10-K
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10-K
10-K
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
For the fiscal year ended December 31, 2020
Commission File Number 001-34099
MASTECH DIGITAL, INC.
(Exact name of registrant as specified in its charter)
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (412)
787-2100
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol Name of exchange on which registered
Common Stock, $.01 par value MHH NYSE American
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes ☐ No ☒
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒
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, 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post 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 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 filer
☒ 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b))
by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the voting stock held by non-affiliates of the registrant as of
June 30, 2020 (based on the closing price on such stock as reported by NYSE American on such date) was $81,727,000.
The number of
shares of the registrant’s Common Stock, par value $.01 per share, outstanding as of March 1, 2021 was 11,417,953 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement, prepared for the Annual Meeting of Shareholders scheduled for May 12, 2021 to be filed
with the Commission, are incorporated by reference into Part III of this Annual Report on Form 10-K.
Table of Contents
MASTECH DIGITAL, INC.
2020 FORM 10-K
TABLE OF CONTENTS
Page
PART I
ITEM 1. BUSINESS 1
ITEM 1A. RISK FACTORS 11
ITEM 1B. UNRESOLVED STAFF COMMENTS 24
ITEM 2. PROPERTIES 24
ITEM 3. LEGAL PROCEEDINGS 25
ITEM 4. MINE SAFETY DISCLOSURES 25
PART II
ITEM 6. SELECTED FINANCIAL DATA 27
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 40
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 41
ITEM 9A. CONTROLS AND PROCEDURES 79
ITEM 9B. OTHER INFORMATION 81
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 82
ITEM 11. EXECUTIVE COMPENSATION 82
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 82
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 83
SIGNATURES 89
Table of Contents
PART I
Forward-Looking Statements
This Annual
Report on Form 10-K contains statements that are not historical facts and that constitute “forward looking statements” within the meaning of such terms under the Private Securities Litigation Reform
Act of 1995. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Actual outcomes and results may differ materially from those expressed in, or implied by,
our forward-looking statements. Words such as “expects”, “intends”, “anticipates”, “believes”, “estimates”, “assumes”, “projects” and similar expressions are intended to identify
such forward-looking statements. You should not rely solely on the forward-looking statements and should consider all uncertainties and risks throughout this Annual Report on Form 10-K, including those
described under “Risk Factors”. These statements are based on information currently available, and we undertake no obligation to update any forward-looking statement as circumstances change.
Factors or events that could cause results or performance to differ materially from those expressed in our forward-looking statements include
the following:
• the severity and duration of the COVID-19 pandemic;
• our ability to retain existing clients and obtain new clients;
• changes in competitive conditions;
• our ability to introduce new service offerings;
• technological changes;
• changes in accounting standards, rules and interpretations;
• the terminability of many of our contracts without penalty to our clients;
• fluctuations due to currency exchange rate variations;
• changes in India’s geopolitical environment, laws, rules and regulations;
• the impact and success of new acquisitions;
• management’s ability to identify and manage risks;
• breach of our systems due to a cyber security attack.
ITEM 1. BUSINESS
Overview
Mastech Digital, Inc. (referred
to in this report as “Mastech Digital”, “Mastech”, the “Company”, “us”, “our” or “we”) is a provider of Digital Transformation IT Services. The Company offers data and analytics solutions;
digital learning; and IT staffing services for both digital and mainstream technologies. Headquartered
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near Pittsburgh, Pennsylvania, we have approximately 1,300 consultants that provide services across a broad spectrum of industry verticals. 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.
Our Data and Analytics Services segment delivers specialized data management, data engineering, customer experience consulting and analytics
services to customers globally. Each of these services 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 services include data management and analytics, cloud, mobility, social and
automation. Our digital transformation services also include staffing and project-based services around digital learning. Our mainstream technologies services 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.
Sales and
marketing of our services are handled by separate and distinct sales organizations within each of our two business segments. Our data and analytic services are marketed through 1) account executives who largely focus on new business development; and
2) technical relationship managers (principals) who focus on growing strong relationships within existing clients. Both account executives and technical relationship managers reside in the U.S., Canada, India, Singapore and Europe.
Our IT staffing and digital transformation services are marketed through account executives across the U.S. who deploy a telesales model,
supplemented with client visits. This cost-effective model is aimed at integrator and other staffing clients, with a need to supplement their abilities to attract highly qualified temporary IT personnel. Additionally, we use a branch service sales
model in select geographies within the U.S. The branch services model employs local sales and recruitment resources, aimed at establishing strong relationships with both end-clients and candidates.
We recruit for both segments through global recruitment centers located in the U.S. and India that deliver a full range of recruiting and
sourcing services. Our centers employ approximately 175 recruiters and sourcers that focus on recruiting U.S.-based candidates to service a geographically-diverse client base in the U.S. Our ability to respond to client requests from our
offshore recruiting centers, with their expanded search coverage, round-the-clock sourcing, and extensive pool of candidates, gives us the ability to deliver
high-quality candidates to our clients in a timely fashion.
History and Developments
Historically, we operated as the former Professional Services segment of iGATE Corporation (“iGATE”). Mastech Digital, Inc. (f/k/a
Mastech Holdings, Inc.) was incorporated in Pennsylvania as a wholly-owned subsidiary of iGATE on June 6, 2008 in anticipation of our spin-off from iGATE. On September 30, 2008, we spun-off from iGATE and began operating as an independent public company. Our operating subsidiaries have 34 years of history as reliable providers of IT staffing services.
Established in 1986, our business model focused on importing global IT talent to the U.S. to meet the growing demand for IT professionals. In
the early 2000s, the demand for IT professionals declined and the supply of IT resources quickly exceeded a declining demand curve. No longer was there a need to recruit abroad for technology talent, as supply was abundant in the U.S. Accordingly,
we retooled our recruiting model to focus on the recruitment of local U.S.-based IT talent. Given our reputation with and knowledge of H1-B visas, part of our recruiting efforts focused on attracting H1-B visa holders currently in the U.S. This approach gave us access to a larger and differentiated recruiting pool when compared to many of our competitors.
