue Canada ~~that they will be conducting an audit of our Canadian subsidiary~~ for the years 2018 and ~~2019 in the coming months.~~

2019.

11.	Derivative Instruments and Hedging Activities

Interest Rate Risk Management

Concurrent with the Company’s July 13, 2017 borrowings under its ~~new~~ 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. ~~Under the~~The swap contracts, which matured on April 1, 2021, ~~the Company paid interest at a fixed rate of 1.99% and received interest at a variable rate equal to the daily U.S. LIBOR on an initial notional amount of $15.0 million. Notional amounts~~ were ~~$7.5 million and $8.1 million at March 31, 2021 and December 31, 2020, respectively. These swap contracts have been~~ designated as cash flow hedging instruments and qualified as effective hedges at inception under ASC Topic 815, “Derivatives and Hedging”. These contracts ~~are~~were recognized on the balance sheet at fair value. The effective portion of the changes in fair value on these instruments iswas recorded in other comprehensive income (loss) and iswas reclassified into the Consolidated Statements of Operations as interest expense in the same period in which the underlying hedge transaction ~~affects~~affected earnings. ~~Changes in the fair value of interest-rate swap contracts deemed ineffective are recognized in the~~

~~Consolidated Statements of Operations as interest expense. The fair value of~~Because the interest-rate swap contracts atmatured, they had no value as of March 31, ~~2021~~2022, and December 31, ~~2020 was $0 and a liability of $35,000, respectively, and~~2021, therefore there is no balance reflected in the Consolidated Balance Sheets ~~as other current liabilities.~~

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 ~~Condensed~~ Consolidated Statements of Operations and ~~Comprehensive Income~~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	$0

Derivatives in ASC Topic 815 Cash Flow Hedging
Relationships

Amount of
Gain / (Loss)
recognized in
OCI on
Derivatives

Location of
Gain / (Loss)
reclassified from
Accumulated
OCI to
Income
(Expense)

Amount of
Gain / (Loss)
reclassified
from
Accumulated
OCI to
Income
(Expense)

Location of
Gain / (Loss)
reclassified in
Income
(Expense)
on Derivatives

Amount of
Gain / (Loss)
recognized in
Income
(Expense)
on Derivatives


(Effective
Portion)

(Effective
Portion)

(Effective
Portion)

(Ineffective Portion/Amounts
excluded from
effectiveness testing)

For the Three Months Ended March 31, 2021:

Interest-Rate Swap Contract
   $ 35    Interest Expense    $ 34    Interest Expense    $ 0

Derivatives in ASC Topic 815 Cash Flow Hedging
Relationships

Amount of
Gain / (Loss)
recognized in
OCI on
Derivatives

Location of
Gain / (Loss)
reclassified from
Accumulated
OCI to
Income
(Expense)

Amount of
Gain / (Loss)
reclassified
from
Accumulated
OCI to
Income
(Expense)

Location of
Gain / (Loss)
reclassified in
Income
(Expense)
on Derivatives

Amount of
Gain / (Loss)
recognized in
Income
(Expense)
on Derivatives


(Effective
Portion)

(Effective
Portion)

(Effective
Portion)

(Ineffective Portion/Amounts
excluded from
effectiveness testing)

For the Three Months Ended March 31, 2020:

Interest-Rate Swap Contract
   $ (94 ) Interest Expense    $ (8 ) Interest Expense    $ 0

~~Information on the location and amounts of derivative fair values in the Condensed Consolidated Balance Sheets (in thousands):~~

March 31, 2021

December 31, 2020

Derivative Instruments

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

Interest-Rate Swap Contracts
   Other Current Liabilities    $ 0      Other Current Liabilities    $ 35

~~The estimated amount of pretax (loss) as of March 31, 2021 that is expected to be reclassified from other comprehensive income into earnings within the next 12 months is $0.~~

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.

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. ~~For the three months ended March 31, 2020, there were 440,000 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.

