Table of Contents
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices) |
(Zip Code) |
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered | ||
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
| ☒ | Smaller reporting company | |||||
| Emerging growth company | ||||||
Table of Contents
MASTECH DIGITAL, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2023
TABLE OF CONTENTS
| Page | ||||||||
| PART 1 |
3 | |||||||
| Item 1. |
3 | |||||||
| (a) |
3 | |||||||
| (b) |
4 | |||||||
| (c) |
Condensed Consolidated Balance Sheets (Unaudited) as of September 30, 2023 and December 31, 2022 |
5 | ||||||
| (d) |
6 | |||||||
| (e) |
7 | |||||||
| (f) |
Notes to Condensed Consolidated Financial Statements (Unaudited) |
8 | ||||||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
19 | ||||||
| Item 3. |
27 | |||||||
| Item 4. |
27 | |||||||
| PART II |
28 | |||||||
| Item 1. |
28 | |||||||
| Item 1A. |
28 | |||||||
| Item 2. |
28 | |||||||
| Item 6. |
29 | |||||||
| 30 | ||||||||
2
Table of Contents
ITEM 1. |
FINANCIAL STATEMENTS |
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2023 |
2022 |
2023 |
2022 |
|||||||||||||
Revenues |
$ | $ | $ | $ | ||||||||||||
Cost of revenues |
||||||||||||||||
Gross profit |
||||||||||||||||
Selling, general and administrative expenses: |
||||||||||||||||
Operating expenses |
||||||||||||||||
Employment-related claim, net of recoveries |
||||||||||||||||
Total selling, general and administrative expenses |
||||||||||||||||
Income (loss) from operations |
( |
) | ( |
) | ||||||||||||
Interest income (expense), net |
( |
) | ( |
) | ||||||||||||
Other income (expense), net |
( |
) | ||||||||||||||
Income (loss) before income taxes |
( |
) | ||||||||||||||
Income tax expense (benefit) |
( |
) | ||||||||||||||
Net income (loss) |
$ | $ | $ | ( |
) | $ | ||||||||||
Earnings (loss) per share: |
||||||||||||||||
Basic |
$ | $ | $ | ( |
) | $ | ||||||||||
Diluted |
$ | $ | $ | ( |
) | $ | ||||||||||
Weighted average common shares outstanding: |
||||||||||||||||
Basic |
||||||||||||||||
Diluted |
||||||||||||||||
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2023 |
2022 |
2023 |
2022 |
|||||||||||||
| Net income (loss) |
$ | $ | $ | ( |
) | $ | ||||||||||
| Other comprehensive income (loss): |
||||||||||||||||
| Foreign currency translation adjustments |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total other comprehensive gain (loss), net of taxes |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total comprehensive income (loss) |
$ | $ | $ | ( |
) | $ | ||||||||||
| |
|
|
|
|
|
|
|
|||||||||
September 30, 2023 |
December 31, 2022 |
|||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | $ | ||||||
Accounts receivable, net of allowance for uncollectible accounts of $ |
||||||||
Unbilled receivables |
||||||||
Insurance recovery |
||||||||
Prepaid and other current assets |
||||||||
Total current assets |
||||||||
Equipment, enterprise software, and leasehold improvements, at cost: |
||||||||
Equipment |
||||||||
Enterprise software |
||||||||
Leasehold improvements |
||||||||
Less – accumulated depreciation and amortization |
( |
) | ( |
) | ||||
Net equipment, enterprise software, and leasehold improvements |
||||||||
Operating lease right-of-use |
||||||||
Deferred financing costs, net |
||||||||
Non-current deposits |
||||||||
Goodwill, net of impairment |
||||||||
Intangible assets, net of amortization |
||||||||
Total assets |
$ | $ | ||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
Current liabilities: |
||||||||
Current portion of long-term debt |
$ | $ | ||||||
Accounts payable |
||||||||
Accrued payroll and related costs |
||||||||
Current portion of operating lease liability |
||||||||
Other accrued liabilities |
||||||||
Deferred revenue |
||||||||
Total current liabilities |
||||||||
Long-term liabilities: |
||||||||
Long-term operating lease liability, less current portion |
||||||||
Long-term accrued income taxes |
||||||||
Deferred income taxes |
||||||||
Total liabilities |
||||||||
Commitments and contingent liabilities (Note 5) |
||||||||
Shareholders’ equity: |
||||||||
Preferred Stock, |
||||||||
Common Stock, par value $ |
||||||||
Additional paid-in-capital |
||||||||
Retained earnings |
||||||||
Accumulated other comprehensive income (loss) |
( |
) | ( |
) | ||||
Treasury stock, at cost; |
( |
) | ( |
) | ||||
Total shareholders’ equity |
||||||||
Total liabilities and shareholders’ equity |
$ | $ | ||||||
Common Stock |
Additional Paid-in Capital |
Accumulated Retained Earnings |
Treasury Stock |
Accumulated Other Comprehensive Income (Loss) |
Total Shareholders’ Equity |
|||||||||||||||||||
Balances, December 31, 2022 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||
Net income |
— | — | — | — | ||||||||||||||||||||
Other comprehensive gain, net of taxes |
— | — | — | — | ||||||||||||||||||||
Stock-based compensation expense |
— | — | — | — | ||||||||||||||||||||
Balances, March 31, 2023 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||
Net (loss) |
— | — | ( |
) | — | — | ( |
) | ||||||||||||||||
Employee common stock purchases |
— | — | — | — | ||||||||||||||||||||
Other comprehensive (loss), net of taxes |
— | — | — | — | ( |
) | ( |
) | ||||||||||||||||
Stock-based compensation expense |
— | — | — | — | ||||||||||||||||||||
Shares repurchased |
— | — | — | ( |
) | — | ( |
) | ||||||||||||||||
Balances, June 30, 2023 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||