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In 2003, we launched our offshore global recruitment center model in an effort to meet an
increase in industry demand with lower cost recruiting resources. Over the last seventeen years, we have made significant investments in our offshore center to improve infrastructure, processes and effectiveness. Additionally, we have made
investments in recent years in our domestic recruitment structure, primarily to support our branch service model.
On June 15, 2015,
we completed the acquisition of Hudson Global Resources Management, Inc.’s U.S. IT staffing business (“Hudson IT”). Hudson IT was a domestic IT staffing business with offices in Chicago, Boston, Tampa and Orlando. Hudson IT
deployed a branch service business model that targeted clients that are direct end-users of IT staffing services. Additionally, as part of the Hudson IT acquisition, we acquired a digital learning services
practice which became one of our technology practices.
In 2016, we changed our name to Mastech Digital, Inc. The name change was part of
our rebranding initiative that reflects our transformation into a digital technologies company. The rebranding also included a logo change and a refreshed corporate website.
In 2017, we added specialized capabilities in delivering data management and analytics services to a global customer-base through the
acquisition of the services division of InfoTrellis, Inc. (“InfoTrellis”), a project-based consulting services company with specialized capabilities in data management and analytics.
In 2018 and particularly in 2019, we significantly expanded our service offerings and capabilities within our Data and Analytics Services
segment.
In 2020, we launched a new service offering in our IT Staffing Services segment branded as
MAS-REMOTE. This new offering allows clients to transcend beyond self-imposed geographical boundaries to gain access to top talent in the U.S. and Canada and reflects learnings from the COVID-19 pandemic that remote workers can be equally or more effective.
Also in 2020, we completed the
acquisition of AmberLeaf Partners, Inc., (“AmberLeaf”) which enhanced our Data and Analytics Services segment’s capabilities with its expertise in customer experience consulting and managed services.
Operating Segments
Our revenues are
generated from two business segments: Data and Analytics Services and IT Staffing Services. Details related to these two businesses are discussed separately below, while information about our employees, differentiators, intellectual property rights
and various other aspects of our business is shown in the aggregate for Mastech Digital, Inc.
Data and Analytics Services
Our Data and Analytics Services segment began with the acquisition of InfoTrellis, Inc.’s services business in July 2017. The resulting
business unit operates under Mastech InfoTrellis, with locations in Atlanta, Toronto, London, Dublin, Singapore, and Chennai, India. Mastech InfoTrellis is a specialist data management, data engineering, and data science business focused on helping
companies “Architect Enterprise Intelligence” and realize improved returns on their investment. With the October 2020 acquisition of AmberLeaf, this segment gained complimentary capabilities in customer experience consulting and managed
services.
Founded by the engineering principals behind IBM’s Master Data Management (“MDM”) products and
Informatica’s Customer 360 code-base, Mastech InfoTrellis represents one of the largest concentrations of technology-agnostic data management, data engineering, and data science expertise in the marketplace.
We help clients accelerate business velocity, minimize costs, and improve corporate resiliency. We architect enterprise intelligence through
personalized, process-oriented programs consisting of strategy, data management (including master data management), business intelligence and reporting, data engineering, customer experience,
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predictive analytics, and advanced analytics. We activate the value of information assets by building a strong data foundation and adding to it, brick by brick, to create modern, advanced
analytics capabilities, such as Artificial Intelligence and Machine Learning.
Sales and Marketing
Sales and Marketing at Mastech InfoTrellis is a single, integrated function spanning across four groups in multiple locations: Marketing,
Inside Sales, Principals, and Client Partners.
In addition to
the above, our Partner / Channel Relationships (such as those we have with IBM and Informatica, among others) also provide us with a significant pipeline of opportunities and new business. Furthermore, prospective clients reach us through referrals
from our existing client base, our reputation in the data & analytics domain, and through our industry partners.
Once engaged
with a prospect, our approach to value-delivery starts with the definition of a discrete business problem. We then master and manage our clients’ data and develop data products and deploy purpose-built advanced analytics, machine learning, and
artificial intelligence, to deliver greater business velocity, significant cost reduction, and greater corporate resilience.
Our
Practices
Mastech InfoTrellis builds a strong data foundation that delivers significant business value. Our expertise and technology
practice stretches across five key domain areas.
Data Management
Our Data Management services help enterprises identify, acquire, store, manage, and transform data to fuel impactful business insights. Our
offerings in this practice are:
Data Engineering
We establish an Enterprise Data Environment to derive insights, knowledge, and intelligence and deliver value from a modern, agile, and trusted
implementation architecture. Our offerings fall under two broad categories:
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Technology
Service
Data Science
We bring our clients a rapid-learning culture, coupled with a co-creation-driven approach, to solve
business problems and make smart decisions by applying Data Science powered by Machine Learning, Artificial Intelligence, and Knowledge Graphs. Our analytics and AI/ML solutions facilitate both culture and business transformation, leveraging domain
knowledge with cognitive computing to produce unbiased learning accelerators for different parts of our client’s business. We offer:
• Analytics Services – to drive excellence in reporting and modeling.