~~Table of Contents~~


	Three Months Ended March 31,						Three Months Ended March 31,
	2021			2020			2022			2021
	(Amounts in thousands)						(Amounts in thousands)
Revenues:
Data and Analytics Services	$	8,794		$	7,360		$	10,152		$	8,794
IT Staffing Services		40,981			43,065			49,603			40,981

Total revenues	$	49,775		$	50,425		$	59,755		$	49,775

Gross Margin %:
Data and Analytics Services		45.7	%		47.1	%		45.2	%		45.7	%
IT Staffing Services		21.4	%		21.5	%		22.9	%		21.4	%

Total gross margin %		25.7	%		25.2	%		26.7	%		25.7	%

Segment operating income:
Data and Analytics Services	$	394		$	909		$	972		$	394
IT Staffing Services		2,268			2,240			3,127			2,268

Subtotal		2,662			3,149			4,099			2,662
Amortization of acquired intangible assets		(793	)		(673	)		(792	)		(793	)
Interest expenses and other, net		(232	)		(226	)		(60	)		(232	)

Income before income taxes	$	1,637		$	2,250		$	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

Table of Contents

16.	Recently Issued Accounting Standards

Recently Adopted Accounting Pronouncements

In ~~December 2019,~~November 2021, the FASB issued ASU

~~2019-12,~~2021-10,

“~~Income Taxes~~Government Assistance (Topic ~~740)”~~832): Disclosures by Business Entities about Government Assistance”. The amendments in this ASU ~~simplify~~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 ~~income taxes by removing certain exceptions to~~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 ~~general principles~~FASB issued ASU

2021-08,

“Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers”. The amendments in ~~Topic 740~~this ASU require that an entity (acquirer) recognize and ~~by clarifying~~measure contract assets and ~~amending other areas~~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 ~~Topic 740.~~the acquisition date. The amendments in this ASU are effective for annual and interim periods beginning after December 15, ~~2020. We adopted~~2022. Early adoption is permitted. The Company does not expect this ASU ~~on January 1, 2021 with no~~to have a material impact on ~~our consolidated~~its financial statements.

~~In March 2020, the FASB issued ASU~~

~~2020-04,~~

“Reference Rate Reform (Topic 848)”. The amendments in this ASU provide optional guidance to ease the burden in accounting for contract modifications associated with the cessation of interbank offered rates, particularly LIBOR, as a result of reference rate reform. The amendments in this ASU are effective for annual and interim periods from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020 through December 31, 2022. We adopted this ASU on January 1, 2021 with no material impact on our consolidated 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, ~~2020,~~2021, included in our Annual Report on Form

10-K,

filed with the Securities and Exchange Commission (“SEC”) on March ~~16, 2021.~~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, ~~2020.~~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.

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. ~~As we enter~~This impact was reduced in 2021 ~~we are encouraged by~~as a result of the global

roll-out

of vaccination programs and ~~some~~ signs of improving economic ~~expansion. While there is still uncertainty in the global markets,~~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 ~~conditions will improve throughout~~concerns regarding the ~~year as the impact~~potential for recessionary conditions.

Results of Operations for the Three Months Ended March 31, ~~2021~~2022 as Compared to the Three Months Ended March 31, ~~2020:~~2021:

Revenues:

Revenues for the three months ended March 31, ~~2021~~2022 totaled ~~$49.8~~$59.8 million compared to ~~$50.4~~$49.8 million for the corresponding three-month period in ~~2020.~~2021. This ~~slight~~20% year-over-year revenue ~~decline~~increase reflected ~~19%~~15% growth in our Data and Analytics Services segment ~~due to the AmberLeaf acquisition~~ and a ~~5% decline~~21% increase in our IT Staffing Services ~~segment due largely to~~segment. For the ~~impact~~three months ended March 31, 2022, the Company had one client that had revenues in excess of ~~the pandemic.~~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%). ~~For the three months ended March 31, 2020, the Company had one client that had revenues in excess of 10% of total revenues (CGI = 12.7%).~~ The Company’s top ten clients represented approximately ~~47%~~52% and ~~46%~~47% of total revenues for the three months ended March 31, 2022 and 2021, ~~and 2020,~~ respectively.

