10-Q
Table of Contents
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Table of Contents
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM
10-Q
 
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2021
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number
001-34099
 
 
MASTECH DIGITAL, INC.
(Exact name of registrant as specified in its charter)
 
 
 
PENNSYLVANIA
 
26-2753540
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
1305 Cherrington Parkway, Building 210, Suite 400
Moon Township, Pennsylvania
 
15108
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code:
(412787-2100
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Trading
Symbol(s)
 
Name of each exchange
on which registered
Common Stock, par value $.01 per share
 
MHH
 
NYSE American
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes
  ☒    No  ☐ 
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes
  ☒    No  ☐ 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”, and “emerging growth company” in
Rule 12b-2
of the Exchange Act.
 
Large accelerated filer     
Accelerated file
r
 
       
Non-accelerated
filer
     Smaller reporting company  
       
         Emerging growth company  
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  
The number of shares of the registrant’s Common Stock, par value $.01 per share, outstanding as of July 30, 2021 was 11,438,013.
 
 
 

Table of Contents
MASTECH DIGITAL, INC.
QUARTERLY REPORT ON FORM
10-Q
FOR THE QUARTER ENDED JUNE 30, 2021
TABLE OF CONTENTS
 
   
Page
 
PART 1
      3  
     
Item 1.
      3  
       
   
(a)
       3  
       
   
(b)
       4  
       
   
(c)
       5  
       
   
(d)
       6  
       
   
(e)
       7  
       
   
(f)
       8  
     
Item 2.
      20  
     
Item 3.
      28  
     
Item 4.
      28  
     
PART II
      29  
     
Item 1.
      29  
     
Item 1A.
      29  
     
Item 2.
      30  
     
Item 6.
      31  
     
        32  
 
2

Table of Contents
PART I. FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS
MASTECH DIGITAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
(Unaudited)
 
    
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
    
2021
   
2020
   
2021
   
2020
 
Revenues
   $ 53,658     $ 47,583     $ 103,433     $ 98,008  
Cost of revenues
     39,343       34,927       76,314       72,633  
    
 
 
   
 
 
   
 
 
   
 
 
 
Gross profit
     14,315       12,656       27,119       25,375  
Selling, general and administrative expenses:
                                
Operating expenses
     10,986       9,042       21,921       19,285  
Revaluation of contingent consideration liability
     (1,982     —         (1,982     —    
    
 
 
   
 
 
   
 
 
   
 
 
 
Total selling, general and administrative expenses
     9,004       9,042       19,939       19,285  
    
 
 
   
 
 
   
 
 
   
 
 
 
Income from operations
     5,311       3,614       7,180       6,090  
Interest income (expense), net
     (159     (198     (354     (477
Other income (expense), net
     15       41       (22     94  
    
 
 
   
 
 
   
 
 
   
 
 
 
Income before income taxes
     5,167       3,457       6,804       5,707  
Income tax expense
     1,429       488       1,872       869  
    
 
 
   
 
 
   
 
 
   
 
 
 
Net income
   $ 3,738     $ 2,969     $ 4,932     $ 4,838  
    
 
 
   
 
 
   
 
 
   
 
 
 
Earnings per share:
                                
Basic
   $ .33     $ .26     $ .43     $ .43  
    
 
 
   
 
 
   
 
 
   
 
 
 
Diluted
   $ .31     $ .25     $ .41     $ .41  
    
 
 
   
 
 
   
 
 
   
 
 
 
Weighted average common shares outstanding:
                                
Basic
     11,442       11,271       11,425       11,199  
    
 
 
   
 
 
   
 
 
   
 
 
 
Diluted
     12,002       11,948       11,999       11,849  
    
 
 
   
 
 
   
 
 
   
 
 
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
 
3

Table of Contents
MASTECH DIGITAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
(Unaudited)
 
    
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
    
2021
   
2020
   
2021
   
2020
 
Net income
   $ 3,738     $ 2,969     $ 4,932     $ 4,838  
Other comprehensive income (loss):
                                
Net unrealized gain (loss) on interest-rate swap contracts
     —         26       35       (68
Foreign currency translation adjustments
     (95     (38     (114     (305
    
 
 
   
 
 
   
 
 
   
 
 
 
Total pretax net unrealized (loss)
     (95     (12     (79     (373
Income tax expense (benefit)
     —         7       9       (18
    
