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.
Any disruption in the supply of power, IT infrastructure and
telecommunications lines to our facilities could disrupt our business process or subject us to additional costs.
Any disruption in
basic infrastructure, including the supply of power, could negatively impact our ability to provide timely or adequate services to our clients. We rely on a number of telecommunication services and other infrastructure providers to maintain
communications between our various facilities and clients. Telecommunications networks are subject to failures and periods of service disruption which can adversely affect our ability to maintain active voice and data communications among our
facilities and with our clients. This could disrupt our business process or subject us to additional costs, materially adversely affecting our business, results of operations and financial condition.
Our inability to successfully recover should we experience a disaster or other business continuity problem could cause material financial loss, loss of
human capital, regulatory actions, reputational harm or legal liability.
Should we experience a disaster or other business
continuity problem, such as an earthquake, hurricane, terrorist attack, pandemic, security breach, power loss, telecommunications failure or other natural or man-made disaster, our continued success will
depend, in part, on the availability of our personnel, our office facilities, and the proper functioning of our computer, telecommunication and other related systems and operations. In such an event, we could experience near-term operational
challenges with regard to particular areas of our operations. In particular, our ability to recover from any disaster, pandemic or other business continuity problem will depend on our ability to protect our technology infrastructure against damage
from business continuity events that could have a significant disruptive effect on our operations. We could potentially lose client data or experience material adverse interruptions to our operations or delivery of services to our clients in a
disaster. A disaster or pandemic, on a significant scale or affecting certain of our key operating areas within or across regions, or our inability to successfully recover should we experience a disaster, pandemic or other business continuity
problem, could materially interrupt our business operations and cause material financial loss, loss of human capital, regulatory actions, reputational harm, damaged client relationships or legal liability. For example, the COVID-19 pandemic and governmental actions taken to curtail the spread of the virus during 2020 had a material impact on our employees, customers and third-party providers and severely restricted the level of
economic activity. Any such disaster or other business continuity problem could have a material adverse impact on our revenues and profitability.
Risks posed by climate change may materially increase our compliance costs and adversely impact our profitability.
Climate change vulnerability is posing new threats and opportunities in the global economy. Climate change and measures adopted to address it
can affect us, our clients and suppliers in myriad ways, depending on the nature and location of the businesses, the near-term capital expenditure needs, the regulatory environments where they operate and their strategic plans. Generally, climate
risks and opportunities for companies and their investors fall into four categories:
• Physical risk from climate change;
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• Litigation risks for emitters of greenhouse gases.
Unmitigated climate change is likely to have severe physical impacts on companies with exposed assets or business operations, including
Mastech Digital. Major environmental risks and liabilities can significantly impact future earnings. To the extent we are unable to comply with applicable regulations related to climate change, and such failure to comply results in material
increases in compliance costs or litigation expenses, those costs or expenses will have an adverse effect on our profitability.
Our success depends
upon retaining the services of its management team and key operating employees.
We are highly dependent on our management team and
expect that continued success will depend largely upon their efforts, expertise and abilities. The loss of the services of any key executive for any reason could have a material adverse effect on our business. To attract and retain executives and
other key employees in a competitive marketplace, we must provide a competitive compensation package, including cash-based and equity-based compensation. The loss or any sustained attrition of our key operating employees could have a material
adverse effect on our business, including our ability to establish and maintain client, consultant and candidate, professional and technical relationships.
Risks Related to Governmental Regulations, Laws and Taxation
Government regulation of H1-B visas may materially affect our workforce and limit our supply of qualified IT
professionals, or increase our cost of securing workers.
We recruit IT professionals on a global basis and, therefore, must comply
with the immigration laws in the countries in which we operate, particularly the U.S. 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, and if we are unable to obtain H1-B visas for our employees in
sufficient quantities or at a sufficient rate for a significant period of time, our business, operating results and financial condition could be adversely affected. Additionally, legislation could be enacted limiting
H1-B visa holders’ employment with staffing and data analytics companies, which could result in reduced revenues and/or a higher cost of recruiting.
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. As a result, the negative impact on recruiting due to the exhaustion of recent H1-B quotas was not substantial. However, the subject of H1-B visas has recently become a major political discussion point and there are indications that the entire H1-B visa program may be significantly overhauled. If a new or revised H1-B visa program is implemented, there could be elements of the new/revised H1-B visa program that may not be advantageous to our business model thus adversely impacting our business, operating results or financial condition.