Net income |
— | — | — | — | ||||||||||||||||||||
Other comprehensive (loss), net of taxes |
— | — | — | — | ( |
) | ( |
) | ||||||||||||||||
Stock-based compensation expense |
— | — | — | — | ||||||||||||||||||||
Balances, September 30, 2023 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||
Common Stock |
Additional Paid-in Capital |
Accumulated Retained Earnings |
Treasury Stock |
Accumulated Other Comprehensive Income (Loss) |
Total Shareholders’ Equity |
|||||||||||||||||||
Balances, December 31, 2021 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||
Net income |
— | — | — | — | ||||||||||||||||||||
Other comprehensive (loss), net of taxes |
— | — | — | — | ( |
) | ( |
) | ||||||||||||||||
Stock-based compensation expense |
— | — | — | — | ||||||||||||||||||||
Stock options exercised |
— | — | — | |||||||||||||||||||||
Balances, March 31, 2022 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||
Net income |
— | — | — | — | ||||||||||||||||||||
Employee common stock purchases |
— | — | — | — | ||||||||||||||||||||
Other comprehensive (loss), net of taxes |
— | — | — | — | ( |
) | ( |
) | ||||||||||||||||
Stock-based compensation expense |
— | — | — | — | ||||||||||||||||||||
Stock options exercised |
— | — | — | — | ||||||||||||||||||||
Balances, June 30, 2022 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||
Net income |
— | — | — | — | ||||||||||||||||||||
Employee common stock purchases |
— | ( |
) | — | — | — | ( |
) | ||||||||||||||||
Other comprehensive (loss), net of taxes |
— | — | — | — | ( |
) | ( |
) | ||||||||||||||||
Stock-based compensation expense |
— | — | — | — | ||||||||||||||||||||
Balances, September 30, 2022 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||
Nine Months Ended September 30, |
||||||||
2023 |
2022 |
|||||||
OPERATING ACTIVITIES: |
||||||||
Net income (loss) |
$ | ( |
) | $ | ||||
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: |
||||||||
Depreciation and amortization |
||||||||
Bad debt expense |
||||||||
Interest amortization of deferred financing costs |
||||||||
Stock-based compensation expense |
||||||||
Deferred income taxes, net |
( |
) | ||||||
Operating lease assets and liabilities, net |
( |
) | ||||||
Loss on disposition of fixed assets |
||||||||
Long term accrued income taxes |
( |
) | ( |
) | ||||
Working capital items: |
||||||||
Accounts receivable and unbilled receivables |
( |
) | ||||||
Insurance recovery |
( |
) | ||||||
Prepaid and other current assets |
( |
) | ||||||
Accounts payable |
||||||||
Accrued payroll and related costs |
||||||||
Other accrued liabilities |
( |
) | ( |
) | ||||
Deferred revenue |
||||||||
Net cash flows provided by (used in) operating activities |
||||||||
INVESTING ACTIVITIES: |
||||||||
Recovery of (payment for) non-current deposits |
||||||||
Capital expenditures |
( |
) | ( |
) | ||||
Net cash flows provided by (used in) investing activities |
( |
) | ( |
) | ||||
FINANCING ACTIVITIES: |
||||||||
(Repayments) on term loan facility |
( |
) | ( |
) | ||||
Proceeds from the issuance of common shares |
||||||||
Purchase of treasury stock |
( |
) | ||||||
Proceeds from the exercise of stock options |
||||||||
Net cash flows provided by (used in) financing activities |
( |
) | ( |
) | ||||
Effect of exchange rate changes on cash and cash equivalents |
( |
) | ( |
) | ||||
Net change in cash and cash equivalents |
( |
) | ||||||
Cash and cash equivalents, beginning of period |
||||||||
Cash and cash equivalents, end of period |
$ | $ | ||||||
1. |
Description of Business and Basis of Presentation: |
2. |
Revenue from Contracts with Customers |
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2023 |
2022 |
2023 |
2022 |
|||||||||||||
(Amounts in thousands) |
(Amounts in thousands) |
|||||||||||||||
Data and Analytics Services Segment |
||||||||||||||||
Time-and-material |
$ | $ | $ | $ | ||||||||||||
Fixed-price Contracts |
||||||||||||||||
Subtotal Data and Analytics Services |
$ |
$ |
$ |
$ |
||||||||||||
IT Staffing Services Segment |
||||||||||||||||
Time-and-material |
$ | $ | $ | $ | ||||||||||||
Fixed-price Contracts |
||||||||||||||||
Subtotal IT Staffing Services |
$ |
$ |
$ |
$ |
||||||||||||
Total Revenues |
$ |
$ |
$ |
$ |
||||||||||||
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2023 |
2022 |
2023 |
2022 |
|||||||||||||
(Amounts in thousands) |
(Amounts in thousands) |
|||||||||||||||
United States |
$ | $ | $ | $ | ||||||||||||
Canada |
||||||||||||||||
India and Other |
||||||||||||||||
Total revenues |
$ |
$ |
$ |
$ |
||||||||||||
3. |
Goodwill and Other Intangible Assets, net |
As of September 30, 2023 |
||||||||||||||||
(Amounts in thousands) |
Amortization Period (In Years) |
Gross Carrying Value |
Accumulative Amortization |
Net Carrying Value |
||||||||||||
IT Staffing Services: |
||||||||||||||||
Client relationships |
$ | $ | $ | |||||||||||||
Covenant-not-to-compete |
||||||||||||||||
Trade name |
||||||||||||||||
Data and Analytics Services: |
||||||||||||||||
Client relationships |
||||||||||||||||
Covenant-not-to-compete |
||||||||||||||||
Trade name |
||||||||||||||||
Technology |
||||||||||||||||
Total Intangible Assets |
$ |
$ |
$ |
|||||||||||||
As of December 31, 2022 |
||||||||||||||||
(Amounts in thousands) |
Amortization Period (In Years) |
Gross Carrying Value |
Accumulative Amortization |
Net Carrying Value |
||||||||||||
IT Staffing Services: |
||||||||||||||||
Client relationships |
$ | $ | $ | |||||||||||||