 
 
   
 
 
   
 
 
   
 
 
 
Total other comprehensive (loss), net of taxes
     (95     (19     (88     (355
    
 
 
   
 
 
   
 
 
   
 
 
 
Total comprehensive income
   $ 3,643     $ 2,950     $ 4,844     $ 4,483  
    
 
 
   
 
 
   
 
 
   
 
 
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
 
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MASTECH DIGITAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share data)
(Unaudited)
 
    
June 30,

2021
   
December 31,
2020
 
ASSETS
                
Current assets:
                
Cash and cash equivalents
   $ 5,302     $ 7,677  
Accounts receivable, net of allowance for uncollectible accounts of $393 in 2021 and $413 in 2020
     26,402       22,036  
Unbilled receivables
     12,182       10,098  
Prepaid and other current assets
     3,416       1,346  
    
 
 
   
 
 
 
Total current assets
     47,302       41,157  
Equipment, enterprise software, and leasehold improvements, at cost:
                
Equipment
     2,107       1,931  
Enterprise software
     2,842       2,730  
Leasehold improvements
     589       563  
    
 
 
   
 
 
 
       5,538       5,224  
Less – accumulated depreciation and amortization
     (3,651     (3,253
    
 
 
   
 
 
 
Net equipment, enterprise software, and leasehold improvements
     1,887       1,971  
Operating lease
right-of-use
assets
     5,595       3,286  
Deferred income taxes
     463       796  
Non-current
deposits
     595       396  
Goodwill, net of impairment
     32,510       32,510  
Intangible assets, net of amortization
     20,344       21,930  
    
 
 
   
 
 
 
Total assets
   $ 108,696     $ 102,046  
    
 
 
   
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
                
Current liabilities:
                
Current portion of long-term debt
   $ 4,400     $ 4,400  
Accounts payable
     4,638       2,589  
Accrued payroll and related costs
     12,461       12,374  
Current portion of operating lease liability
     1,435       1,079  
Other accrued liabilities
     789       1,051  
Deferred revenue
     437       478  
    
 
 
   
 
 
 
Total current liabilities
     24,160       21,971  
    
 
 
   
 
 
 
Long-term liabilities:
                
Long-term debt, less current portion, net
     10,716       12,875  
Contingent consideration liability
     900       2,882  
Long-term operating lease liability, less current portion
     4,419       2,325  
Long-term accrued income taxes
     165       165  
Long-term payroll tax liabilities
     2,295       2,295  
    
 
 
   
 
 
 
Total liabilities
     42,655       42,513  
Commitments and contingent liabilities (Note 6)
                
Shareholders’ equity:
                
Preferred Stock, no par value; 20,000,000 shares authorized; none outstanding
     —         —    
Common Stock, par value $.01; 250,000,000 shares authorized and 13,084,433 shares issued as of June 30, 2021 and 13,039,893 shares issued as of December 31, 2020
     131       130  
Additional
paid-in-capital
     27,172       25,509  
Retained earnings
     43,552       38,620  
Accumulated other comprehensive income (loss)
     (627     (539
Treasury stock, at cost; 1,646,420 shares as of June 30, 2021 and as of December 31, 2020
     (4,187     (4,187
    
 
 
   
 
 
 
Total shareholders’ equity
     66,041       59,533  
    
 
 
   
 
 
 
Total liabilities and shareholders’ equity
   $ 108,696     $ 102,046  
    
 
 
   
 
 
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
 
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MASTECH DIGITAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Amounts in thousands)
(Unaudited)
 
    
Common
Stock
    
Additional
Paid-in

Capital
    
Accumulated
Retained
Earnings
    
Treasury
Stock
   
Accumulated
Other
Comprehensive
Income (Loss)
   
Total
Shareholders’
Equity
 
Balances, December 31, 2020
   $ 130      $ 25,509      $ 38,620      $ (4,187   $ (539   $ 59,533  
Net income
     —          —          1,194        —         —         1,194  
Other comprehensive gain, net of taxes
     —          —          —          —         7       7  
Stock-based compensation expense
     —          621        —          —         —         621  
Stock options exercised
     —          101        —          —         —         101  
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balances, March 31, 2021
   $ 130      $ 26,231      $ 39,814      $ (4,187   $ (532   $ 61,456  
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Net income
     —          —          3,738        —         —         3,738  
Employee common stock purchases
     —          181        —          —         —         181  
Other comprehensive (loss), net of taxes
     —          —          —          —         (95     (95
Stock-based compensation expense
     —          757        —          —         —         757  
Stock options exercised
     1        3        —          —         —         4  
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balances, June 30, 2021
   $ 131      $ 27,172      $ 43,552      $ (4,187   $ (627   $ 66,041  
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
             