Reclassification of our independent contractors by tax or regulatory authorities could have a material adverse effect on our business model and/or could
require us to pay significant retroactive wages, taxes and penalties.
We utilize individuals to provide certain services in
connection with our business as qualified third-party independent contractors rather than as direct employees. Heightened state and federal scrutiny of independent contractor relationships could adversely affect us given that we utilize independent
contractors to perform certain services. An adverse determination related to the independent contractor status of these subcontracted personnel could result in substantial taxes or other liabilities to us, which could result in a material adverse
effect upon our business.
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Restrictions on immigration or unjustified or discriminatory enforcement of immigration laws could
increase our cost of doing business, cause us to change the way we conduct our business or otherwise disrupt our operations.
The
success of our business is dependent on our ability to recruit IT and data and analytics professionals and to mobilize them to meet our clients’ needs. Immigration laws in the countries in which we operate are subject to legislative changes, as
well as variations in the standards of application and enforcement due to political forces and economic conditions. It is difficult to predict the political and economic events that could affect immigration laws, or the restrictive impact they could
have on obtaining or renewing work visas for our professionals.
Immigration change continues to attract significant attention in the
public arena and in the current U.S. administration and Congress. If new immigration legislation is enacted in the U.S. or in the other jurisdictions in which we do business, such legislation may contain provisions that could make it more difficult
or costly for us to recruit and retain IT professionals, and to a lesser extent data and analytics professionals. Additionally, there is uncertainty as to the position the U.S. will take with respect to immigration under the Biden administration or
any new administration. As a result, we may incur additional costs to run our business or may have to change the way we conduct our operations, either of which could have a material adverse effect on our business, operating results and financial
condition. Also, if the enforcement of immigration laws by governmental authorities is unjustified or discriminatory, such enforcement could have the effect of disrupting our workforce.
The U.S. Congress and Biden administration may make substantial changes to fiscal, tax, and other federal policies that may adversely affect our
business.
In 2017, U.S. Congress and the Trump administration made substantial changes to U.S. policies, which included
comprehensive corporate and individual tax reform. In addition, the Trump administration called for significant changes to U.S. trade, healthcare, immigration and government regulatory policy. With the transition to the Biden administration in early
2021, it is possible, if not likely, that U. S. policy changes will occur. To the extent the U.S. Congress or the Biden administration implements changes to U.S. policy, those changes may impact, among other things, the U.S. and global economy,
international trade relations, unemployment, immigration, healthcare, taxation, the U.S. regulatory environment, inflation and other areas. Although we cannot predict the impact, if any, of these changes to our business, they could adversely affect
our business. Until we know what policy changes are made and how those changes impact our business and the business of our competitors over the long term, we will not know if, overall, we will benefit from them or be negatively affected by them.
Adverse results in tax audits or interpretations of tax laws could have an adverse impact on our business.
We are subject to periodic federal, state and local tax audits for various tax years. We also need to comply with new, evolving or revised tax
laws and regulations. The Tax Cuts and Jobs Act of 2017 continues to require interpretation, and the Biden administration has indicated that it intends to modify key aspects of the tax code, which could materially affect our tax obligations and
effective tax rate. Although we attempt to comply with all taxing authority regulations, adverse findings or assessments made by taxing authorities as the result of an audit could have a material adverse effect on our business, results of operations
and financial condition.
Requirements of the Affordable Care Act may continue to increase our employee benefits costs and could negatively affect
our operating results, cash flows and financial condition if such costs aren’t recovered with increases in client bill rates.
We provide healthcare coverage to our U.S.-based employees that are subject to the Affordable Care Act (“ACA”). Additional provisions
of the ACA and the compliance of such may result in higher overall costs to the Company, which could have a negative impact on our operating results, cash flows and financial condition.
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Risks Related to Economic and Financial Conditions
Negative economic conditions in North America may adversely affect demand for our services.
Approximately 99% of our revenues are generated from clients located in North America. Our business depends on the overall demand for IT and
data and analytics professionals and on the economic health of our clients. Weak economic conditions may force companies to reduce their IT staffing and data and analytics budgets and adversely affect demand for our services, thus reducing our
revenues.
Our industries are highly competitive and fragmented, which may limit our ability to increase our prices for services.