Covenant-not-to-compete |
||||||||||||||||
Trade name |
||||||||||||||||
Data and Analytics Services: |
||||||||||||||||
Client relationships |
||||||||||||||||
Covenant-not-to-compete |
||||||||||||||||
Trade name |
||||||||||||||||
Technology |
||||||||||||||||
Total Intangible Assets |
$ |
$ |
$ |
|||||||||||||
Years Ended December 31, |
||||||||||||||||||||
2023 |
2024 |
2025 |
2026 |
2027 |
||||||||||||||||
(Amounts in thousands) |
||||||||||||||||||||
Amortization expense |
$ | $ | $ | $ | $ | |||||||||||||||
4. |
Leases |
September 30, 2023 |
December 31, 2022 |
|||||||
(in thousands) |
||||||||
Assets: |
||||||||
Long-term operating lease right-of-use |
$ | $ | ||||||
Liabilities: |
||||||||
Short-term operating lease liability |
$ | $ | ||||||
Long-term operating lease liability |
||||||||
Total Liabilities |
$ | $ | ||||||
Amount as of September 30, 2023 |
||||
(in thousands) |
||||
2023 (for remainder of year) |
$ | |||
2024 |
||||
2025 |
||||
2026 |
||||
2027 |
||||
Thereafter |
||||
Total |
$ | |||
Less: Imputed interest |
( |
) | ||
Present value of operating lease liabilities |
$ | |||
5. |
Commitments and Contingencies |
6. |
Employee Benefit Plan |
7. |
Stock-Based Compensation |
8. |
Credit Facility |
9. |
Income Taxes |
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2023 |
2022 |
2023 |
2022 |
|||||||||||||
(Amounts in thousands) |
(Amounts in thousands) |
|||||||||||||||
Income (loss) before income taxes: |
||||||||||||||||
Domestic |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
Foreign |
( |
) | ( |
) | ||||||||||||
Income (loss) before income taxes |
$ | $ | $ | ( |
) | $ | ||||||||||
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2023 |
2022 |
2023 |
2022 |
|||||||||||||
(Amounts in thousands) |
(Amounts in thousands) |
|||||||||||||||
Current provision (benefit): |
||||||||||||||||
Federal |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
State |
( |
) | ||||||||||||||
Foreign |
( |
) | ( |
) | ||||||||||||
Total current provision (benefit) |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
Deferred provision (benefit): |
||||||||||||||||
Federal |
( |
) | ||||||||||||||
State |
( |
) | ( |
) | ||||||||||||
Foreign |
( |
) | ( |
) | ||||||||||||
Total deferred provision (benefit) |
( |
) | ( |
) | ||||||||||||
Change in valuation allowance |
( |
) | ||||||||||||||
Total provision (benefit) for income taxes |
$ | $ | $ | ( |
) | $ | ||||||||||
Three Months Ended September 30, 2023 |
Three Months Ended September 30, 2022 |
|||||||||||||||
Income taxes computed at the federal statutory rate |
$ | % | $ | % | ||||||||||||
State income taxes, net of federal tax benefit |
( |
) | ( |
) | ||||||||||||
Excess tax expense (benefit) from stock options/restricted shares |
||||||||||||||||
Difference in income tax rate on foreign earnings/other |
( |
) | ( |
) | ||||||||||||
Change in valuation allowance |
( |
) | ( |
) | ||||||||||||
| $ | % | $ | % | |||||||||||||
Nine Months Ended September 30, 2023 |
Nine Months Ended September 30, 2022 |
|||||||||||||||
Income taxes computed at the federal statutory rate |
$ | ( |
) | ( |
)% | $ | % | |||||||||
State income taxes, net of federal tax benefit |
( |
) | ( |
) | ||||||||||||
Excess tax expense (benefit) from stock options/restricted shares |
||||||||||||||||
Difference in income tax rate on foreign earnings/other |
||||||||||||||||
Change in valuation allowance |
||||||||||||||||
| $ | ( |
) | ( |
)% | $ | % | ||||||||||
10. |
Shareholders’ Equity |
11. |
Earnings (Loss) Per Share |
12. |
Business Segments and Geographic Information |
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2023 |
2022 |
2023 |
2022 |
|||||||||||||
(Amounts in thousands) |
(Amounts in thousands) |
|||||||||||||||
Revenues: |
||||||||||||||||
Data and Analytics Services |
$ | $ | $ | $ | ||||||||||||
IT Staffing Services |
||||||||||||||||
Total revenues |
$ | $ | $ | $ | ||||||||||||
Gross Margin %: |
||||||||||||||||
Data and Analytics Services |
% | % | % | % | ||||||||||||
IT Staffing Services |
% | % | % | % | ||||||||||||
Total gross margin % |
% | % | % | % | ||||||||||||
Segment operating income (loss): |
||||||||||||||||
Data and Analytics Services |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
IT Staffing Services |
||||||||||||||||
Subtotal |
||||||||||||||||
Amortization of acquired intangible assets |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
Employment-related claim, net of recoveries |
( |
) | ||||||||||||||
Reserve for cyber-security breach |
( |
) | ( |
) | ||||||||||||
Severance expense |
( |
) | ( |
) | ||||||||||||
Interest expenses, FX gains/losses and other, net |
||||||||||||||||
Income (loss) before income taxes |
$ | $ | $ | ( |
) | $ | ||||||||||
September 30, 2023 |
December 31, 2022 |
|||||||
(Amounts in thousands) |
||||||||
Total assets: |
||||||||
Data and Analytics Services |
$ | $ | ||||||
IT Staffing Services |
||||||||
Total assets |
$ | $ | ||||||
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2023 |
2022 |
2023 |
2022 |
|||||||||||||
(Amounts in thousands) |
(Amounts in thousands) |
|||||||||||||||
United States |
$ | $ | $ | $ | ||||||||||||
Canada |
||||||||||||||||
India and Other |
||||||||||||||||
Total revenues |
$ | $ | $ | $ | ||||||||||||
13. |
Recently Issued Accounting Standards |
Table of Contents
| 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, 2022, included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on March 27, 2023.