    
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  
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
             
Net income
     —          —          2,969        —         —         2,969  
Employee common stock purchases
     —          105        —          —         —         105  
Other comprehensive (loss), net of taxes
     —          —          —          —         (19     (19
Stock-based compensation expense
     —          612        —          —         —         612  
Stock options exercised
     2        765        —          —         —         767  
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balances, June 30, 2020
   $ 130      $ 24,432      $ 33,597      $ (4,187   $ (713   $ 53,259  
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
 
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MASTECH DIGITAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
 
    
Six Months Ended
June 30,
 
    
2021
   
2020
 
OPERATING ACTIVITIES:
                
Net income
   $ 4,932     $ 4,838  
Adjustments to reconcile net income to cash provided by (used in) operating activities:
                
Depreciation and amortization
     1,996       1,741  
Interest amortization of deferred financing costs
     41       52  
Stock-based compensation expense
     1,378       1,068  
Deferred income taxes, net
     333       (188
Revaluation of contingent consideration liability
     (1,982     —    
Operating lease assets and liabilities, net
     141       (23
Loss on disposition of fixed assets
     —         2  
Working capital items:
                
Accounts receivable and unbilled receivables
     (6,450     1,144  
Prepaid and other current assets
     (2,070     323  
Accounts payable
     2,049       (954
Accrued payroll and related costs
     87       3,209  
Other accrued liabilities
     (236     392  
Deferred revenue
     (41     (29
    
 
 
   
 
 
 
Net cash flows provided by operating activities
     178       11,575  
    
 
 
   
 
 
 
INVESTING ACTIVITIES:
                
Recovery of (payment for)
non-current
deposits
     (199     20  
Capital expenditures
     (326     (155
    
 
 
   
 
 
 
Net cash flows (used in) investing activities
     (525     (135
    
 
 
   
 
 
 
FINANCING ACTIVITIES:
                
(Repayments) borrowings on revolving credit facility, net
     —         (4,551
(Repayments) on term loan facility
     (2,200     (6,250
Proceeds from the issuance of common shares
     181       107  
Proceeds from the exercise of stock options
     105       1,321  
    
 
 
   
 
 
 
Net cash flows (used in) financing activities
     (1,914     (9,373
    
 
 
   
 
 
 
Effect of exchange rate changes on cash and cash equivalents
     (114     (305
    
 
 
   
 
 
 
Net change in cash and cash equivalents
     (2,375     1,762  
Cash and cash equivalents, beginning of period
     7,677       2,981  
    
 
 
   
 
 
 
Cash and cash equivalents, end of period
   $ 5,302     $ 4,743  
    
 
 
   
 
 
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
 
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MASTECH DIGITAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021 AND 2020
(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 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. This business 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 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 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 six months 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 of the pandemic subsides. There is, however, still uncertainty regarding the virus and the pace, nature and extent of the recovery of global markets and particular industries from the pandemic.
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, included in our Annual Report on Form
10-K
filed with the SEC on March 16, 2021. Additionally, our operating results for the three and six months ended June 30, 2021 are not necessarily indicative of the results that can be expected for the year ending December 31, 2021 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 for a more detailed discussion of our significant accounting policies and critical accounting estimates. There were no material changes to these critical accounting policies during the six months ended June 30, 2021.
 
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Table of Contents
Segment Reporting
The Company has two reportable segments, in accordance with Accounting Standards Committee (“ASC”) Topic 280 “Disclosures About Segments of an Enterprise and Related Information”: Data and Analytics Services and IT Staffing Services.
2.
Revenue from Contracts with Customers
The Company recognizes revenue on
time-and-material
contracts over time as services are performed and expenses are incurred.
Time-and-material
contracts typically bill at an agreed-upon hourly rate, plus
out-of-pocket
expense reimbursement.
Out-of-pocket
expense reimbursement amounts vary by assignment, but on average represent less than 2% of total 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.
 