Customer Experience Consulting
We
optimize Customer Experience (“CX”) across Sales, Service, and Marketing with relevant, coordinated, consistent, and personalized experiences informed by analytics:
Cloud Services
We help our clients take advantage of enterprise Cloud Infrastructure by modernizing application development and accelerate Cloud adoption:
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Geographic and Vertical Focus
Mastech InfoTrellis’ primary customer geographies are in North America; however, we have customers and prospects in Europe, the Middle
East and the ASEAN region. Our target clients are largely corporations with revenues exceeding $1 billion. Average project size ranges from $500,000 to $15 million, depending on the scope and duration of the engagement. From a vertical
perspective, customers in the financial services, retail, healthcare, manufacturing and government segments are significant users of our services. Below is a breakdown of customer revenue percentages for each industry vertical in 2020:
Financial Services 36% Healthcare 16%
Manufacturing 21% Government 7%
Retail 18% Other 2%
IT Staffing Services
In our IT Staffing Services business, we typically negotiate our business relationship by using one of three methods to gain agreement on the
services to be provided. We either establish our relationship based on a simple standard term sheet; create a Statement of Work (“SOW”) specific to a project; or enter into a master service agreement with a client that describes the
framework of our relationship. In each case, a client will submit to us positions and / or requirements that they plan on satisfying by using temporary contractors. We propose consultants to the client that we believe satisfy their needs and propose
an hourly bill rate for each consultant submitted. The client will select our consultant or a competing firm’s consultant based on their view of quality, fit and pricing. Consultant specific contractual details, such as billable rates, are
documented as an annex to the agreement type that is chosen by the client. While we have the ability to deliver our digital transformation services on a managed solutions basis, the majority of our assignments have been delivered as staffing
assignments.
We generally do not enjoy exclusivity with respect to a client’s contractor needs. Most of our clients use multiple
suppliers to satisfy their requirements and to ensure a competitive environment. Our success with any particular client is determined by (a) the quality and fit of our consultant; (b) our ability to deliver a quality consultant on a timely
basis; and (c) pricing considerations. We invoice our clients on a weekly, bi-weekly or monthly basis, in accordance with the terms of our agreement. Typical credit terms require our invoices to be paid
within 30 to 45 days of receipt by the client.
While our primary focus is on contract IT staffing and digital transformation services, we
also provide permanent placement services for our clients when opportunities arise. Permanent placement revenues have historically represented less than 1% of our total revenues.
Sales and Marketing
We
target much of our marketing efforts on businesses and institutions with significant budgets and recurring IT staffing and digital transformation needs. We look to develop relationships with new clients. In addition, we work to penetrate our
existing client relationships to deeper levels. Most of our strategic relationships are established at the vice president / sales director level.
Selling is conducted through account executives utilizing a sales model which is desirable to our clients’ needs. For clients with a need
to supplement their own abilities to attract highly qualified temporary IT personnel
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and prefer a low-touch sales model, such as integrator and staffing clients, we generally deploy a centralized telesales model, complemented with client
visits. We supplement these domestic sales efforts through our sales organization in India, whose account executives target smaller IT staffing clients utilizing a cost-effective offshore telesales model. For
end-user clients, who typically prefer a higher-touch sales model, we generally utilize a branch service model which deploys sales and recruitment resources locally, or regionally, in select geographies within
the U.S. Account executives generally are responsible for a combination of new business development efforts and expanding existing client relationships. Account executives at our branch operations call on, and meet with, potential new customers and
are also responsible for maintaining existing client relationships within their geographic territory. These account executives are paired with recruiters and both receive incentive compensation based on revenue generation activities using a
localized sales and recruitment model.
Many large end-users of IT staffing services retain a
third party to provide vendor management services to centralize the consultant hiring process and reduce costs. Under this arrangement, the third-party managed service provider (“MSP”) retains control of the vendor selection and vendor
evaluation process, which somewhat weakens the relationship built with the client. Our lower-cost centralized telesales model and highly efficient offshore recruiting model have better positioned us to respond to the growing use of MSPs.
Recruiting
We operate five small recruiting centers located in the U.S. and one significantly larger facility in NOIDA, India that deliver a full range of
recruiting and sourcing services. Our centers employ approximately 175 recruiters and sourcers who focus on recruiting U.S.-based candidates to service a geographically diverse client base in the U.S. Our ability to respond to client requests faster
than the competition is critical for success in our industry as most staffing firms access the same candidate pool via job boards and websites. The combination of our offshore recruiting capabilities, investment in sourcing and recruiting processes,
expanded search coverage, around-the-clock sourcing, and extensive candidate pool, gives us the ability to deliver high-quality candidates to our clients in a timely
fashion.
We continue to invest in leading technologies and recruitment tools to enhance efficiencies. For example, we use artificial
intelligence and web-based tools to expand the reach of our candidate searches. We also employ a
state-of-the-art applicant tracking system that has recently been enhanced with proprietary tool-kits and job board / internet
interfacing capabilities, resulting in further operational efficiencies.
In 2016, we closed our offshore recruitment office in Bangalore,
India and concentrated all of our offshore recruitment efforts exclusively in NOIDA, a city near New Delhi. In late 2018, we significantly expanded our offshore recruitment offices in NOIDA which gave us the ability to nearly double our recruiter
seats. This facility provides our offshore organization with state-of-the-art infrastructure and workforce amenities to attract top-quality recruiters and sourcers. This centralized offshore facility also affords us the ability to improve operational efficiencies compared to operating two offshore facilities.
We have access to a large and differentiated recruiting pool due to our brand recognition with both U.S. citizens and H1-B visa holders in the U.S. Unlike most staffing firms that have a high concentration of either H1-B workers or W-2 hourly U.S.
citizens, we have historically maintained a balance of H1-B and W-2 hourly employees. We believe that this balanced mix allows us to access a broader candidate pool than
our primary competition.
Technology Focus of our IT Staffing and Digital Transformation Services
Our staffing delivery teams, spread across the U.S. and India, are segmented by technologies, allowing us to reach deep and wide in our
understanding of technology domains. The delivery teams work in an integrated manner to provide quality IT talent with a faster turnaround time than many of our competitors. We have long-standing engagements with marquee brands such as Oracle
Corporation, Accenture PLC and other premier global enterprises across various industries.