Below is a tabular presentation of revenues by reportable segment for the three months ended March 31, 2022 and 2021, ~~and 2020,~~ respectively:

Revenues (Amounts in thousands)

Three Months Ended
March 31, 2021

Three Months Ended
March 31, 2020

Data and Analytics Services
   $ 8,794    $ 7,360
IT Staffing Services
   40,981    43,065




Total revenues
   $ 49,775    $ 50,425


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 ~~$8.8~~$10.2 million in the ~~first~~ quarter ending March 31, ~~2021,~~2022, compared to ~~$7.4~~$8.8 million in the corresponding period last year. The year-over-year improvement ~~was due to~~largely reflected improved backlog in the ~~AmberLeaf acquisition in October 2020, which contributed $1.9 million during the quarter.~~2022 period. Bookings in ~~the~~ first quarter 2022 totaled $11.8 million compared to first quarter 2021 bookings of $15.8 million. The 2021 ~~were $15.8 million and pipeline opportunities have strengthened in recent months. However, pandemic-related delays have pushed out start dates on a number of projects.~~

quarter included several booking orders that included multi-year durations.

Revenues from our IT Staffing Services segment totaled ~~$41.0~~$49.6 million in the three months ended March 31, ~~2021~~2022 compared to ~~$43.1~~$41.0 million during the corresponding ~~2020~~2021 period. This 5%21% revenue ~~decline~~increase reflected a higher level of billing consultants in the ~~impact of the pandemic. Activity levels increased during the first~~2022 quarter ofversus 2021. Billing consultants at March 31, 2021 as totaled

1,295-consultants

compared ~~to the pandemic affected periods in 2020 and our billable consultant base increased by~~

~~99-consultants~~

~~during first quarter 2021~~ to

1,162-consultants

at ~~quarter end.~~March 31, 2021. Our average bill rate in the first quarter of ~~2021~~2022 for the segment was ~~$75.12~~$78.99 / per hour compared to ~~$76.68~~$75.12 / per hour in the first quarter of ~~2020.~~2021. The ~~decrease~~increase in average bill rate was due to ~~lower~~higher rates on new assignments and is reflective of the types of skill-sets that we deployed. Permanent placement / fee revenues were approximately ~~$0.2~~$0.6 million during the quarter, which was

~~in-line~~

~~with~~ $0.4 million higher than our permanent placement performance of a year ago.

Gross Margins:

Gross profits in the first quarter of ~~2021~~2022 totaled ~~$12.8~~$15.9 million compared to gross profits of ~~$12.7~~$12.8 million in the first quarter of ~~2020.~~2021, a 24% year-over-year increase. Gross profit as a percentage of revenue was ~~25.7%~~26.7% for the three-month period ending March 31, ~~2021~~2022, compared to ~~25.2%~~25.7% during the same period of ~~2020.~~2021. This

~~50-basis~~100-basis

point improvement reflected higher revenue levels in our high-margin Data and Analytics Services segment ~~(favorable revenue mix).~~and improved gross margins in our IT Staffing Services segment due to higher permanent placement fees and revenues from our 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, ~~and 2020,~~ respectively:

S,G&A Expenses (Amounts in millions)

Three Months Ended
March 31, 2021

Three Months Ended
March 31, 2020

Data and Analytics Services Segment

Sales and Marketing
   $ 1.8    $ 1.3
Operations
   0.8    0.4
Amortization of Acquired Intangible Assets
   0.6    0.5
General & Administrative
   1.0    0.8




Subtotal Data and Analytics Services
   $ 4.2    $ 3.0




IT Staffing Services Segment

Sales and Marketing
   $ 1.8    $ 2.0
Operations
   2.0    2.4
Amortization of Acquired Intangible Assets
   0.2    0.2
General & Administrative
   2.7    2.6




Subtotal IT Staffing Services
   $ 6.7    $ 7.2




Total S,G&A Expenses
   $ 10.9    $ 10.2


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, ~~2021~~2022 totaled ~~$10.9~~$12.6 million or ~~21.9%~~21.1% of total revenues, compared to ~~$10.2~~$10.9 million or ~~20.2%~~21.9% of revenues for the three months ended March 31, ~~2020.~~2021. Excluding amortization of acquired intangible assets in both periods, S,G&A expense as a percentage of total revenues would have been ~~20.3%~~19.7% and ~~18.8%~~20.3%, respectively.