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Table of Contents
The following table depicts the disaggregation of our revenues by contract type and operating segment:
 
    
Three Months Ended
June 30,
    
Six Months Ended
June 30,
 
    
2021
    
2020
    
2021
    
2020
 
    
(Amounts in thousands)
    
(Amounts in thousands)
 
Data and Analytics Services Segment
                                   
Time-and-material
Contracts
   $ 5,917      $ 3,685      $ 11,771      $ 7,812  
Fixed-price Contracts
     3,033        3,087        5,973        6,320  
    
 
 
    
 
 
    
 
 
    
 
 
 
Subtotal Data and Analytics Services
  
$
8,950
 
  
$
6,772
 
  
$
17,744
 
  
$
14,132
 
    
 
 
    
 
 
    
 
 
    
 
 
 
IT Staffing Services Segment
                                   
Time-and-material
Contracts
   $ 44,708      $ 40,811      $ 85,689      $ 83,876  
Fixed-price Contracts
     —          —          —          —    
    
 
 
    
 
 
    
 
 
    
 
 
 
Subtotal IT Staffing Services
  
$
44,708
 
  
$
40,811
 
  
$
85,689
 
  
$
83,876
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total Revenues
  
$
53,658
 
  
$
47,583
 
  
$
103,433
 
  
$
98,008
 
    
 
 
    
 
 
    
 
 
    
 
 
 
For the three months ended June 30, 2021, the Company had one client that exceeded 10% of total revenue (CGI = 14.8%). For the six months ended June 30, 2021, the Company had one client that exceeded 10% of total revenue (CGI = 14.9%). For the three months ended June 30, 2020, the Company had one client that exceeded 10% of total revenue (CGI = 15.1%). For the six months ended June 30, 2020, the Company had one client that exceeded 10% of total revenue (CGI = 13.9%).
The Company’s top ten clients represented approximately 48% and 49% of total revenues for the three months ended June 30, 2021 and 2020, respectively. For the six months ended June 30, 2021 and 2020, the Company’s top ten clients represented approximately 48% and 47% of total revenues, respectively. The following table presents our revenue from external customers disaggregated by geography, based on the work location of our customers:
 
    
Three Months Ended
June 30,
    
Six Months Ended
June 30,
 
    
2021
    
2020
    
2021
    
2020
 
    
(Amounts in thousands)
    
(Amounts in thousands)
 
United States
   $ 51,532      $ 46,777      $ 99,474      $ 96,127  
Canada
     1,018        734        2,282        1,595  
India and Other
     1,108        72        1,677        286  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total revenues
   $ 53,658      $ 47,583      $ 103,433      $ 98,008  
    
 
 
    
 
 
    
 
 
    
 
 
 
 
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.
 
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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
     —    
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. During the three month period ended June 30, 2021, the Company revalued the contingent consideration liability related to the AmberLeaf acquisition after determining that relevant conditions for payment of such liabilities were unlikely to be fully satisfied. The revaluation resulted in a $2.0 million reduction to the contingent consideration liability.
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 and six month periods ended June 30, 2021 and 2020.
Included in the Condensed Statement of Operations for the three and six month periods ended June 30, 2021 are revenues of $1.9 million and $3.8 million, respectively, and net income of approximately $0.1 million and breakeven (excluding the impact of the contingent consideration revaluation), respectively, applicable to the AmberLeaf operations acquired on October 1, 2020.
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Table of Contents
The following reflects the Company’s unaudited pro forma results had the results of AmberLeaf been included for all periods presented:
 
    
Three Months Ended June 30,
    
Six Months Ended June 30,
 
    
2021
Actual
    
2020
Pro Forma
    
2021
Actual
    
2020
Pro Forma
 
(Amounts in thousands, except per share data)
                                   
Revenue
   $  53,658      $ 50,217      $ 103,433      $ 103,851  
Net income
   $  3,738      $ 3,245      $ 4,932      $ 5,582  
Earnings per share—diluted
   $ .31      $ .27      $ .41      $ .47  
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
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. 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 June 30, 2021 and December 31, 2020:
 
    
As of June 30, 2021
 
(Amounts in thousands)
  
Amortization
Period (In Years)
    
Gross Carrying
Value
    
Accumulative
Amortization
    
Net Carrying
Value
 
IT Staffing Services:
                                   
Client relationships
     12      $ 7,999      $ 4,028      $ 3,971  
Covenant-not-to-compete
     5        319        319        —    
Trade name
     3        249        249        —    
Data and Analytics Services:
                                   