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, 2022. 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.
Website Access to SEC Reports:
The Company’s website is www.mastechdigital.com. The Company’s Annual Report on Form 10-K for the year ended December 31, 2022, current reports on Form 8-K and all other reports filed with the SEC, are available free of charge on the Investors page. The website is updated as soon as reasonably practical after such reports are filed electronically with the SEC.
Critical Accounting Policies
Please refer to Note 1 “Summary of Significant Accounting Policies” of the Consolidated Financial Statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations–Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2022 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 nine months ended September 30, 2023.
Employment-Related Claims Against the Company
In December 2022, the Company received a demand letter from the attorney of a former employee who resigned from his employment with the Company in November 2022. Among other allegations in the letter, this former employee has asserted various employment-related claims against the Company, including a claim of wrongful termination. For the three and nine months ended September 30, 2023, the Company incurred $225,000 and $1.2 million, respectively, of professional service fees related to this matter. Additionally, the Company recorded a $3.1 million loss reserve, net of recoveries in the second quarter of 2023, with respect to an estimated settlement. During the third quarter, we settled this claim and, under the terms of the settlement agreement with this former employee, we paid the settlement amount. The exact terms of the settlement agreement are to remain confidential; however, the settlement amount, net of expected recoveries, was fully reserved in the second quarter of 2023 and is included in Selling, General and Administrative expenses in the Condensed Consolidated Statement of Operations included in this quarterly report on Form 10-Q.
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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 data and analytics 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 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 and extensions 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. 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 during the period from 2010 through 2019, activity levels improved. However, as the recovery strengthened, we experienced 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 starting 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. In 2021, we were encouraged by the global rollout of vaccination programs and signs of economic improvement, however, the proliferation of COVID-19 variants has caused further uncertainty and disruption in the global markets. In 2022, COVID-19-related concerns seemed to subside, however, increased inflation, expanding interest rates and concerns about a possible recession created much uncertainty and adversely impacted demand for our services in the second half of the year. During the first nine months of 2023, economic uncertainty continued to impact our businesses, particularly in our IT Staffing Services segment, as we experienced reduced demand from our clients and prospective clients, largely in the financial services industry. Additionally, it is difficult to predict the impact or duration that these economic pressures may have on our businesses and results of operations in future quarters.
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In addition to tracking general economic conditions in the markets that we service, a large portion of our revenues is generated from a limited number of clients (see Item 1A, the Risk Factor entitled “Our revenues are highly concentrated, and the loss of a significant client would adversely affect our business and revenues” in our Annual Report on Form 10-K for the year ended December 31, 2022). Accordingly, our trends and outlook are additionally impacted by the prospects and well-being of these specific clients. This “account concentration” factor may result in our results of operations deviating from the prevailing economic trends from time to time.
Within our IT Staffing Services segment, a larger portion of our revenues has come from strategic relationships with systems integrators and other staffing organizations. Additionally, many large end users of IT staffing services are employing managed service providers to manage their contractor spending. Both of these dynamics may pressure our staffing gross margins in the future.
Recent growth in advanced technologies (social, cloud, analytics, mobility, automation) is providing opportunities within our IT Staffing Services segment. However, supply side challenges have proven to be acute with respect to many of these technologies. We believe these challenges will remain in the remainder of 2023 and likely into 2024.
Within our Data and Analytics Services segment, many customers are satisfying their data and analytics needs using a holistic approach. This often results in the customer using one vendor partner rather than multiple vendors. We have responded to this trend by establishing a service offering called “Center of Excellence,” which bundles a customer’s total requirements under a multi-year contract. This concept allows us to better understand the customer’s longer-term strategy with respect to data and analytics and effectively address such needs.
Results of Operations for the Three Months Ended September 30, 2023 as Compared to the Three Months Ended September 30, 2022:
Revenues:
Revenues for the three months ended September 30, 2023 totaled $47.8 million, compared to $63.2 million for the corresponding three-month period in 2022. This 24% year-over-year revenue decline reflected a 20% decrease in our Data and Analytics Services segment and a 25% decline in our IT Staffing Services segment. For the three months ended September 30, 2023, the Company had one client that had revenues in excess of 10% of total revenues (CGI = 21.1%). For the three months ended September 30, 2022, the Company had the same one client that had revenues in excess of 10% of total revenues (CGI = 23.7%). The Company’s top ten clients represented approximately 52% and 54% of total revenues for the three months ended September 30, 2023 and 2022, respectively.
Below is a tabular presentation of revenues by reportable segment for the three months ended September 30, 2023 and 2022, respectively:
| Revenues (Amounts in millions) |
Three Months Ended September 30, 2023 |
Three Months Ended September 30, 2022 |
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| Data and Analytics Services |
$ | 8.0 | $ | 10.1 | ||||
| IT Staffing Services |
39.8 | 53.1 | ||||||
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| Total revenues |
$ | 47.8 | $ | 63.2 | ||||
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Revenues from our Data and Analytics Services segment totaled $8.0 million in the quarter ended September 30, 2023, compared to $10.1 million in the corresponding quarter last year. This year-over-year decline of 20% reflected client spending reductions on several existing projects and assignment delays with respect to new orders. New bookings in the third quarter of 2023 totaled $5.1 million, which were significantly below second quarter 2023 bookings due to award delays on assignments in which we received verbal commitments from the client.