Fluctuations within S,G&A expense components during the first quarter of ~~2021,~~2022, compared to the first quarter of ~~2020,~~2021, included the following:

Sales expense increased by ~~$0.3~~$0.8 million in the ~~2021~~2022 period compared to ~~2020.~~2021. An increase of ~~$0.5~~$0.1 million related to our Data and Analytics Services segment which reflected ~~$0.3 million of AmberLeaf sales expense~~additional staff and ~~$0.2 million of staff increases in the sales organization.~~higher commissions. Sales expense in our IT Staffing Services segment ~~declined~~increased by ~~$0.2~~$0.7 million due to staff ~~reductions made in light of the pandemic.~~increases, higher commissions and bonuses, higher travel and other variable expenses.

Operations expense ~~was flat~~increased by $0.6 million in the ~~2021~~2022 period compared to ~~2020.~~2021. In our Data and Analytics Services segment operations expense decrease by increased $0.2 million due to ~~AmberLeaf.~~lower staff. In our IT Staffing Services segment operations expense ~~declined~~increased by ~~$0.2~~$0.8 million related to staff ~~reductions in response~~increases and higher variable expense to ~~the pandemic.~~support revenue growth.

Amortization of acquired intangible assets was ~~$0.1~~$0.8 million ~~higher~~ in both the 2022 and 2021 ~~period due to the AmberLeaf acquisition.~~periods.

Table of Contents

General and administrative expense increased by $0.3 million in the ~~2021~~2022 period compared to ~~2020.~~2021. Approximately ~~$0.2~~$0.1 million was related to our Data and Analytics Services segment and ~~$0.1~~$0.2 million was related to our IT Staffing Services ~~segment and both~~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 ~~compensation expense~~rents and ~~stock-based compensation expense in the 2021 period.~~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). ~~For the three months ended March 31, 2020, Other Income / (Expense) consisted of interest expense of ($279,000) and foreign exchange gains of $53,000.~~ The lower level of interest expense was reflective of debt repayments in ~~2020~~2021 and the first quarter of ~~2021.~~2022.

Income Tax Expense:

Income tax expense for the three months ended March 31, ~~2021~~2022 totaled ~~$443,000,~~$915,000, representing an effective tax rate on

pre-tax

income of ~~27.1%~~28.2% compared to ~~$381,000~~$443,000 for the three months ended March 31, ~~2020,~~2021, which represented a ~~16.9%~~27.1% effective tax rate on

pre-tax

income. The ~~lower~~higher effective tax rate in the ~~2020~~2022 period largely reflected an increase in our tax ~~benefits~~valuation allowance related to ~~the exercise of stock options~~foreign net operating losses (“NOLs”) in Singapore and the ~~vesting of restricted share units.~~UK.

Liquidity and Capital Resources:

Financial Conditions and Liquidity:

AtAs of March 31, ~~2021,~~2022, we had bank debt, net of cash balances on hand, of ~~$9.2~~$4.8 million and approximately ~~$25~~$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. AtAs of March 31, ~~2021,~~2022, our accounts receivable “days sales outstanding” (“DSOs”) measurement was

~~65-days,~~64-days,

which ~~is on~~was one day lower than at the ~~higher~~ end of ~~our acceptable range and reflected a late payment from a major client due at~~

~~quarter-end.~~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, ~~2021~~2022 totaled ~~$0.8~~$1.6 million compared to ~~$2.8~~$0.8 million during the three months ended March 31, ~~2020.~~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, ~~period~~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). ~~During the three months ended March 31, 2020, elements of cash flow were net income of $1.9 million,~~

~~non-cash~~

charges of $1.1 million, and an increase in operating working capital levels of ($0.2 million). The operating working capital increases in 2021 reflected a late payment from a major client due at the end of the quarter.