Client relationships
     12        19,641        5,684        13,957  
Covenant-not-to-compete
     5        1,201        668        533  
Trade name
     5        1,711        1,041        670  
Technology
     7        1,979        766        1,213  
             
 
 
    
 
 
    
 
 
 
Total Intangible Assets
           
$
33,099
 
  
$
12,755
 
  
$
20,344
 
             
 
 
    
 
 
    
 
 
 
   
    
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
 
             
 
 
    
 
 
    
 
 
 
 
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Amortization expense for the three and six month periods ended June 30, 2021 totaled $793,000 and $1.6 million, respectively, and is included in selling, general and administrative expenses in the Consolidated Statement of Operations. For the three and six month periods ended June 30, 2020, amortization expense was $669,000 and $1.3 million, respectively.
The estimated aggregate amortization expense for intangible assets for the years ending December 31, 2021 through 2025 is as follows:
 
    
Years Ended December 31,
 
    
2021
    
2022
    
2023
    
2024
    
2025
 
    
(Amounts in thousands)
 
Amortization expense
   $ 3,168      $ 2,987      $ 2,772      $ 2,693      $ 2,553  
 
5.
Leases
The Company
 rents certain office facilities and equipment under noncancelable operating leases. As of June 30, 2021, approximately 97,000 square feet of office space is utilized for our sales and recruiting offices, delivery centers, and corporate headquarters. All of our leases are classified as operating leases. The average initial lease term is four years. Several leases have an option to renew, at our sole discretion, for an additional term. Our present lease terms range from less than one year to 5.8 years with an average of 3.1 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:
 
    
June 30, 2021
    
December 31, 2020
 
    
( in thousands)
 
Assets:
                 
Long-term operating lease
right-of-use
assets
   $ 5,595      $ 3,286  
    
 
 
    
 
 
 
Liabilities:
                 
Short-term operating lease liability
   $ 1,435      $ 1,079  
Long-term operating lease liability
     4,419        2,325  
    
 
 
    
 
 
 
Total liabilities
   $ 5,854      $ 3,404  
    
 
 
    
 
 
 
Future minimum rental payments for office facilities and equipment under the Company’s noncancelable operating leases are as follows:
 
    
Amount as of
June 30, 2021
 
    
(in thousands)
 
2021 (For remainder of year)
   $ 795  
2022
     1,689  
2023
     1,641  
2024
     900  
2025
     630  
Thereafter
     756  
    
 
 
 
Total
     6,411  
Less: Imputed interest
     (557
    
 
 
 
Present value of operating lease liabilities
   $ 5,854  
    
 
 
 
The weighted average discount rate used to calculate the present value of future lease payments was 4.2%.
We recognize rent expense for these leases on a straight-line basis over the lease term. Rental expense for the three and six months ended June 30, 2021 totaled $0.5 million and $0.9 million, respectively. Rental expense for the three and six months ended June 30, 2020 totaled $0.4 million and $0.8 million, respectively.
 
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Total cash paid for lease liabilities for the three and six months ended June 30, 2021 totaled $0.3 million and $0.7 million, respectively. Total cash paid for lease liabilities for the three and six months ended June 30, 2020 totaled $0.4 million and $0.8 million, respectively.
New leases entered into during the three and six months ended June 30, 2021 totaled $2.8 million and $3.1 million, respectively. New leases entered into during the three and six months ended June 30, 2020 totaled $0 and $0.2 million, respectively.
On April 1, 2021, the Company entered into an operating lease for 35,356 square feet of office space in Chennai, India, which replaces a 19,120 square foot lease.
 
6.
Commitments and Contingencies
In the ordinary course of our business, the Company is involved in a number of lawsuits and administrative proceedings. While uncertainties are inherent in the final outcome of these matters, the Company’s management believes, after consultation with legal counsel, that the disposition of these proceedings should not have a material adverse effect on our financial position, results of operations or cash flows.
 
7.
Employee Benefit Plan
The Company provides an Employee Retirement Savings Plan (the “Retirement Plan”) under Section 401(k) of the Internal Revenue Code of 1986, as amended (the “Code”), that covers substantially all U.S. based salaried and
W-2
hourly employees. Employees may contribute a percentage of eligible compensation to the Retirement Plan, subject to certain limits under the Code. The Company did not provide for any matching contributions for the three and six month periods ended June 30, 2021 and 2020.
 