Revenues from our IT Staffing Services segment totaled $39.8 million in the three months ended September 30, 2023, compared to $53.1 million during the corresponding 2022 period. This 25% year-over-year decrease reflected lower demand for our services, particularly with respect to financial services clients. Our financial services consultant base decreased from approximately 53% at December 31, 2022 to 44% at September 30, 2023. Total billable consultants declined by 49 during the 2023 third quarter compared to a decline of 83 in the 2023 second quarter. While this quarterly decline in billable headcount is a significant improvement from the previous quarter, it still had a negative impact on our revenue performance compared to the corresponding quarter of 2022. Billable consultants at September 30, 2023 totaled 992-consultants compared to 1,307-consultants one year earlier. Our average bill rate during the third quarter of 2023 was $80.96 per hour compared to $81.60 per hour in the third quarter of last year. This decrease in average bill rate was due to lower rates on new assignments during the 2023 period and was reflective of the types of skill sets that we deployed. Permanent placements / fee revenues were approximately $0.2 million during the 2023 third quarter compared to $0.5 million in the corresponding quarter of 2022.
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Gross Margins:
Gross profits in the third quarter of 2023 totaled $12.6 million, compared to $16.3 million in the third quarter of 2022. Gross profit as a percentage of revenue was 26.3% for the three-month period ended September 30, 2023, compared to 25.8% during the same period of 2022. This 50-basis point increase related to improved utilization in the Data and Analytics Services segment.
Below is a tabular presentation of gross margin by reporting segment for the three months ended September 30, 2023 and 2022, respectively:
| Gross Margin |
Three Months Ended September 30, 2023 |
Three Months Ended September 30, 2022 |
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| Data and Analytics Services |
45.8 | % | 39.6 | % | ||||
| IT Staffing Services |
22.4 | 23.2 | ||||||
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| Total gross margin |
26.3 | % | 25.8 | % | ||||
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Gross margins from our Data and Analytics Services segment were 45.8% of revenues during the third quarter of 2023, compared to 39.6% of revenues during the third quarter of 2022. The margin improvement reflected higher utilization in the 2023 period. In the third quarter of 2022, we did not fully deploy our billable resources, which negatively impacted utilization. Additionally, we incurred a project cost-over-run of $0.3 million on a fixed priced assignment during the 2022 period.
Gross margins from our IT Staffing Services segment were 22.4% in the third quarter of 2023, compared to 23.2% during the corresponding quarter of 2022. This 80-basis point decline was largely due to lower permanent placement fees and higher medical claims related to our self-insured healthcare program.
Selling, General and Administrative (“SG&A”) Expenses:
Below is a tabular presentation of operating expenses by expense category for the three months ended September 30, 2023 and 2022, respectively:
| SG&A Expenses (Amounts in millions) | Three Months Ended September 30, 2023 |
Three Months Ended September 30, 2022 |
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| Data and Analytics Services Segment |
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| Sales and Marketing |
$ | 1.8 | $ | 1.0 | ||||
| Operations |
0.3 | 0.6 | ||||||
| General & Administrative |
2.4 | 1.6 | ||||||
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| Subtotal Data and Analytics Services |
$ | 4.5 | $ | 3.2 | ||||
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| SG&A Expenses (Amounts in millions) |
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| IT Staffing Services Segment |
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| Sales and Marketing |
$ | 2.0 | $ | 2.4 | ||||
| Operations |
2.1 | 2.7 | ||||||
| General & Administrative |
3.3 | 3.3 | ||||||
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| Subtotal IT Staffing Services |
$ | 7.4 | $ | 8.4 | ||||
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| Amortization of Acquired Intangible Assets |
$ | 0.7 | $ | 0.8 | ||||
| Reserve for cyber-security breach |
— | 0.4 | ||||||
| Severance expense |
— | 0.1 | ||||||
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| Total SG&A Expenses |
$ | 12.6 | $ | 12.9 | ||||
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SG&A expenses for the three months ended September 30, 2023 totaled $12.6 million or 26.4% of total revenues, compared to $12.9 million or 20.4% of total revenues for the three-months ended September 30, 2022. Excluding the amortization of acquired intangible assets in both periods and reserves for severance and a cyber-security breach in the 2022 quarter, SG&A expense as a percentage of total revenues was 25.0% and 18.4%, respectively.
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Fluctuations within SG&A expense components during the third quarter of 2023, compared to the third quarter of 2022, included the following:
| • | Sales expense increased by $0.4 million in the 2023 period compared to the corresponding 2022 period. Approximately $0.8 million related to our Data and Analytics Services segment, which reflected additional staff and higher variable compensation expense in the 2023 third quarter. Sales expense in our IT Staffing Services segment decreased by $0.4 million, largely due to lower commissions, bonuses and other variable expenses. |
| • | Operations expenses decreased by $0.9 million in the 2023 period compared to the corresponding 2022 period. Operations expenses were down $0.3 million in our Data and Analytics Services segment due to staff reductions. In our IT Staffing Services segment, operations expenses decreased by $0.6 million and reflected reductions in recruitment staff and lower variable expenses related to our lower revenues. |
| • | General and administrative expense increased by $0.8 million in the 2023 period compared to the corresponding 2022 period. General and administrative expenses in our Data and Analytics Services segment increased by $0.8 million due to higher executive leadership staff increases and higher professional service fees of $0.2 million. In our IT Staffing Services segment, general and administrative expenses were flat as higher cyber-security-related initiatives were offset by lower bonus accruals. |
| • | Amortization of acquired intangible assets was $0.7 million in the 2023 period, compared to $0.8 million in the corresponding 2022 period. |
| • | Reserve for a cyber-security breach totaled $0.4 million in the 2022 period, compared to no expense in 2023. |
| • | Severance expense associated with the closure of operations in Singapore and Ireland, and the rationalization of our cost structure in the UK totaled $0.1 million in the 2022 period, compared to no expense in 2023. |
Other Income / (Expense) Components:
Other Income / (Expense) for the three months ended September 30, 2023 consisted of interest income of $148,000 and foreign exchange gains of $55,000. For the three months ended September 30, 2022, Other Income / (Expense) consisted of interest expense of ($85,000) and foreign exchange gains of $85,000. Higher cash balances on hand, no outstanding borrowings and a stronger U.S. dollar in the 2023 quarter were responsible for the favorable year-over-year variance from the 2022 period.