Cash flows (used in) investing activities:

Cash (used in) investing activities for the three months ended March 31, ~~2021~~2022 was ($~~191,000)~~646,000) compared to ($~~102,000)~~191,000) for the three months ended March 31, ~~2020. In both 2021 and 2020~~2021. The increase in capital expenditures ~~represented~~in 2022 compared to 2021 reflects expenditures related to the ~~majority~~Chennai delivery center in India and the implementation of ~~these expenditures.~~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. Cash provided (used in) financing activities for the three months ended March 31, 2020 totaled ($2.8 million) and consisted of net repayments under our revolving credit facility of ($2.3 million ) and ($1.1 million) of debt payments on our term loan facility, partially offset by $0.6 million of proceeds from the exercise of stock options.

Off-Balance

Sheet ~~Arrangements:~~

Arrangements

We do not have any

off-balance

sheet arrangements.

Table of Contents

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.

~~Cash~~Interest Rates

As of March 31, 2022, we had outstanding borrowings of $12.0 million under our Credit Agreement with PNC Bank and ~~cash equivalents~~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 ~~defined~~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 ~~cash~~a component of accumulated other comprehensive income (loss) within Shareholders’ Equity. Gains and ~~highly liquid investments with maturities~~losses resulting from foreign currency transactions are included as a component of ~~three months~~other income (expense), net in the Consolidated Statements of Operations, and have not been material for all periods presented. A hypothetical 10% increase or ~~less when purchased. Cash equivalents are stated at cost, which approximates market value. Our cash flows~~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 ~~earnings are subject~~reassess our approach to managing the risks relating to fluctuations due to currency exchange rate variations. Foreign currency risk exists by nature of our global recruitment and delivery centers. In 2012 through 2015, we attempted to limit our exposure to currency exchange fluctuations in the Indian rupee via the purchase of foreign currency forward contracts. The Company elected not to engage in currency ~~hedging activities in 2016 to date.~~

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~~Rules

13a-15(b)

~~and~~

~~15d-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 ~~not effective due to the previously identified and disclosed material weaknesses described below.~~effective.

~~The Company completed the acquisition of AmberLeaf Partners, Inc. on October 1, 2020 and has~~

We do not yet included AmberLeaf in its assessment of the effectiveness of its internal control over financial reporting. The Company is currently integrating AmberLeaf into its operations, compliance programs and internal control processes. Accordingly, pursuant to the SEC’s general guidanceexpect that ~~an assessment of a recently acquired business may be omitted from the scope of an assessment for one year following the acquisition, the scope of our assessment of the effectiveness of~~ our disclosure controls and procedures ~~does~~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 ~~include AmberLeaf. AmberLeaf constituted approximately 13%~~absolute, assurance that the objectives of the ~~Company’s total assets (inclusive~~disclosure controls and procedures are met. Further, the design of ~~acquired intangible assets) as of March 31, 2021,~~disclosure controls and ~~approximately 14%~~procedures must reflect the fact that there are resource constraints, and the benefits must be considered relative to their costs. Because of the ~~Company’s net sales for the three months ended March 31, 2021. AmberLeaf will be included~~inherent limitations in ~~our assessment~~all disclosure controls and procedures, no evaluation of ~~the effectiveness of our internal control over financial reporting as of December 31, 2021.~~

~~Previously Identified Material Weakness in Internal Control over Financial Reporting~~

~~As disclosed in Part II, Item 9A of the Company’s Annual Report on Form~~

~~10-K~~

~~for the year ended December 31, 2020, management has identified material weaknesses in the Company’s internal~~disclosure controls ~~related to (1) management review controls designed to address risks associated with complex accounting matters~~and procedures can provide absolute assurance that ~~arise from significant routine~~

~~and non-routine transactions~~

related to goodwill impairment, business combinations, revenue recognition, share-based compensation, and income taxes; and (2) information technology general controls in the areas of change management, information security and IT operations. The material weaknesses will not be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

~~Implementation of Plan to Remediate Material Weaknesses~~

Management is in the process of implementing measures designed to improve the Company’s internal control over financial reporting to remediate these material weaknesses. Remediation activities and planning are subject to ongoing senior management review, as well as audit committee oversight. During the quarter ended March 31, 2021, we implemented the following changes to our internal control over financial reporting:

~~hired additional personnel; and~~

~~enhanced our management review control processes associated with complex accounting matters.~~

~~Management will take additional measures to address the material weakness described above.~~