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 June 30, 2021 and June 30, 2020, the Company granted no shares under the Plan.
During the six months ended June 30, 2021, the Company granted restricted share units of 11,955 and 270,000 stock option grants at an average strike price of $17.65. During the six months ended June 30, 2020, the Company granted restricted share units of 11,475 and 800,000 stock option grants at an average strike price of $15.49. As of June 30, 2021 and December 31, 2020, there were 343,000 shares and 613,000 shares, respectively, available for grants under the Plan.
Stock-based compensation expense for the three months ended June 30, 2021 and 2020 was $757,000 and $612,000, respectively, and for the six months ended June 30, 2021 and 2020 was $1.4 million and $1.1 million. Stock-based compensation expense is included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.
During the three and six months ended June 30, 2021, the Company issued 30,239 shares, respectively, related to the vesting of restricted shares and the exercising of stock options. During the three and six months ended June 30, 2020, the Company issued 317,774 shares, respectively, related to the vesting of restricted shares and the exercising 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 Purchase Plan”). The Stock Purchase Plan is intended to meet the requirements of Section 423 of the Code and was required to be approved by the Company’s shareholders to be qualified. On May 15, 2019, the Company’s shareholders approved the Stock Purchase Plan. Under the Stock Purchase Plan, 600,000 shares of Common Stock (subject to adjustment upon certain changes in the Company’s capitalization) are available for purchase by eligible employees who become participants in the Stock Purchase Plan. The purchase price per share is 85% of the lesser of (i) the fair market value per share of Common Stock on the first day of the offering period, or (ii) the fair market value per share of Common Stock on the last day of the offering period.
The Company’s eligible full-time employees are able to contribute up to 15% of their base compensation into the employee stock purchase plan, subject to an annual limit of $25,000 per person. Employees are able to purchase Company common stock at a 15% discount to the lower of the fair market value of the Company’s common stock on the initial or final trading dates of each
six-month
offering period. Offering periods begin on January 1 and July 1 of each year. The Company uses the Black-Scholes option pricing model to determine the fair value of employee stock purchase plan share-based payments. The fair value of the
six-month
“look-back” option in the Company’s employee stock purchase plans 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.
 
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During the three months and
 
six months ended June 30, 2021 and 2020, there were
14,301
shares (the fifth offering period ended June 30, 2021) and
11,735
shares (the third offering period ended June 30, 2020) issued under the Stock Purchase Plan at a share price of $
12.71
and $
8.97
, respectively. Stock-based compensation expense related to the fifth offering period totaled $
81,000
and stock-based compensation expense related to the third offering period totaled $
37,000
and is included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations for the six months ended June 30, 2021 and 2020. At June 30, 2021, there were
524,740
shares available for grants under the 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 million, consisting of (i) a revolving credit facility (the “Revolver”) in an aggregate principal amount not to exceed $30 million (subject to increase by up to an additional $15 million upon satisfaction of certain conditions) and; (ii) a $17.5 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 Exhibit 10.2 to the Form
8-K/A
filed with the SEC on October 7, 2020.
The Revolver expires in October 2023 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. 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 (“LIBOR”), 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 is between 1.50% and 2.25% on revolver borrowings and between 2.75% and 3.50% on term loans. A 20 to
30-basis
point per annum commitment fee on the unused portion of the revolver facility is charged and due monthly in arrears. The applicable commitment fee is determined based upon the Company’s senior leverage ratio.
The Company pledged substantially all of its assets in support of the Credit Agreement. The credit agreement contains standard financial covenants, including, but not limited to, covenants related to the Company’s senior leverage ratio and fixed charge ratio (as defined under the credit agreement) and limitations on liens, indebtedness, guarantees, contingent liabilities, loans and investments, distributions, leases, asset sales, stock repurchases and mergers and acquisitions. As of June 30, 2021, 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 amendments to the Credit Agreement, the Company paid a commitment fee and incurred deferred financing costs totaling $752,000, which were capitalized and are being amortized as interest expense over the life of the facility. Deferred financing costs of $184,000 and $225,000 (net of amortization) as of June 30, 2021 and December 31, 2020, respectively, are presented as reductions in long-term debt in the Company’s Condensed Consolidated Balance Sheets.
As of June 30, 2021 and December 31, 2020, the Company had no outstanding borrowings under the Revolver and unused borrowing capacity available was approximately $26.1 million and $22.0 million, respectively. The Company’s outstanding borrowings under the term loan were $15.3 million and $17.5 million at June 30, 2021 and December 31, 2020, respectively.
 