The IT staffing services and data analytics services industries are highly competitive and served by numerous global, national, regional and
local firms. Primary competitors include participants from a variety of market segments, including the major consulting firms, systems consulting and implementation firms, U.S.-based staffing services companies, data and analytics service companies,
applications software firms, service groups of computer equipment companies, specialized consulting firms, programming companies and temporary staffing firms. Many of these competitors have substantially greater financial, technical and marketing
resources and greater name recognition than we have. There are relatively few barriers to entry into many of our markets, and as such we may face additional competition from new entrants into our markets. In addition, there is a risk that clients
may elect to increase their internal resources to satisfy their staffing and data and analytics needs. There can be no assurance that we will compete successfully with existing or new competitors in the staffing and data analytics services markets.
Regional conflicts in South Asia could adversely affect the Indian economy, disrupt our operations and cause our business to suffer.
South Asia has, from time to time, experienced instances of civil unrest and hostilities among neighboring countries, such as between India and
Pakistan, India and China, and even within India. There have been military confrontations along the India-Pakistan and India-China borders from time to time. The potential for hostilities between India and Pakistan is high due to past terrorist
incidents in India, troop mobilizations along the border, and the geopolitical situation in the region. Military activity or terrorist attacks in the future could influence the Indian economy by disrupting communications and making travel more
difficult. This, in turn, could have a material adverse effect on our business, operating results and financial condition.
Wage costs in India may
increase, which may reduce our operating margins and reduce a competitive advantage of ours.
Our wage costs in India have
historically been significantly lower than wage costs in the U.S. for comparably skilled professionals, and this has been one of our competitive advantages with respect to the costs of our Indian recruiting and delivery offices. However, wage
increases in India may prevent us from sustaining this competitive advantage and may negatively affect our operating margins. We may need to increase the levels of our employee compensation more rapidly than in the past to retain talent. Unless we
are able to continue to increase the efficiency and productivity of our employees, wage increases in the long term may reduce our overall margins.
Negative economic or business conditions brought on by a global health epidemic or outbreak may adversely affect demand for our services.
Our business depends on the overall demand for IT and data and analytics professionals and on the economic health of our clients. Our business
could be adversely affected by the effects of the COVID-19 virus or another epidemic or outbreak on the economic and business climate. For example, the spread of the
COVID-19 virus and the efforts taken to control its spread may cause companies to reduce their staffing and data and
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analytics budgets and adversely affect demand for our services, thus reducing our revenues. Furthermore, the impact of the COVID-19 virus outbreak and the
actions taken to curtail the spread of the virus could disrupt or materially impair the ability of our clients to operate their businesses. Any such disruption or impairment could lower the demand for our services, result in collection issues on our
outstanding accounts receivable and have a material adverse impact on our revenues and profitability.
If our clients are adversely affected by
climate change or related compliance costs, this may reduce their spending and demand for our services, leading to a decrease in revenue.
In addition to emissions and climate change risks posed directly to Mastech Digital, we also have clients in varied industries such as
healthcare, consumer products, manufacturing, technology, and retail, among others. Some of the clients may be significantly affected by climate change resulting in greater physical risk. This may lead to a reduction of demand and loss of business
from such clients, which would impact our business, results of operations and financial condition.
Risks Related to Our Stock
The price of our common stock may fluctuate substantially, and your investment may decline in value.
The market price of our common stock may be highly volatile and may fluctuate substantially due to many factors, including:
• actual or anticipated fluctuations in our results of operations;
• our ability to integrate acquisitions;
• announcements of significant contracts by us or our competitors;
• changes in our pricing policies or the pricing policies of our competitors;
• loss of one or more of our significant customers;
• legislation;
• changes in market valuation or earnings of our competitors;
• the trading volume of our common stock;
• general economic conditions.
Our ownership is highly concentrated in two individuals and the interests of those individual shareholders may not coincide with yours.
Sunil Wadhwani and Ashok Trivedi, co-founders of the Company, own approximate 60% of Mastech
Digital’s outstanding common stock. Accordingly, Messrs. Wadhwani and Trivedi together have sufficient voting power to elect all the members of the Board of Directors and to effect transactions without the approval of our other shareholders,
except for those limited transactions that require a supermajority vote under our bylaws or articles of incorporation. The interests of Messrs. Wadhwani and Trivedi may from time to time diverge from our interests. Mastech Digital’s Audit
Committee consists of independent directors and addresses
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certain potential conflicts of interest and related party transactions that may arise between us and our directors, officers or our other affiliates. However, there can be no assurance that any
conflicts of interest will be resolved in our favor.