Income Tax Expense (Benefit):
Income tax expense for the three months ended September 30, 2023 totaled $29,000, representing an effective tax rate on pre-tax income of 18.8% compared to $1.0 million for the three months ended September 30, 2022, which represented a 28.3% effective tax rate on pre-tax income. The higher effective tax rate in the 2022 period largely reflected an increase in our valuation allowance related to foreign net operating losses in Singapore, Ireland and the UK. Additionally, the tax rate in 2023 reflected a benefit related to an adjustment for non-deductible meals and entertainment.
Results of Operations for the Nine Months Ended September 30, 2023 as Compared to the Nine Months Ended September 30, 2022:
Revenues:
Revenues for the nine months ended September 30, 2023 totaled $155.0 million, compared to $185.0 million for the corresponding nine-month period in 2022. This 16% year-over-year revenue decline reflected a 16% decrease in our IT Staffing Services segment and a 17% decline in our Data and Analytics Services segment. For the nine months ended September 30, 2023, the Company had one client that had revenues in excess of 10% of total revenues (CGI = 23.7%). For the nine months ended September 30, 2022, the Company had the same one client that had revenues in excess of 10% of total revenues (CGI = 21.3%). The Company’s top ten clients represented approximately 54% and 53% of total revenues for the nine months ended September 30, 2023 and 2022, respectively.
Below is a tabular presentation of revenues by reportable segment for the nine months ended September 30, 2023 and 2022, respectively:
| Revenues (Amounts in millions) |
Nine Months Ended September 30, 2023 |
Nine Months Ended September 30, 2022 |
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| Data and Analytics Services |
$ | 26.2 | $ | 31.5 | ||||
| IT Staffing Services |
128.8 | 153.5 | ||||||
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| Total revenues |
$ | 155.0 | $ | 185.0 | ||||
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Revenues from our Data and Analytics Services segment totaled $26.2 million during the nine months ended September 30, 2023, compared to $31.5 million in the corresponding nine-month period last year. The 17% year-over-year decline reflected client spending reductions on several existing projects and assignment delays on new orders.
Revenues from our IT Staffing Services segment totaled $128.8 million in the nine months ended September 30, 2023, compared to $153.5 million during the corresponding 2022 period. This 16% decline largely reflected a lower level of billable consultants due to lower demand for staffing services in the 2023 period.
Gross Margins:
Gross profits in the nine months ended September 30, 2022 totaled $39.7 million, compared to $49.0 million during the corresponding 2022 period. Gross profit as a percentage of revenue was 25.6% for the nine-month period ended September 30, 2023, compared to 26.5% during the same period of 2022. This 90-basis point decline reflected lower gross margins in the IT Staffing Services segment.
Below is a tabular presentation of gross margin by reporting segment for the nine months ended September 30, 2023 and 2022, respectively:
| Gross Margin |
Nine Months Ended September 30, 2023 |
Nine Months Ended September 30, 2022 |
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| Data and Analytics Services |
43.1 | % | 42.8 | % | ||||
| IT Staffing Services |
22.0 | % | 23.1 | % | ||||
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| Total gross margin |
25.6 | % | 26.5 | % | ||||
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Gross margins from our Data and Analytics Services segment were 43.1% of revenues during the nine-month period ended September 30, 2023, compared to gross margins of 42.8% in the corresponding period of 2022. The margin improvement reflected better utilization rates during the first nine months of 2023.
Gross margins from our IT Staffing Services segment were 22.0% in the nine months ended September 30, 2023, compared to 23.1% during the corresponding period of 2022. This 110-basis point reduction was due to lower permanent placement revenues of $0.9 million (70-basis point impact of GM%) and higher medical claims related to our self-insured healthcare program in the 2023 period.
Selling, General and Administrative (“SG&A”) Expenses:
Below is a tabular presentation of operating expenses by expense category for the nine months ended September 30, 2023 and 2022, respectively:
| SG&A Expenses (Amounts in millions) | Nine Months Ended September 30, 2023 |
Nine Months Ended September 30, 2022 |
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| Data and Analytics Services Segment |
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| Sales and Marketing |
$ | 5.2 | $ | 4.7 | ||||
| Operations |
1.1 | 1.9 | ||||||
| General & Administrative |
7.4 | 4.4 | ||||||
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| Subtotal Data and Analytics Services |
$ | 13.7 | $ | 11.0 | ||||
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| IT Staffing Services Segment |
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| Sales and Marketing |
$ | 6.4 | $ | 7.3 | ||||
| Operations |
6.7 | 8.4 | ||||||
| General & Administrative |
10.0 | 9.2 | ||||||
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| Subtotal IT Staffing Services |
$ | 23.1 | $ | 24.9 | ||||
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| Amortization of Acquired Intangible Assets |
$ | 2.1 | $ | 2.4 | ||||
| Reserve for Cyber-security Breach |
— | 0.4 | ||||||
| Severance expense |
— | 0.1 | ||||||
| Employment-related Claim, net of Recoveries |
3.1 | — | ||||||
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| Total SG&A Expenses |
$ | 42.0 | $ | 38.8 | ||||
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SG&A expenses for the nine months ended September 30, 2023 totaled $42.0 million or 27.1% of total revenues, compared to $38.8 million or 21.0% of total revenues for the nine months ended September 30, 2022. Excluding the employment-related claim in 2023, the reserve for a cyber-security breach and severance expense in 2022, and the amortization of acquired intangible assets in both periods, SG&A expense as a percentage of total revenues was 23.8% and 19.4%, respectively.