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10.
Income Taxes
The components of income before income taxes, as shown in the accompanying Financial Statements, consisted of the following for the three and six months ended June 30, 2021 and 2020:
 
    
Three Months Ended
June 30,
    
Six Months Ended
June 30,
 
    
2021
    
2020
    
2021
    
2020
 
    
(Amounts in thousands)
    
(Amounts in thousands)
 
Income before income taxes:
                                   
Domestic
   $ 5,566      $ 3,028      $ 7,447      $ 5,353  
Foreign
     (399      429        (643      354  
    
 
 
    
 
 
    
 
 
    
 
 
 
Income before income taxes
   $ 5,167      $ 3,457      $ 6,804      $ 5,707  
    
 
 
    
 
 
    
 
 
    
 
 
 
The Company has subsidiaries organized in jurisdictions outside the United States, which generate revenues from
non-U.S.-based
clients. Additionally, these subsidiaries provide services to the Company’s U.S. parents. Accordingly, the Company allocates a portion of its income to these subsidiaries based on a “transfer pricing” model and reports such income as foreign in the above table.
The provision for income taxes, as shown in the accompanying Financial Statements, consisted of the following for the three and six months ended June 30, 2021 and 2020:
 
    
Three Months Ended
June 30,
    
Six Months Ended
June 30,
 
    
2021
    
2020
    
2021
    
2020
 
    
(Amounts in thousands)
    
(Amounts in thousands)
 
Current provision (benefit):
                                   
Federal
   $ 901      $ 186      $ 1,259      $ 514  
State
     211        86        304        186  
Foreign
     (26      229        (16      339  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total current provision (benefit)
     1,086        501        1,547        1,039  
    
 
 
    
 
 
    
 
 
    
 
 
 
Deferred provision (benefit):
                                   
Federal
     293        11        287        (93
State
     70                  68        (30
Foreign
     (57      (77      (99      (159
    
 
 
    
 
 
    
 
 
    
 
 
 
Total deferred provision (benefit)
     306        (66      256        (282
    
 
 
    
 
 
    
 
 
    
 
 
 
Change in valuation allowance
     37        53        69        112  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total provision for income taxes
   $ 1,429      $ 488      $ 1,872      $ 869  
    
 
 
    
 
 
    
 
 
    
 
 
 
The reconciliation of income taxes computed using the statutory U.S. income tax rate and the provision for income taxes for the three and six months ended June 30, 2021 and 2020 were as follows (amounts in thousands):
 
    
Three Months Ended
June 30, 2021
   
Three Months Ended
June 30, 2020
 
Income taxes computed at the federal statutory rate
   $ 1,085        21.0   $ 725        21.0
State income taxes, net of federal tax benefit
     277        5.4       220        6.3  
Excess tax benefit from stock options/restricted shares
     19        0.4       (582      (16.8
Difference in income tax rate on foreign earnings/other
     11        0.2       72        2.1  
Change in valuation allowance
     37        0.7       53        1.5  
    
 
 
    
 
 
   
 
 
    
 
 
 
     $ 1,429        27.7   $ 488        14.1
    
 
 
    
 
 
   
 
 
    
 
 
 
     
    
Six Months Ended
June 30, 2021
   
Six Months Ended
June 30, 2020
 
Income taxes computed at the federal statutory rate
   $ 1,429        21.0   $ 1,198        21.0
State income taxes, net of federal tax benefit
     381        5.6       356        6.2  
 
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Table of Contents
    
Three Months Ended
June 30, 2021
   
Three Months Ended
June 30, 2020
 
Excess tax benefit from stock options/restricted shares
     (48      (0.7     (925      (16.2
Difference in income tax rate on foreign earnings/other
     41        0.6       128        2.2  
Change in valuation allowance
     69        1.0       112        2.0  
    
 
 
    
 
 
   
 
 
    
 
 
 
     $ 1,872        27.5   $ 869        15.2
    
 
 
    
 
 
   
 
 
    
 
 
 
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 of future profitability; the duration of statutory carry-forward periods and tax planning alternatives. At June 30, 2021, our valuation allowance was comprised of balances within locations of Singapore and the United Kingdom. The valuation allowance balances at these locations totaled $248,000 and $179,000 as of June 30, 2021 and December 31, 2020, respectively, and reflect net operating losses which may not be realizable in the future.
The Company’s 2018 tax return is currently being audited by the IRS. 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.
 