We identified material weaknesses in our internal controls designed to address management
review of complex accounting matters that arise from significant transactions and information technology general control systems, the existence of which, if not remediated appropriately or timely, could result in loss of investor confidence and
adversely impact our stock price.
Internal controls related to the operation of our business are critical to our ability to
provide accurate financial statements and an appropriate internal controls environment. As disclosed in Part II, Item 9A, management has identified material weaknesses in our internal controls related to (1) management review controls designed
to address risks associated with complex accounting matters that arise from significant routine and non-routine transactions related to goodwill impairment, business combinations, revenue recognition,
share-based compensation, and income taxes and (2) information technology general controls in the areas of change management, information security and IT operations. As a result, management concluded that our internal control over financial
reporting was not effective as of December 31, 2020. We are implementing remedial measures but there can be no assurance that our efforts will be successful. These measures will result in additional personnel, technology and other expenses. If
we are unable to remediate the material weakness, or are otherwise unable to maintain effective internal control over financial reporting or disclosure controls and procedures, our ability to record, process and report financial information
accurately, and to prepare financial statements within required time periods, could be adversely affected, which could subject us to litigation or investigations requiring management resources and payment of legal and other expenses, negatively
affect investor confidence in our financial statements and adversely impact our stock price.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Information regarding the principal properties leased by us and our subsidiaries as of December 31, 2020 is set forth below:
Location Principal Use Occupying Business Segment ApproximateSquareFootage
Waltham, Massachusetts Sales office IT Staffing 1,700
Dallas, Texas Sales and recruiting office IT Staffing 2,600
Chicago, Illinois Sales and recruiting office IT Staffing 2,600
Orlando, Florida Sales office IT Staffing 1,000
Atlanta, Georgia Executive, sales and marketing Data and Analytics 2,700
NOIDA, India Sales and recruiting office IT Staffing 39,900
Chennai, India Sales and delivery center Data and Analytics 19,000
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ITEM 3. 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 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
Our common stock is traded on the NYSE American under the symbol “MHH”. We began trading
“regular way” on the former American Stock Exchange (“AMEX”) on October 1, 2008.
The following table sets forth,
for the periods indicated, the range of high and low closing sale prices of the common stock of Mastech during the calendar quarters indicated.
Common Stock Market Price High Low
On March 1, 2021, we had 117 registered holders of record of our common stock. This figure excludes an
estimate of the indeterminate number of beneficial holders whose shares may be held by brokerage firms and clearing agencies. We currently do not pay recurring dividends on our common stock.
Currently, we do not have an active share repurchase program. However, we do from time to time purchase shares to satisfy employee tax
obligations related to the vesting of restricted shares, in accordance with the Company’s Stock Incentive Plan provisions. During 2020 and 2019, the Company purchased 0 and 2,574 shares at an average price of $0 and $5.05, respectively, to
satisfy such employee tax obligations.
The Company adopted a Stock Incentive Plan in 2008 which, as amended, provides that up to
4,900,000 shares of the Company’s common stock shall be allocated for issuance to directors, executive management, and key personnel. The most recent amendment approved by shareholder vote at the Company’s Annual Meeting of Shareholders on
May 13, 2020 increased the number of shares of common stock that may be issued pursuant to the Plan by 1,000,000 shares to a total of 4,900,000. Details of shares issued and outstanding under this plan are disclosed in Note 11 “Stock-Based
Compensation” to the Consolidated Financial Statements included in Item 8 herein.
In October 2018, the Board of Directors of the
Company approved the Mastech Digital, Inc. 2019 Employee Stock Purchase Plan (the “Stock Purchase Plan”). The Stock Purchase Plan is intended to meet the requirements of Section 423 of the Code and required the approval of the
Company’s shareholders to be qualified under Section 423 of the Code. On May 15, 2019, the Company’s shareholders approved the Stock Purchase Plan. Under the Stock Purchase Plan, 600,000 shares of Common Stock (subject to
adjustment upon certain changes in the Company’s capitalization) are available for purchase by eligible employees who become participants in the Stock Purchase Plan. The purchase price per share is 85% of the lesser of (i) the fair market
value per share of Common Stock on the first day of the offering period, or (ii) the fair market value per share of Common Stock on the last day of the offering period. For the year ended December 31, 2020 and December 31, 2019, stock
purchases under the Stock Purchase Plan totaled 20,459 and 40,500 shares at an average purchase price of $10.91 and $4.11, respectively. At December 31, 2020 there were 539,041 shares available for purchase under the Plan.