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IT Staffing—Digital Technologies
Recognizing that a new breed of IT professionals adept in digital technologies are in high demand, we enhanced our recruitment capabilities to
focus on digital technology skill sets. Today, Mastech Digital provides its clients with the ability to secure skill sets that encompass social, mobile, analytics, cloud-based technologies and automation. IT staffing for digital technologies is
growing much faster than mainstream technologies, a trend that is expected to continue into the future. Digital technologies include the following areas:
• Social Analytics • Data Engineering
• Social Blogging • Data Analytics
• Social Campaign Management • Data Science
• Enterprise Mobility Strategy • Cloud Strategy
• Mobile Application Development • Cloud Implementation and Support
• Artificial Intelligence • Machine Learning
IT Staffing—Mainstream Technologies
A large part of our business today comes from IT staffing services around mainstream technologies. We provide services and have strategic
relationships in many high-demand mainstream technology areas. Our IT professionals help design, develop, integrate, maintain and support mainstream technologies in the following areas:
• Mainframes • Open Source (JAVA)
• Databases • Data Warehousing
• Middleware • Microsoft (C, .NET, SQL)
• Enterprise Systems • IT Administration
• SoA and Web Services • IT Helpdesk and Support
• Verification and Validation • Business Analysis
• Project Management
Digital Learning Services
Our digital learning practice provides custom training programs for different organizational needs. With rich experience and proven success in
handling several learning and performance engagements across industries, Mastech Digital’s team combines digital and physical modes of learning methods to ensure unified organizational behavior and augmented performance across teams. Mastech
Digital’s learning paradigm consists of web-based learning, mobile learning, social learning, hybrid learning and virtual learning.
Geographic Presence & Industry Verticals
All of our IT staffing services revenues are generated from services provided in the U.S. We market our services on a national basis and have
the ability to provide services in all 50 U.S. States. Our geographical concentration tends to track major client locations, such as California, Texas, Pennsylvania, Virginia and Massachusetts, and in large metropolitan areas such as Chicago, New
York City and Washington, D.C.
We provide these services across a broad spectrum of industry verticals, including: financial services,
government, healthcare, manufacturing, retail, technology, telecommunications and transportation. Below is a breakdown of our IT Staffing billable consultant base by industries that represented at least 5% of our billable consultants as of
December 31, 2020:
Financial Services 41% Technology 9%
Healthcare 11% Retail 6%
Telecom 10% Transportation 5%
Government 9% Other 9%
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Mastech Digital, Inc.
Employees
At
December 31, 2020, we had 1,068 North American employees and 442 employees offshore, in addition to 161 subcontracted professionals. None of our employees are subject to collective bargaining agreements governing their employment with our
Company. We employ our consultants on both an hourly and salary basis. A large portion of our salaried employees are H1-B visa holders. We enjoy a good reputation within the
H1-B visa community, which allows us to access a very broad candidate pool. The majority of our hourly employees are U.S. citizens. On average, we maintain a balanced composition of salaried and hourly
employees. We believe that our employee relations are good.
Intellectual Property Rights
Our intellectual property consists primarily of proprietary processes; client, employee and candidate information; and proprietary rights of
third parties from whom we license intellectual property. We also own proprietary knowledge of the frameworks and products that we have built in our Mastech InfoTrellis business segment. We rely upon a combination of nondisclosure and other
arrangements to protect our intellectual property.
Seasonality
Our operations are generally not affected by seasonal fluctuations. However, our consultants’ billable hours are affected by national
holidays and vacation practices. Accordingly, we typically have lower utilization rates during the fourth quarter. Additionally, assignment completions tend to be higher near the end of the calendar year, which largely impact our revenue and gross
profit performance during the subsequent quarter.
Our Competitive Position
We operate in highly competitive and fragmented industries, with largely low barriers to entry. In our Data and Analytics Services segment, we
primarily compete with Cognizant, Tata Consultancy Services, Deloitte, Accenture, as well as with smaller boutique data and analytics firms. Many competitors are significantly larger and have greater financial resources in comparison to us. Our IT
Staffing Services segment competes for potential clients with providers of outsourcing services, systems integrators, computer systems consultants, other staffing services firms and, to a lesser extent, temporary personnel agencies.
We believe that the principal competitive factors for securing and building client relationships are driven by the ability to precisely
comprehend client requirements and by providing highly qualified personnel who are motivated to meet or exceed a client’s expectations. We must be able to do this efficiently to provide speed to market with pricing that is competitive and
represents value to our clients. The principal competitive factors in attracting qualified personnel are compensation, availability, location and quality of projects and schedule flexibility. We believe that many of the professionals included in our
database may also pursue other employment opportunities. Therefore, our responsiveness to the needs of these professionals is an important factor in our ability to be successful.
Our Strengths
We believe our strengths
compared to industry peers include:
Established client base
Our client base consists of large, medium-sized and small companies that span across multiple industry
verticals. Long-standing relationships with corporate clients, blue-chip IT integrators and MSPs are a core component of our future growth strategy for our staffing business, while good relationships with customer influencers and decision makers
drives our Mastech InfoTrellis business. These relationships, exemplified by our consistently low customer attrition rate, reflect our focus and commitment to our customers.
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Operational excellence
In our Data and Analytics Services business, our global delivery model is designed to ensure operational excellence by delivering higher value
to our customers on project-based Mastech InfoTrellis engagements. Projects are delivered using our proprietary SMART Implementation Methodology—a multi-phased approach based on parts of the Rational Unified Process (RUP) and Agile development
methodologies.