While we believe the changes described above will improve our internal control over financial reporting, the implementation of these measures is ongoing and will require validation and testing of the design and operating effectiveness of internal controls over a sustained period of financial reporting cycles. We cannot assure you that the measures we have ~~taken to date, or~~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 ~~we may take~~any design will succeed in ~~the future, will be sufficient to remediate the material weaknesses we have identified or avoid~~achieving its stated goals under all potential future ~~material weaknesses. Accordingly, there could continue to be a reasonable possibility that a material misstatement of our financial statements would not be prevented or detected on a timely basis.~~


	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


~~10.1~~		~~Schedule~~ ~~A-5,~~ dated March 10, 2021, to Fourth Amended and Restated Executive Employment Agreement, dated as of March 20, 2019, between Mastech Digital Technologies, Inc., Mastech Digital, Inc. and Vivek Gupta (incorporated by reference to Exhibit 10.1 to Mastech Digital, Inc.’s Current Report on Form ~~8-K,~~ ~~filed with the Securities and Exchange Commission on March 12, 2021)~~

~~10.2~~		Executive Employment Agreement, dated December 12, 2018, between Mastech InfoTrellis Inc. and Paul Burton (incorporated by reference to Exhibit 10.2 to Mastech Digital, Inc.’s Current Report on Form ~~8-K,~~ ~~filed with the Securities and Exchange Commission on March 12, 2021)~~

~~10.3~~		~~Schedule~~ ~~A-10,~~ dated March 20, 2021, to Third Amended and Restated Executive Employment Agreement, dated as of March 20, 2019, between Mastech Digital Technologies, Inc., Mastech Digital, Inc. and John J. Cronin, Jr. (incorporated by reference to Exhibit 10.3 to Mastech Digital, Inc.’s Current Report on Form ~~8-K,~~ ~~filed with the Securities and Exchange Commission on March 12, 2021)~~

~~10.4~~		~~Lease Deed, made and executed on April 1, 2021, by and between Olympia Tech Park (Chennai) Private Limited and InfoTrellis India Private Limited~~

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.~~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)


	March 31, 2021			December 31, 2020
ASSETS
Current assets:
Cash and cash equivalents	$	7,242		$	7,677
Accounts receivable, net of allowance for uncollectible accounts of $426 in 2021 and $413 in 2020		23,425			22,036
Unbilled receivables		12,781			10,098
Prepaid and other current assets		1,238			1,346

Total current assets		44,686			41,157
Equipment, enterprise software, and leasehold improvements, at cost:
Equipment		2,055			1,931
Enterprise software		2,730			2,730
Leasehold improvements		563			563

		5,348			5,224
Less – accumulated depreciation and amortization		(3,453	)		(3,253	)

Net equipment, enterprise software, and leasehold improvements		1,895			1,971
Operating lease right-of-use assets		3,199			3,286
Deferred income taxes		804			796
Non-current deposits		459			396
Goodwill, net of impairment		32,510			32,510
Intangible assets, net of amortization		21,137			21,930

Total assets	$	104,690		$	102,046

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	4,400		$	4,400
Accounts payable		3,915			2,589
Accrued payroll and related costs		12,882			12,374
Current portion of operating lease liability		1,056			1,079
Other accrued liabilities		1,166			1,051
Deferred revenue		405			478

Total current liabilities		23,824			21,971

Long-term liabilities:
Long-term debt, less current portion, net		11,795			12,875
Contingent consideration liability		2,882			2,882
Long-term operating lease liability, less current portion		2,273			2,325
Long-term accrued income taxes		165			165
Long-term payroll tax liabilities		2,295			2,295

Total liabilities		43,234			42,513
Commitments and contingent liabilities (Note 6)		0			0
Shareholders’ equity:
Preferred Stock, 0 par value; 20,000,000 shares authorized; NaN outstanding		0—			0—
Common Stock, par value $.01; 250,000,000 shares authorized and 13,076,972 shares issued as of March 31, 2021 and 13,039,893 shares issued as of December 31, 2020		130			130
Additional paid-in-capital		26,231			25,509
Retained earnings		39,814			38,620
Accumulated other comprehensive income (loss)		(532	)		(539	)
Treasury stock, at cost; 1,646,420 shares as of March 31, 2021 and as of December 31, 2020		(4,187	)		(4,187	)