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ITEM 6. SELECTED FINANCIAL DATA
You should read the information set forth below in conjunction with our Consolidated Financial Statements and accompanying Notes and
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Annual Report on Form 10-K.
Years Ended December 31,
(Amounts in thousands, except per share data)
Income Statement Data:
Earnings per share:
Weighted average common shares outstanding:
Balance Sheet Data:
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This Management’s Discussion and Analysis should be read in conjunction with our Consolidated Financial Statements and
accompanying Notes included in this Annual Report on Form 10-K.
This Management’s Discussion and
Analysis contains forward-looking statements that involve risks, uncertainties, and assumptions as described under the heading “Forward-Looking Statements” included in Part I of this Annual Report on Form
10-K. Our actual results could differ materially from those anticipated by these forward-looking statements as a result of many factors, including those discussed under “Item 1A. Risk Factors” and
elsewhere in this Annual Report on Form 10-K.
Overview:
We are a provider of Digital Transformation IT Services to mostly large and medium-sized organizations.
Our portfolio of offerings includes data management and analytics services; other digital transformation services such as digital
learning services; and IT staffing services.
We operate in two reporting segments – Data and Analytics Services and IT Staffing
Services. Our data and analytics services are marketed on a global basis under the brand Mastech InfoTrellis and are delivered largely on a project basis with on-site and
off-shore resources. These capabilities and expertise were acquired through our acquisition of InfoTrellis and enhanced and expanded subsequent to the acquisition. In October 2020, we acquired AmberLeaf
Partners, Inc. (“AmberLeaf”), a Chicago-based customer experience consulting firm. This acquisition enhances our capabilities in customer experience strategy and managed services offerings for a variety of Cloud-based enterprise
applications across sales, marketing and customer services organizations. Our IT staffing business combines technical expertise with business process experience to deliver a broad range of staffing services in digital and mainstream technologies, as
well as our other digital transformation services.
Both business segments provide their services across various industry verticals,
including: financial services; government; healthcare; manufacturing; retail; technology; telecommunications; and transportation. In our Data and Analytics Services segment we evaluate our revenues and gross profits largely by service line. In our
IT Staffing Services segment, we evaluate our revenues and gross profits largely by sales channel responsibility. This analysis within both our reporting segments is multi-purposed and includes technologies employed, client relationships, and
geographic locations.
Economic Trends and Outlook
Generally, our business outlook is highly correlated to general North American economic conditions, particularly with respect to our IT
Staffing Services segment. During periods of increasing employment and economic expansion, demand for our services tends to increase. Conversely, during periods of contracting employment and / or a slowing global economy, demand for our services
tends to decline. As the economy slowed in 2007 and recessionary conditions emerged in 2008 and 2009, we experienced less demand for our IT staffing services. With economic expansion in 2010 through 2019 activity levels improved. However, as the
recovery strengthened, we experience increased tightness in the supply-side (skilled IT professionals) of our businesses. These supply-side challenges pressured resource costs and to some extent gross margins. As we entered 2020, we were encouraged
by continued growth in the domestic job markets and expanding U.S. and global economies. However, with the COVID-19 pandemic surfacing in the first quarter of 2020, we realized the economic growth would
quickly turn into recessionary conditions, which had a material impact on activity levels in both of our business segments. As we enter 2021, we are encouraged by the global roll-out of vaccination programs
and some signs of economic expansion. While there is still uncertainty in the global markets, we are hopeful that economic conditions will improve throughout the year as the impact of the pandemic subsides.
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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”).
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 MSP’s to manage their contractor spending. Both of these dynamics may pressure our IT 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.
Results of
Operations
We operate in two reporting segments – Data and Analytics Services and IT Staffing Services. The 2020 results of
operations for our Data and Analytics Services segment include the operating results of AmberLeaf from the October 1, 2020 acquisition date through December 31, 2020.