In the IT Staffing Services business, operational excellence largely relates to a firm’s ability to effectively
recruit high quality talent. Our offshore recruitment operation gives us the ability to respond to clients’ staffing needs in a timely and cost-effective manner. Investments in sourcing and recruiting processes and leading technologies and
recruitment tools have resulted in a highly scalable offshore recruiting model, which has delivered value to our clients.
Additionally,
we employ a human resource management model, featuring portal technology as well as immigration support services, for our widely dispersed consultant base. This model enables us to maintain attrition rates that are lower than the industry averages
for our salaried workforce.
Minority-owned status
Our businesses benefit with some clients from the fact that we are a large minority-owned staffing firm. We have received multiple awards for
our commitment to diversity. We have been certified as a minority-owned business by the National Minority Supplier Development Council (“NMSDC”). This certification is attractive to certain existing and potential clients in the U.S.
government and public-sector segments, where project dollars are specifically earmarked for diversity spending.
Attractive financial
profile
We have historically enjoyed a lower operating cost structure than our industry peers due to our low cost telesales in our IT
Staffing Services segment and our offshore delivery models in both of our operating segments. These business models are cost-effective and allow us to quickly adjust our cost structure to changes in our business environment. Our blue-chip client
base has resulted in high quality accounts receivable and a strong and predictable cash flow conversion metric. Additionally, we have an existing credit facility to support our organic growth aspirations and we have access to supplementary credit
for inorganic opportunities.
Expertise in high-demand digital transformation IT skills
In our Data and Analytics Services segment, we have strong expertise in data management, data engineering, analytics and customer experience
consulting – both on-shore as well as off-shore. In our IT Staffing Services segment, we have substantial expertise in certain advanced technology IT skills,
including: cloud, mobile, data & analytics, social media, artificial intelligence/machine learning and digital learning. We also have the capacity in both of our business segments to take advantage of our technical expertise in these high
demand growth areas, as we are well positioned in terms of scale, capabilities, and a blue-chip client base.
Experienced management
team
Business leaders of our Data and Analytics Services business were part of the original thought leaders in the Master Data
Management space, which lends significant credibility to this segment’s Master Data service offerings. Today, we are led by an executive team of “business transformation” veterans and data science experts, with a track record of
delivering positive business outcomes for clients across industry verticals.
Our IT staffing management team is comprised of business
leaders with deep industry experience, is a unique blend of executives with significant Mastech Digital experience and others who have held leadership roles in other companies. We believe this talent, together with combined experience across a
variety of industries, allows us to capitalize on the positives of our existing business models and, at the same time, improve our service offerings, internal processes and long-term strategy for future growth.
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Reportable Financial Segments
The Company has two reportable segments in accordance with Accounting Standards Codification (“ASC”) Topic 280 “Disclosures
about Segments of an Enterprise and Related Information”. Refer to Note 19 “Business Segments and Geographic Information” to our Consolidated Financial Statements included in Item 8 herein for information about our two reportable
segments.
Government Regulation
We
recruit IT professionals on a global basis from time to time and, therefore, must comply with the immigration laws in the countries in which we operate. As of December 31, 2020, approximately 42% of our workforce was working under Mastech
Digital sponsored H1-B temporary work permits. Statutory law limits the number of new H1-B petitions that may be approved in a fiscal year to enter the U.S. Legislation
could be enacted limiting H1-B visa holders’ employment with staffing companies. In recent years, the vast majority of our H1-B hires were not subject to the annual
quota limiting H1-B visas because they were already in the U.S. under H1-B visa status with other employers. Additionally, the U.S. Congress has recently considered, and
may consider in the future, extensive changes to U.S. immigration laws regarding the admission of high-skilled temporary and permanent workers and increases in prevailing wage related to H1-B employees. Such
changes, if enacted, may impact the types of H1-B temporary work permits that could be granted, the number of available H1-B temporary work permits, or the required
prevailing wage that we are required to pay our H1-B employees, which in turn may have a negative impact on our revenues and profits.
Available Information
Our headquarters
are located at 1305 Cherrington Parkway, Building 210, Suite 400, Moon Township, Pennsylvania 15108, and our telephone number is (412) 787-2100. The Company’s website is www.mastechdigital.com. Our
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and other Securities and Exchange
Commission (the “SEC”) filings, including any amendments to the foregoing reports, are available free of charge by accessing the Investors page of the Company’s website as soon as reasonably practical after such reports are filed
with, or furnished to, the SEC.
ITEM 1A. RISK FACTORS
You should carefully consider each of the following risk factors and all of the other information set forth in this Annual Report on Form 10-K or incorporated by reference herein. Based on the information currently known to us, we believe that the following information identifies the most significant risk factors affecting our company. However,
additional risks and uncertainties not currently known to us or that we currently believe to be immaterial may also adversely impact our business.
If any of the following risks and uncertainties develop into actual events, these events could have a material adverse effect on our
business, financial condition or results of operations.
Risks Related to the Company’s Business and Operation
We are unable to predict the extent to which the global COVID-19 pandemic may adversely impact our business
operations, financial performance and results of operations.
The COVID-19 pandemic and
efforts to control its spread have significantly curtailed the movement of people and goods and services worldwide in regions where we sell our services and conduct our business operations. The pandemic has resulted in a global slowdown of economic
activity, including travel restrictions and prohibitions of non-essential activities in some cases. Our revenues and operations were affected by a range of external factors in 2020 related to the COVID-19 pandemic. Although we believe the immediate impact of the COVID-19 pandemic has been assessed and largely reflected in our 2020 financial results, the long-term
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magnitude and duration of the disruption and resulting decline in business activity is still highly uncertain and cannot currently be predicted. While the
roll-out of global vaccination programs is an encouraging sign for the future, the COVID-19 pandemic and efforts to control its spread could still continue to adversely
affect our business, impact the demand for our services and alter the way we conduct our business, and we cannot predict the magnitude or duration of these effects.