Fluctuations within SG&A expense components during the first nine months of 2023, compared to the first nine months of 2022, included the following:
| • | Sales expense decreased by $0.4 million in the 2023 period compared to the corresponding 2022 period. Sales expense in our Data and Analytics Services segment increased by $0.5 million in the 2023 period and reflected lower variable compensation expense in the third quarter of 2022. Sales expense in our IT Staffing Services segment was lower by $0.9 million due to lower variable compensation and other variable expense items. |
| • | Operations expenses decreased by $2.5 million in the 2023 period, compared to the corresponding 2022 period. In our Data and Analytics Services segment operations expenses decreased by $0.8 million due to staff reductions and lower commission expense. Operations expenses in our IT Staffing Services segment declined by $1.7 million and largely related to recruitment staff reductions and lower other variable expenses. |
| • | General and administrative expense increased by $3.8 million in the 2023 period compared to the corresponding 2022 period. General and administrative expense in our Data and Analytics Services segment increased by $3.0 million due to executive leadership staff increases and higher professional services fees related to an employment claim of $1.2 million. In our IT Staffing Services segment, general and administrative expense increased by $0.8 million due to higher corporate-related expenses and an increase in cyber-security expenditures. |
| • | Amortization of acquired intangible assets was $2.1 million in 2023, compared to $2.4 million in the 2022 period. |
| • | Reserve for a cyber-security breach totaled $0.4 million in the 2022, compared to no expense in 2023. |
| • | Severance expense associated with the closure of operations in Singapore and Ireland, and the rationalization of our cost structure in the UK totaled $0.1 million in the 2022 period, compared to no expense in 2023. |
| • | Employment-related claim reserve, net of expected recoveries, totaled $3.1 million in the 2023 period, compared to no expense in the corresponding 2022 period. |
Other Income / (Expense) Components:
Other Income / (Expense) for the nine months ended September 30, 2023 consisted of interest income of $232,000 and foreign exchange losses of ($32,000). For the nine months ended September 30, 2022, Other Income / (Expense) consisted of interest expense of ($326,000) and foreign exchange gains of $334,000. Currency fluctuations, cash balances on hand and no outstanding borrowings in the 2023 period were responsible for the favorable year-over-year variance.
Income Tax Expense:
Income tax benefit for the nine months ended September 30, 2023 totaled $358,000, representing an effective tax rate on pre-tax loss of 16.7% compared to income tax expense of $3.0 million for the nine months ended September 30, 2022, which represented a 29.8% effective tax rate on pre-tax income. The higher effective tax rate in the 2022 period was due to higher state taxes and higher excess tax expense from stock options and restricted shares activity.
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Liquidity and Capital Resources:
Financial Conditions and Liquidity:
As of September 30, 2023, we had cash balances on hand of $15.9 million, no bank debt outstanding and approximately $25 million of borrowing capacity under our existing credit facility.
Historically, we have funded our organic business needs with cash generated from operating activities. Controlling our operating working capital levels by closely managing our accounts receivable balance is an important element of cash generation. As of September 30, 2023, our accounts receivable “days sales outstanding” (“DSOs”) measurement improved by 1-day to 55-days from our June 30, 2023 measurement.
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 support our share repurchase program that we announced in February 2023 over the next twelve months, exclusive of any acquisition activity.
Cash flows provided by (used in) operating activities:
Cash provided by operating activities for the nine months ended September 30, 2023 totaled $10.5 million compared to cash provided by operating activities of $7.7 million during the nine months ended September 30, 2022. Elements of cash flows in the 2023 period were net loss of ($1.8 million), non-cash charges of $5.1 million, and a decrease in operating working capital levels of $7.2 million. During the nine months ended September 30, 2022, elements of cash flows were net income of $7.2 million, non-cash charges of $5.5 million and an increase in operating working capital levels of ($5.0 million). The operating working capital decline in 2023 reflected our lower revenues and a lower DSO measurement compared to revenue growth in the 2022 period.
Cash flows (used in) investing activities:
Cash (used in) investing activities for the nine months ended September 30, 2023 was ($0.1 million) compared to ($0.8 million) for the nine months ended September 30, 2022. In 2023, capital expenditures totaled ($0.2 million), partially offset by the recovery of non-current deposits of $0.1 million. In 2022, capital expenditures accounted for nearly all of our investing activities. Capital expenditures during the 2022 period were higher than in 2023 and largely related to system upgrades and transitioning our Data and Analytics Services segment to our Oracle Cloud platform.
Cash flows (used in) financing activities:
Cash (used in) financing activities for the nine months ended September 30, 2023 totaled ($1.5 million) and consisted of ($1.1 million) of term loan repayments and the purchase of treasury shares under our share repurchase program of ($0.6 million), partially offset by $0.2 million related to proceeds from the issuance of shares of common stock under the Employee Stock Purchase Plan. Cash (used in) financing activities for the nine months ended September 30, 2022 totaled ($9.4 million) and consisted of ($10.9 million) of term loan repayments, partially offset by $1.5 million related to the issuance of common stock applicable to the Company’s Employee Stock Purchase Plan and the exercise of stock options.