Below is a tabular presentation of revenues and gross profit margins by segment for the periods discussed:
Revenues & Gross Margin by Segment
(Revenues in millions)
Years Ended December 31,
Data and Analytics Services $ 30.2 $ 26.7 $ 23.8
Gross Margin %
Data and Analytics Services 50.5 % 46.7 % 44.0 %
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Below is a tabular presentation of operating expenses by sales and marketing operations,
amortization of acquired intangible assets, acquisition transaction expenses, revaluation of contingent consideration, goodwill impairment and general and administrative categories for the periods discussed:
Selling, General & Administrative (“S,G&A”) Expense Details
(Amounts in millions)
Years Ended December 31,
Data and Analytics Services Segment
Sales and Marketing $ 4.9 $ 3.4 $ 2.7
Amortization of Acquired Intangible Assets 2.1 2.0 2.0
Acquisition Transaction Expenses 0.6 (0.1 ) (0.1 )
Revaluation of Contingent Consideration — (6.1 ) (11.1 )
Goodwill Impairment — — 9.7
General & Administrative 3.0 2.5 1.8
Subtotal Data and Analytics Services $ 12.5 $ 2.7 $ 5.3
IT Staffing Services Segment
Sales and Marketing $ 7.1 $ 8.6 $ 8.6
Amortization of Acquired Intangible Assets 0.7 0.7 0.8
General & Administrative 9.7 8.8 7.4
Subtotal IT Staffing Services $ 25.6 $ 28.3 $ 25.6
2020 Compared to 2019
Revenues
Revenues for the year
ended December 31, 2020 totaled $194.1 million, compared to $193.6 million for the year ended December 31, 2019. This slight increase in revenues reflected revenue growth of 13% (approximately 6% organic) in our Data and
Analytics Services segment and a 2% revenue decline in our IT Staffing Services segment. In our Data and Analytics Services segment, existing client projects continued largely uninterrupted, resulting in revenue growth during the year. However, the
pandemic clearly impacted new assignments and pipeline opportunities with project start delays, which resulted in curtailed revenue growth in 2020. Revenue declined in our IT Staffing Services segment resulting in a
104-consultant decline during the year, as we ended 2020 with 1,063 consultants-on-billing. This decline in IT Staffing Services
segment revenues was the direct result of the COVID-19 pandemic and its impact on activity levels and early assignment ends, particularly in the first-half of the year. Our average IT staffing bill rate for
2020 increased to $76.60 per hour compared to $74.97 per hour in 2019 — an increase of about 2%. This bill rate increase was primarily the result of our continued focus on advanced technology skill-sets.
In both 2020 and 2019, we had one client that exceeded 10% of total revenues (CGI = 15.0% and 11.3%, respectively). Our top ten clients
represented 47% of total revenues in 2020 compared to 45% of total revenues in 2019.
Gross Margin
Gross profit increased to $51.5 million in 2020 compared to $48.0 million in 2019. Gross profit as a percentage of revenue
totaled 26.6% in 2020 compared to 24.8% in 2019. The improvement in our gross margin
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percentage reflected margin expansion in both of our business segments. In our Data and Analytics Services segment, gross margins increased by 380-basis
points to a record 50.5%. This increase was due to higher-valued assignments, improved utilization and very little reimbursable travel expense revenues due to the pandemic (pass-through revenues with no gross margin content). Gross margins in our IT
Staffing Services segment were 22.1% in 2020 compared to 21.3% in 2019. This 80-basis point improvement was largely due to better margins on new assignments and reflected our continued focus on advanced
technology skill-sets.
Selling, General and Administrative (“S,G&A”) Expenses
S,G&A expenses in 2020 totaled $38.1 million and represented 19.6% of total revenues, compared to $31.0 million or 16.0% of
revenues in 2019. When excluding acquisition transaction expenses; the revaluation of contingent consideration; goodwill impairment; and the amortization of acquired intangible assets, adjusted S,G&A expenses related to operations, as a
percentage of revenues was 17.9% in 2020 versus 17.8% in 2019. The slight increase in S,G&A as a percentage of revenues excluding these items was largely due to investments made to our Data and Analytics Services segment, including expenses
related to the integration of the AmberLeaf business following the acquisition.