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 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 $0 and $8.1 million at June 30, 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 recognized on the balance sheet at fair value. The effective portion of the changes in fair value on these instruments is recorded in other comprehensive income (loss) and is reclassified into the Consolidated Statements of Operations as interest expense in the same period in which the underlying hedge transaction affects 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 the interest-rate swap contracts at June 30, 2021 and December 31, 2020 was $0 and a liability of $35,000, respectively, and is reflected in the Consolidated Balance Sheets as other current liabilities.
The effect of derivative instruments on the Condensed Consolidated Statements of Operations and Comprehensive Income are as follows (in thousands):
 
Derivatives in ASC Topic 815 Cash Flow Hedging
Relationships
  
Amount of
Gain / (Loss)
recognized in
OCI on
Derivatives
   
Location of
Gain / (Loss)
reclassified from
Accumulated
OCI to
Income
(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 June 30, 2021:
                                          
Interest-Rate Swap Contract
   $          Interest Expense      $          Interest Expense      $     
For the Six Months Ended June 30, 2021:
                                          
Interest-Rate Swap Contract
   $ 35       Interest Expense      $ 34       Interest Expense      $     
For the Three Months Ended June 30, 2020:
                                          
Interest-Rate Swap Contract
   $ 26       Interest Expense      $ (34     Interest Expense      $     
For the Six Months Ended June 30, 2020:
                                          
Interest-Rate Swap Contract
   $ (68     Interest Expense      $ (42     Interest Expense      $     
 
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Information on the location and amounts of derivative fair values in the Condensed Consolidated Balance Sheets (in thousands):
 
    
June 30, 2021
    
December 31, 2020
 
Derivative Instruments
  
Balance Sheet Location
  
Fair Value
    
Balance Sheet Location
  
Fair Value
 
Interest-Rate Swap Contracts
   Other Current
Liabilities
   $         Other Current
Liabilities
   $ 35  
The estimated amount of pretax expense as of June 30, 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.
At June 30, 2021 and December 31, 2020, the Company carried the following financial assets (liabilities) at fair value measured on a recurring basis (in thousands):
 
    
Fair Value as of June 30, 2021
 
(Amounts in thousands)
  
Level 1
    
Level 2
    
Level 3
    
Total
 
Interest-Rate Swap Contracts
   $ —        $ —        $ —        $ —    
Contingent
C
onsideration
L
iabilities
   $ —        $ —        $ (900    $ (900
    
 
 
    
 
 
    
 
 
    
 
 
 
   
    
Fair Value as of December 31, 2020
 
(Amounts in thousands)
  
Level 1
    
Level 2
    
Level 3
    
Total
 
Interest-Rate Swap Contracts
   $ —        $ (35    $ —        $ (35
Contingent
C
onsideration
L
iabilities
   $ —        $ —        $ (2,882    $ (2,882
    
 
 
    
 
 
    
 
 
    
 
 
 
The fair value of interest-rate swap contracts are based on quoted prices for similar instruments from a commercial bank, and therefore, the fair value measurement is considered to be within Level 2.
The fair value of the contingent consideration liability was estimated by utilizing a probability weighted simulation model to determine the fair value of contingent consideration, and therefore, the fair value measurement is considered to be within Level 3.
In 2020, the Company incurred a $2.9 million contingent consideration liability related to the AmberLeaf acquisition. During the three months ended June 30, 2021, the Company revalued the contingent consideration liability related to the AmberLeaf acquisition after determining that relevant conditions for payment of such liabilities were unlikely to be fully satisfied. The revaluation resulted in a $2.0 million reduction to the contingent consideration liability.
The following table provides information regarding changes in the Company’s contingent consideration liability for the periods ended June 30, 2021 and December 31, 2020.
 
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Six Months Ended

June 30, 2021
    
Twelve Months Ended

December 31, 2020
 
    
(Amounts in thousands)
 
Beginning balance
   $ 2,882      $     
Contingent consideration liability incurred
               2,882  
Payments made