Off-Balance Sheet Arrangements:
We do not have any off-balance sheet arrangements.
Inflation:
We do not believe that inflation had a significant impact on our results of operations for the periods presented, although economic uncertainty, including the concerns of our clients and other companies with respect to inflationary conditions in North America and elsewhere, has had and may continue to have an adverse impact on the demand for our services. On an ongoing basis, we attempt to minimize any effects of inflation on our operating results by controlling operating costs and, whenever possible, seek to ensure that billing rates reflect increases in costs due to inflation. However, high levels of inflation may result in higher interest rates which could increase our cost of borrowings.
In addition, refer to “Item 1A. Risk factors” in our 2022 Annual Report on Form 10-K for a discussion about risks that inflation directly or indirectly may pose to our business
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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 13 to the accompanying financial statements.
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
In addition to the inherent operational risks, the Company is exposed to certain market risks, primarily related to changes in interest rates and currency fluctuations.
Interest Rates
As of September 30, 2023, we had no outstanding borrowings under our Credit Agreement with PNC Bank — Refer to Note 8 – “Credit Facility” in the Notes to Condensed Consolidated Financial Statements, included herein.
Currency Fluctuations
The reporting currency of the Company and its subsidiaries is the U.S. dollar. The functional currency of the Company’s subsidiary in Canada is the U.S. dollar because the majority of its revenue is denominated in U.S. dollars. The functional currencies of the Company’s Indian and European subsidiaries are the local currency of the location of such subsidiary. The results of operations of the Company’s Indian and European subsidiaries are translated at the monthly average exchange rates prevailing during the period. The financial position of the Company’s Indian and European subsidiaries is translated at the current exchange rates at the end of the period, and the related translation adjustments are recorded as a component of accumulated other comprehensive income (loss) within Shareholders’ Equity. Gains and losses resulting from foreign currency transactions are included as a component of other income (expense), net in the Condensed Consolidated Statements of Operations, and have not been material for all periods presented. A hypothetical 10% increase or decrease in overall foreign currency rates in the first nine months of 2023 would not have had a material impact on our consolidated financial statements.
| ITEM 4. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of Company management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(b). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.
We do not expect that our disclosure controls and procedures will prevent all errors and all instances of fraud. Disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits must be considered relative to their costs. Because of the inherent limitations in all disclosure controls and procedures, no evaluation of disclosure controls and procedures can provide absolute assurance that we have detected all our control deficiencies and instances of fraud, if any. The design of disclosure controls and procedures also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
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Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2023 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
| ITEM 1. | LEGAL PROCEEDINGS |
In the ordinary course of our business, we are involved in a number of lawsuits and administrative proceedings. While uncertainties are inherent in the final outcome of these matters, management believes, after consultation with legal counsel, that the disposition of these proceedings should not have a material adverse effect on our financial position, results of operations or cash flows.
| ITEM 1A. | RISK FACTORS |
There have been no material changes from the risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 27, 2023.
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
A summary of our Common Stock repurchased during the quarter ended September 30, 2023 is set forth in the following table:
| Period |
Total Number of Shares Purchased (1) |
Average Price per Share (1) |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) |
Maximum Number of Shares that May Yet Be Purchased Under this Plan or Programs (1) |
||||||||||||
| July 1, 2023 — July 31, 2023 |
— | $ | — | — | 437,639 | |||||||||||
| August 1, 2023 — August 31, 2023 |
— | $ | — | — | 437,639 | |||||||||||
| September 1, 2023 — September 30, 2023 |
— | $ | — | — | 437,639 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
— | $ | — | — | 437,639 | |||||||||||
| (1) | On February 8, 2023, the Company announced that the Board of Directors authorized a share repurchase program of up to 500,000 shares of Common Stock over a two-year period. Repurchases under the program may occur from time to time in the open market, through privately negotiated transactions, through block purchases or other purchase techniques, or by any combination of such methods, and the program may be modified, suspended or terminated at any time at the discretion of the Board of Directors. The Company did not repurchase any shares of its Common Stock during the quarter ended September 30, 2023. |
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| ITEM 6. | EXHIBITS |
(a) Exhibits
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 10th day of November, 2023.
| MASTECH DIGITAL, INC. | ||||
| November 13, 2023 | /s/ VIVEK GUPTA | |||
| Vivek Gupta Chief Executive Officer | ||||
| /s/ JOHN J. CRONIN, JR. | ||||
| John J. Cronin, Jr. | ||||
| Chief Financial Officer | ||||
| (Principal Financial Officer) | ||||
30
Exhibit 31.1
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer
I, Vivek Gupta, certify that:
| 1. | I have reviewed this report on Form 10-Q of Mastech Digital, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in case of the annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| MASTECH DIGITAL, INC. | ||||||
| Date: November 13, 2023 | /S/ VIVEK GUPTA | |||||
| Vivek Gupta | ||||||
| Chief Executive Officer | ||||||
Exhibit 31.2
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer
I, John J. Cronin, Jr., certify that:
| 1. | I have reviewed this report on Form 10-Q of Mastech Digital, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in case of the annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| MASTECH DIGITAL, INC. | ||||||
| Date: November 13, 2023 | /S/ JOHN J. CRONIN, JR. | |||||
| John J. Cronin, Jr. | ||||||
| Chief Financial Officer | ||||||
Exhibit 32.1
Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Mastech Digital, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2023, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Vivek Gupta, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| /S/ VIVEK GUPTA |
| Vivek Gupta |
| Chief Executive Officer |
| Date: November 13, 2023 |
Exhibit 32.2
Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Mastech Digital, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2023, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John J. Cronin, Jr. Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| /S/ JOHN J. CRONIN, JR. |
| John J. Cronin, Jr. |
| Chief Financial Officer |
| Date: November 13, 2023 |