Fluctuations within S,G&A expense components during
2020 compared to 2019 included the following:
Other Income / (Expense) Components
In 2020, other income / (expense) consisted of interest expense of ($866,000) and foreign exchange gains of $96,000. In 2019, other income /
(expense) consisted of interest expense of ($1.8 million) and foreign exchange gains of $11,000. The decline in interest expense was due to lower average outstanding borrowings resulting from debt repayments made during the year and a lower
effective interest rate. Net foreign exchange gains in 2020 and 2019 largely reflected exchange rate variations between the Indian rupee and the Canadian dollar compared to the U.S. dollar.
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Income Tax Expense
Income tax expense for 2020 was $2.8 million and represented an effective tax rate on pre-tax
income of 21.9% compared to $4.1 million in 2019, which represented an effective tax rate on pre-tax income of 26.8%. The lower 2020 effective tax rate was largely due to excess tax benefits related to
the exercise of stock options and the vesting of restricted shares.
2019 Compared to 2018
Revenues
Revenues for the year
ended December 31, 2019 totaled $193.6 million, compared to $177.2 million for the year ended December 31, 2018. This 9% increase in revenues reflected revenue growth of 12% in our Data and Analytics Services segment and
approximately 9% revenue growth in our IT Staffing Services segment. In our Data and Analytics Services segment, new service- offerings helped drive 2019 revenues, particularly during the second half of the year. Revenue growth in our IT Staffing
Services segment reflected a 65-consultant expansion of our billable consultant-base and a higher average bill rate. Utilization in 2019 was slightly below 2018 levels due to more downtime related to the
fourth quarter holiday season. Our average IT staffing bill rate for 2019 increased to $74.97 per hour in 2019 from $73.01 per hour in 2018 – an increase of about 3%. This bill rate increase was reflective of the types of skill sets that
we deployed on new assignments during 2019.
In 2019 and 2018, we had one client that exceeded 10% of total revenues (CGI = 11.3% and
12.8%, respectively). Our top ten clients represented 45% of total revenues in 2019 compared to 47% of total revenues in 2018.
Gross Margin
Gross profit increased to $48.0 million in 2019 compared to $42.5 million in 2018. Gross profit as a percentage of
revenue totaled 24.8% in 2019 compared to 24.0% in 2018. The increase in gross profit dollars reflected higher revenues in 2019. The improvement in our gross margin percentage reflected margin expansion in both of our business segments. In our Data
and Analytics Services segment, gross margins increased by 270-basis points to 46.7%, due to lower bench costs and higher margins on new assignments secured during the year. In our IT Staffing Services
segment, gross margins increased by 40-basis points to 21.3% largely due to higher margins on digital technology assignments.
Selling, General and Administrative (“S,G&A”) Expenses
S,G&A expenses in 2019 totaled $31.0 million and represented 16.0% of total revenues, compared to $30.9 million or 17.4% of
revenues in 2018. When excluding acquisition transaction expenses; the revaluation of contingent consideration; goodwill impairment; and the amortization of acquired intangible assets, adjusted S,G&A expenses related to operations, as a
percentage of revenues was 17.8% in 2019 versus 16.7% in 2018. The increase in adjusted S,G&A as a percentage of revenues was largely due to investments made to our Data and Analytics Services segment’s sales and delivery organizations and
higher recruitment and general & administrative expenses in our IT staffing services business.
Fluctuations within S,G&A
expense components during 2019 compared to 2018 included the following:
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Other Income / (Expense) Components
In 2019, other income / (expense) consisted of interest expense of ($1.8 million) and foreign exchange gains of $11,000. In 2018, other income
/ (expense) consisted of interest expense of ($2.2 million) and foreign exchange losses of ($40,000). The decline in interest expense was due to lower average outstanding borrowings resulting from debt repayments made during the year and a
lower effective interest rate. Net foreign exchange gains / (losses) in 2019 and 2018 largely reflected exchange rate variations between the Indian rupee and the Canadian dollar compared to the U.S. dollar.
Income Tax Expense
Income tax
expense for 2019 was $4.1 million and represented an effective tax rate on pre-tax income of 26.8% compared to $2.7 million in 2018, which represented an effective tax rate on pre-tax income of 28.9%. The 2019 effective tax rate was lower than 2018 because 2018 income tax expense included U.S. tax reform transition taxes.