The execution of austerity measures that we implemented in 2020 to mitigate the impact of the pandemic on our financial results may not
achieve the results and savings we anticipate, and our temporary cost-saving measures may negatively affect employee morale and future recruiting efforts. To the extent the COVID-19 pandemic or the efforts
taken to control its spread adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in this “Risk Factors” section. Because developments concerning the COVID-19 pandemic have been and continue to be constantly evolving, additional impacts and risks may arise that we are not aware of or that we may not be able to appropriately or timely address.
Lack of success in recruitment and retention of IT and data and analytics professionals may decrease our revenues and increase the costs needed to
maintain our workforce.
Our business involves the delivery of professional services and is labor-intensive. Our success depends
upon our ability to attract, develop, motivate and retain highly skilled professionals who possess the skills and experience necessary to deliver our services. Qualified IT and data and analytics professionals are in demand worldwide and are likely
to remain a limited resource for the foreseeable future. There can be no assurance that these qualified professionals will be available to us in sufficient numbers, or that we will be successful in retaining current or future employees. Failure to
attract and retain qualified professionals in sufficient numbers may have a material adverse effect on our business, operating results and financial condition. Historically, we have done much of our recruiting from outside of the country where the
client work is performed. Accordingly, any perception among our IT professionals, whether or not well founded, that our ability to assist them in obtaining temporary work visas and permanent residency status has been diminished, could lead to
significant employee attrition. Any significant employee attrition will increase expenses necessary to replace and retrain our professionals and could decrease our revenues if we are not able to provide sufficient numbers of these resources to our
clients.
We may have difficulty maintaining client relationships if the trend towards utilizing Managed Service Providers continues.
Within our IT Staffing Services segment, many large users of staffing services are employing MSP’s to manage their contractor expenses in
an effort to drive down overall costs. The general impact of this shift towards the MSP model has been to lower our gross margins. Should this trend towards utilizing the MSP model continue, it is likely that our gross margins will be pressured in
the future. In addition, if large users of staffing services continue to employ MSPs, the relationship between us and those large users may be primarily conducted through MSPs, in which case we may have difficulty maintaining those client
relationships because the MSP model uses the MSP as an intermediary between the staffing service provider and the end-user, and reduces our direct contact with the
end-user.
We are dependent upon our Indian operations and there can be no assurance that our Indian
operations will support our growth strategy and historical cost structure.
Our Indian recruitment and delivery centers depend
greatly upon business and technology transfer laws in India, and upon the continued development of technology infrastructure. There can be no assurance that our Indian operations will support our growth strategy. The risks inherent in our Indian
business activities include:
• unexpected changes in regulatory environments;
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• foreign currency fluctuations;
• tariffs and other trade barriers;
• difficulties in managing international operations; and
• the burden of complying with a wide variety of foreign laws and regulations.
Our failure to manage growth, attract and retain personnel or a significant interruption in our ability to transmit data and voice
efficiently, could have a material adverse impact on our ability to successfully maintain and develop our global recruitment and delivery centers and could have a material adverse effect on our business, operating results and financial condition.
The Indian rupee may increase in value relative to the dollar, increasing our costs. Although, we receive the vast majority of our
revenues in U.S. dollars, we maintain a significant portion of our recruiting and delivery workforces in India, and those employees are paid in rupees. Therefore, any increase in the value of the rupee versus the dollar would increase our expenses,
which could have a material adverse effect on our business, operating results and financial condition.
Our quarterly operating results may be
subject to significant variations.
Our revenues and operating results have historically been subject to significant variations
from quarter to quarter depending on a number of factors, including the timing and number of client projects commenced and completed during the quarter, the number of working days in a quarter, employee hiring and attrition, and utilization rates
during the quarter.
Our multi-year Center of Excellence service offering may be early terminated with a short-notice from the client, which could
materially impact our backlog and adversely affect our business and future revenues.
Our Data and Analytics Services segment
markets a multi-year service offering known as a Center of Excellence. This service provides our clients with a virtual extension of their internal team to assist with their data and analytics business strategies and objectives. These
engagements are generally multi-year and provide added flexibility to the client by adjusting dedicated readily-available and appropriately skilled resources on an as needed basis. While these engagements provide opportunities to partner with
and deeply understand a client’s data management and analytics longer-term objectives, these contracts generally can be early terminated by the client with a short-term notice. Should a client terminate an engagement early, this termination
could materially impact our backlog of orders and adversely affect our business and future revenues.
Our acquisitions of InfoTrellis, Inc. and
AmberLeaf Partners, Inc. may not provide us with the long-term business advantages that we expected which may result in the slower growth of our business and reduced operating margins.
Our July 13, 2017 acquisition of the service division of InfoTrellis, Inc. and our October 1, 2020 acquisition of AmberLeaf Partners,
Inc., and the purchase prices of such acquisitions, were based on a series of long-term assumptions and estimates. There can be no assurance that these long-term expectations will be completely realized and could result in a material adverse
effect on our business, operating results and financial condition.
Our strategy of expansion through the acquisition of additional companies may
not be successful and may result in slower growth of our business and reduced operating margins.
We plan to gradually expand our
operations through the acquisition of, or investment in, additional businesses and companies. We may be unable to identify businesses that complement our strategy for growth. If
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we do succeed in identifying a company with such a business, we may not be able to acquire the company, its relevant business or an interest in the company for many reasons, including:
• a failure to agree on the terms of the acquisition or investment;
• competition from other potential acquirers;
• a lack of capital to make the acquisition or investment; or
• the unwillingness of the company to partner with us.
If we are unable to acquire and invest in attractive businesses, our strategy for growth may be impaired. Even if we are able to complete one
or more acquisitions, there can be no assurance that those completed acquisitions will result in successful growth, and the costs of completing an acquisition may reduce our margins.