Total shareholders’ equity		61,456			59,533

Total liabilities and shareholders’ equity	$	104,690		$	102,046


(in thousands)	Amounts
Cash purchase price at closing	$	9,664
Working capital adjustments		0—
Estimated payout of contingent consideration (1)		2,882

Total Fair Value of Consideration	$	12,546


(in thousands)	Amounts
Cash balances on hand	$	—
Increase in term loan debt facility		10,000
Revolving line of credit		(336	)

Cash Paid at Closing	$	9,664


(in thousands)	Amounts
Cash on hand	$	319
Working capital assets, net of liabilities		1,153
Identifiable intangible assets:
Client relationships		2,970
Covenant not-to-compete		440
Trade name		490
Technology		770

Total identifiable intangible assets		4,670
Goodwill		6,404

Net Assets Acquired	$	12,546


	Three Months Ended March 31,
	2021 Actual		2020 Pro Forma
(Amounts in thousands, except per share data)
Revenue	$	49,775	$	53,634
Net income	$	1,194	$	2,337
Earnings per share—diluted	$	.10	$	.20


	As of March 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	$	3,861	$	4,138
Covenant-not-to-compete		5		319		319		—
Trade name		3		249		249		—
Data and Analytics Services:
Client relationships		12		19,641		5,274		14,367
Covenant-not-to-compete		5		1,201		608		593
Trade name		5		1,711		956		755
Technology		7		1,979		695		1,284

Total Intangible Assets			$	33,099	$	11,962	$	21,137


	As of December 31, 2020
(Amounts in thousands)	Amortization Period (In Years)		Gross Carrying Value		Accumulative Amortization		Net Carrying Value
IT Staffing Services:
Client relationships		12	$	7,999	$	3,694	$	4,305
Covenant-not-to-compete		5		319		319		—
Trade name		3		249		249		—
Data and Analytics Services:
Client relationships		12		19,641		4,866		14,775
Covenant-not-to-compete		5		1,201		548		653
Trade name		5		1,711		869		842
Technology		7		1,979		624		1,355

Total Intangible Assets			$	33,099	$	11,169	$	21,930


	Amount as of March 31, 2021
	(in thousands)
2021 (For remainder of year)	$	888
2022		1,187
2023		1,139
2024		339
2025		52
Thereafter		30


Total		3,635
Less: Imputed interest		(306	)


Present value of operating lease liabilities	$	3,329


	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	%


	Three Months Ended March 31, 2021					Three Months Ended March 31, 2020
Income taxes computed at the federal statutory rate	$	344		21.0	%	$	473		21.0	%
State income taxes, net of federal tax benefit		104		6.3			136		6.0
Excess tax benefits from stock options/restricted shares		(67	)	(4.1	)		(343	)	(15.2	)
Difference in tax rate on foreign earnings/other		30		1.9			56		2.5
Change in valuation allowance		32		2.0			59		2.6

	$	443		27.1	%	$	381		16.9	%


	Fair Value as of March 31, 2021
(Amounts in thousands)	Level 1		Level 2			Level 3			Total
Interest-Rate Swap Contracts	$	—	$	—		$	—		$	—
Contingent consideration liabilities	$	—	$	—		$	(2,882	)	$	(2,882	)


	Fair Value as of December 31, 2020
(Amounts in thousands)	Level 1		Level 2			Level 3			Total
Interest-Rate Swap Contracts	$	—	$	(35	)	$	—		$	(35	)
Contingent consideration liabilities	$	—	$	—		$	(2,882	)	$	(2,882	)


	March 31, 2021		December 31, 2020
	(Amounts in thousands)
Total assets:
Data and Analytics Services	$	54,810	$	55,792
IT Staffing Services		49,880		46,254

Total assets	$	104,690	$	102,046


Gross Margin	Three Months Ended March 31, 2021			Three Months Ended March 31, 2020
Data and Analytics Services		45.7	%		47.1	%
IT Staffing Services		21.4			21.5

Total gross margin		25.7	%		25.2	%


		MASTECH DIGITAL, INC.

May ~~7, 2021~~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)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company