Liquidity and Capital Resources
Financial Conditions and Liquidity
At December 31, 2020, we had outstanding bank debt, net of cash balances on hand, of $9.8 million and approximately $22 million
of borrowing capacity under our existing credit facility. During 2020, our outstanding bank debt, net of cash balances on hand, declined by approximately $13 million, despite $10 million of term-loan borrowings to support our
AmberLeaf acquisition. This reduction in debt was reflective of net cash flows provided by operating activities. Reductions in operating working capital levels provided $7.3 million of cash, of which $4.6 million was related to the COVID-19 payroll tax deferment program. (see Note 8 for further details).
Historically, we have funded
our business needs with cash generation from operating activities. In the data and analytics services and IT staffing services industries, investment in operating working capital levels (defined as current assets excluding cash and cash equivalents
minus current liabilities, excluding short-term borrowings) is a significant use of cash. Controlling our operating working capital levels by closely managing our accounts receivable balance is an important element of cash preservation. Our accounts
receivable “days sales outstanding” measurement (“DSO”) was 60-days at year-end 2020 and 55-days at year-end 2019. The higher DSO measurement in 2020 reflected some cash conversion disruptions due to the COVID-19 pandemic.
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Cash provided by operating activities, our cash and cash equivalent balances on hand at
December 31, 2020 and current availability under our existing credit facility are expected to be adequate to fund our business needs over the next 12 months, absent any acquisition-related activities.
Below is a tabular presentation of cash flow activities for the periods discussed:
Years Ended December 31,
(Amounts in millions)
Operating activities $ 21.2 $ 16.1 $ (0.5 )
Investing activities (9.6 ) (0.9 ) (1.1 )
Financing activities (6.7 ) (13.4 ) 0.6
Operating Activities
Cash provided by (used in) operating activities for the years ended December 31, 2020, 2019 and 2018 totaled $21.2 million,
$16.1 million, and ($0.5 million), respectively. In 2020, cash flows from operating activities included net income of $9.9 million, non-cash charges of $4.0 million and reductions in
operating working capital of $7.3 million. In 2019, cash flows from operating activities included net income of $11.1 million, non-cash charges of ($0.1 million) and reductions in operating working
capital of $5.1 million. In 2018, cash flows from operating activities included net income of $6.7 million and non-cash charges of $2.7 million, offset by an increase in operating working
capital of ($9.9 million). The 2020 reduction in operating working capital was due to lower accounts receivable, reflecting revenue declines in the second half of the year and $4.6 million related to the
COVID-19 payroll tax deferment program. The 2019 decline in operating working capital was reflective of the resolution of cash conversion disruptions related to our 2018 Cloud-based ERP platform
implementation.
We would expect operating working capital levels to increase should revenue grow in 2021. Accordingly, an increase in
operating working capital would result in a reduction in cash generated from operating activities. We believe DSO’s will remain at current levels or improve modestly during 2021. Additionally, the $4.6 million payroll tax deferment will be
required to be repaid, $2.3 million in 2021 and $2.3 million in 2022, which will negatively impact cash flows from operations in those years.
Investing Activities
Cash (used
in) investing activities for the years ended December 31, 2020, 2019 and 2018 totaled ($9.6 million), ($0.9 million), and ($1.1 million), respectively. In 2020, cash (used in) investing activities related to the acquisition of AmberLeaf of
($9.3 million) and capital expenditures of ($0.3 million). In 2019, cash (used in) investing activities included capital expenditures of ($1.0 million), partially offset by $0.1 million of recoveries of
non-current deposits (office lease deposits). In 2018, cash (used in) investing activities included capital expenditures of ($0.8 million) and increases in non-current
deposits of ($0.3 million). In 2020, capital expenditures consist of general items. In 2019 and 2018, capital expenditures were largely related to system upgrade expenditures.
Financing Activities
In 2020,
cash (used in) financing activities totaled ($6.7 million) and consisted of debt repayments, net of term-loan refinancing associated the AmberLeaf acquisition of ($8.0 million) and the payment of deferred financing costs of ($0.3 million), partially
offset by $1.4 million proceeds from the exercise of stock options and the issuance of common stock related to the Company’s employee stock purchase plan of $0.2 million. In 2019, cash (used in) financing activities totaled ($13.4
million) and largely consisted of net debt repayments of ($13.6 million), partially offset by $0.2 million of proceeds from the issuance of common stock. In 2018, cash provided
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