We have made in the past, and may make in the future, acquisitions which could require significant management attention, disrupt our existing business,
result in dilution to our shareholders, deplete our cash reserves, increase our debt levels and adversely affect our financial results.
Acquisitions, such as our acquisitions of Hudson IT, the services division of InfoTrellis, Inc., and AmberLeaf Partners, Inc., involve numerous
risks, including the possibility that:
In addition to the foregoing, acquisitions may also
cause us to:
• use a substantial portion of our cash reserves or incur debt;
• assume liabilities, including potentially unknown liabilities;
• incur amortization expenses related to certain intangible assets;
• become subject to intellectual property litigation or other litigation.
Acquisitions of technology companies and assets are inherently risky and subject to many factors outside of our control and no assurance can
be given that our recently completed or future acquisitions will be successful and will not materially adversely affect our business, operating results, or financial condition. Failure to manage and successfully integrate acquisitions could
materially harm our business and operating results.
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Our revenues are highly concentrated, and the loss of a significant client would adversely affect our
business and revenues.
Our revenues are highly dependent on clients located in North America, as well as clients concentrated in
certain industries. Economic slowdowns, changes in law and other restrictions or factors that affect the economic health of these industries may affect our business. For the year ended December 31, 2020, approximately 47% of our revenues were
derived from our top ten clients. Consequently, if our clients reduce or postpone their spending significantly, this may lower the demand for our services and negatively affect our revenues and profitability. Further, any significant decrease in the
rate of economic growth may reduce the demand for our services and negatively affect our revenues and profitability.
We have in the past,
and may in the future, derive a significant portion of our revenues from a relatively limited number of clients. These contracts are terminable without penalty, as are most of our contracts. The loss of any significant client or major project,
or an unanticipated termination of a major project, could result in the loss of substantial anticipated revenues.
Our leverage could materially and
adversely affect our financial condition or operating flexibility and prevent us from fulfilling our obligations under our Credit Agreement.
At December 31, 2020, we had outstanding borrowings of $17.5 million under our Credit Agreement with PNC Bank and certain other
financial institution lenders (the “Credit Agreement”), which amount consists of $17.5 million of outstanding borrowings under the term loan and no outstanding borrowings under the revolving credit facility. Our level of indebtedness
could have important consequences on our future operations, including the following:
In addition, we may incur additional indebtedness in the future and, if we incur new debt or other liabilities, the related risks that we face
could intensify.
Our ability to make required payments or to refinance our indebtedness depends on our future performance, which will be
affected by financial, business and economic conditions and other factors, many of which are not within our control. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay
investments and capital expenditures, or to sell assets, seek additional capital, or restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In
addition, the terms of existing or future debt agreements and other factors may restrict us from pursuing any of these alternatives.
If
we are in default under our Credit Agreement due to our inability to make the required payments, or if we otherwise fail to comply with the financial and other covenants contained therein, all of our debt thereunder could be accelerated and the
lenders under our Credit Agreement could be permitted to foreclose on our assets securing such debt.
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The covenants in our Credit Agreement impose restrictions that may limit our operating and financial
flexibility.
The Credit Agreement contains 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 and contingent liabilities, loans and investments, distributions, leases, asset sales, stock
repurchases and mergers and acquisitions. These covenants and limitations may limit our ability to, among other things:
• create, incur or assume liens;
• make investments and loans;
• create, incur, assume or guarantee additional indebtedness;
• pay dividends, or redeem or repurchase our capital stock;
• alter the business that we conduct;
• engage in certain transactions with officers, directors and affiliates;
• prepay, redeem or purchase other indebtedness;
• enter into certain agreements; and
• make material changes to accounting and reporting practices.
Operating results below current levels or other adverse factors, including increases in interest rates, could result in us being unable to
comply with certain covenants contained in our Credit Agreement. If we violate these covenants and are unable to obtain waivers, our debt under the Credit Agreement would be in default, could be accelerated and could permit our lenders to foreclose
on our assets securing the debt thereunder. If the indebtedness is accelerated, we may not be able to repay our debt or borrow sufficient funds to refinance it. Even if we are able to obtain new financing, it may not be on commercially reasonable
terms or on terms that are acceptable to us. If our debt is in default for any reason, our cash flows, operating results, or financial condition could be materially and adversely affected. In addition, complying with these covenants may also cause
us to take actions that may make it more difficult for us to successfully execute our business strategy and compete against companies that are not subject to such restrictions.
We must keep pace with the rapid technological changes that characterize the IT and data and analytics industries and our failure to do so could result
in lower demand for services.
The IT staffing and data analytics services industries are characterized by rapid technological
change, evolving industry standards, changing client preferences and new product introductions. Our success will depend in part on our ability to keep pace with industry developments. There can be no assurance that we will be successful in
addressing these developments on a timely basis or that, if these developments are addressed, we will be successful in the marketplace. In addition, there can be no assurance that products or technologies developed by others will not render our
services noncompetitive or obsolete. Our failure to address these developments could have a material adverse effect on our business, operating results and financial condition.
A significant number of organizations are attempting to migrate their IT business applications to advanced technologies. As a result, our
ability to remain competitive depends on several factors, including our ability to develop, train and hire employees with skills in advanced technologies. Our failure to hire, train and retain employees with such skills could have a material adverse
impact on our future revenues.
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Our “preferred vendor” contracts generally result in lower margins. In addition, we may not
be able to maintain “preferred vendor” status with existing clients or obtain that status with new clients, which may lead to a decrease in the volume of business we obtain from these clients.
In our IT Staffing Services segment, we are party to several “preferred vendor” contracts, and we are seeking additional similar
contracts in order to obtain new or additional business from large and medium-sized clients. Clients enter into these contracts to reduce their number of vendors and obtain better pricing in return for a
potential increase in the volume of business to the preferred vendor. While these contracts are expected to generate higher volumes, they generally carry lower margins. Although we attempt to lower costs to maintain margins, there can be no
assurance that we will be able to sustain margins on such contracts. In addition, the failure to be designated as a preferred vendor, or the loss of such status, may preclude us from providing services to existing or potential clients, except as a
subcontractor, which could have a material adverse effect on the volume of business obtained from such clients.
Our success depends upon the
maintenance and protection of our intellectual property rights and processes, and any substantial costs incurred protecting such rights and processes may decrease our operating margins.
Our success depends in part upon certain methodologies and tools we use in designing, developing and implementing application systems and other
proprietary intellectual property rights. We rely upon a combination of nondisclosure and other contractual arrangements and trade secrets, copyright and trademark laws to protect our proprietary rights and the proprietary rights of third parties
from whom we license intellectual property. We enter into confidentiality agreements with our employees and limit distribution of proprietary information. There can be no assurance that the steps we take in this regard will be adequate to deter
misappropriation of proprietary information or that we will be able to detect unauthorized use and take appropriate steps to enforce our intellectual property rights. In the event of an unfavorable resolution of a dispute over our intellectual
property rights, we may incur substantial costs or liabilities, which would decrease our operating margins.
Our business is certified as a
minority-owned business, and loss of that certification may impact our ability to gain new customers or expand our business with existing customers.
We are a large minority-owned staffing and data analytics services firm and have been certified as minority-owned by the National Minority
Supplier Development Council (the “NMSDC”). NMSDC certification has helped us to expand our business with existing clients as well as obtain new customers. While we cannot quantify the effect of the loss of this status, its loss could
adversely affect our ability to expand our business or cause us to lose existing business.
Because the NMSDC certification relies in
large part upon Messrs. Wadhwani and Trivedi maintaining their positions as the collective majority holders of our common stock, any decrease in their collective ownership may jeopardize our status as a minority-owned business. There can be no
assurance that Messrs. Wadhwani and Trivedi will maintain their majority position in the Company.
Existing and potential customers may consider
outsourcing their IT requirements to foreign countries, which could have an adverse effect on our ability to obtain new customers or retain existing customers.
In the past years, more companies started to use low-cost offshore outsourcing centers to perform
technology-related work. Should this shift towards moving technology-related work to offshore outsourcing centers continue, our business, operating results and financial condition could be adversely affected.
We may be subject to liability to clients arising from our engagements.
Many of our engagements involve projects that are critical to the operations of our clients’ businesses and provide benefits that may be
difficult to quantify. Although we attempt to contractually limit our liability for
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damages arising from errors, mistakes, omissions or negligent acts in rendering our services, there can be no assurance that our attempts to limit liability will be successful. Our failure or
inability to meet a client’s expectations in the performance of our services could result in a material adverse change to the client’s operations and, therefore, could give rise to claims against us or damage our reputation, adversely
affecting our business, operating results and financial condition.
Security breaches and other disruptions could compromise our information and
expose us to liability, which would cause our business and reputation to suffer.
In the ordinary course of our business, we
collect and store sensitive data, including intellectual property, our proprietary business information and that of our customers, suppliers and business partners, and personally identifiable information of our customers and employees, in our data
center and on our networks. The secure processing, maintenance and transmission of this information is critical to our operations and business strategy. In response to the pandemic, our move to a work-from-home business model may heighten risks of
security breaches. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our
networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of
personal information, and regulatory penalties, disrupt our operations and the services we provide to customers, and damage our reputation, and cause a loss of confidence in our services, which could adversely affect our operating results and
competitive position. We maintain cyber risk insurance, but this insurance may not be sufficient to cover all of our losses from any breaches of our networks.
We depend on the proper functioning of our information systems.
We are dependent on the proper functioning of information systems in operating our business. Critical information systems are used in every
aspect of our daily operations, perhaps most significantly, in the identification and matching of staffing resources to client assignments and in the client billing and consultant or vendor payment functions. Our information systems may not perform
as expected and are vulnerable to damage or interruption including natural disasters, fire or casualty theft, technical failures, terrorist acts, cybersecurity breaches, power outages, telecommunications failures, physical or software intrusions,
computer viruses, employee errors or other events. Failure or interruption of our critical information systems may require significant additional capital and management resources to resolve, which could have a material adverse effect on our
business. Additionally, many of our information technology systems and networks are cloud-based or managed by third parties, whose future performance and reliability we cannot control. The risk of a cyber-attack or security breach on a third party
carries the same risks to us as those associated with our internal systems. There can be no assurance that such parties will not experience cybersecurity breaches that could adversely affect our employees, customers and businesses or that our audit
or diligence processes will successfully deter or prevent such breach.
If our clients are subjected to cyber-attacks or data security breaches, it
may result in damage to our business and the disclosure of our confidential information.
In addition to cybersecurity threats
posed directly against us, our clients’ information systems are also vulnerable to an increasing threat of continually evolving cybersecurity risks. There is no guarantee that our clients have implemented procedures that are adequate to
safeguard against all data security breaches. The failure of our clients to adequately safeguard against data security breaches could have a material adverse effect on our business and operations. The theft and/or breach of our clients’ data
security could cause the disclosure and/or loss of our confidential information and data and result in significant costs. In addition, any cybersecurity damage to the networks or computer systems used by us or our clients could result in a claim for
substantial damages against us and significant reputational harm, regardless of our responsibility for the failure.
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If our insurance costs increase significantly, these incremental costs could negatively affect our
financial results.
We purchase various insurance policies to limit or transfer certain risks inherent in our operations. These
costs largely relate to obtaining and maintaining professional and general liability insurance policies. If the costs of carrying these insurance policies increase significantly, due to poor claims history or changes in market conditions, this could
have an adverse impact on our profitability and financial condition.