Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2023 ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 001-34099 | Securities registered pursuant to Section 12(b) of the Act: | | | | --- | --- | --- | | Trading | | Name of each exchange | | Title of ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2023 ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 001-34099 MASTECH DIGITAL, INC. (Exact name of registrant as specified in its charter) PENNSYLVANIA 26-2753540 (State or other jurisdiction of incorpora ...

Revenue Performance - For the three months ended March 31, 2023, total revenues were $55,063,000, a decrease of 7.2% from $59,755,000 in the same period of 2022[43]. - The Data and Analytics Services segment generated $9,395,000 in revenue, down from $10,152,000, reflecting a decline of 7.5% year-over-year[42]. - The IT Staffing Services segment reported revenues of $45,668,000, a decrease of 7.4% from $49,603,000 in the prior year[43]. - Revenue from the United States was $53,755,000, down from $58,347,000, representing a decline of 7.3% year-over-year[44]. - Total revenues for Q1 2023 were $55.1 million, an 8% decrease from $59.8 million in Q1 2022, with a 7% decline in Data and Analytics Services and an 8% decline in IT Staffing Services[100]. Client Concentration - The top ten clients accounted for approximately 56% of total revenues in Q1 2023, compared to 51% in Q1 2022, indicating increased client concentration[44]. - The company's top ten clients represented approximately 56% of total revenues in Q1 2023, up from 51% in Q1 2022, indicating a higher revenue concentration[100]. Gross Profit and Margins - Gross profits for Q1 2023 were $13.5 million, down 15% from $15.9 million in Q1 2022, with a gross margin percentage of 24.5% compared to 26.7% in the prior year[103]. - Gross margin for Data and Analytics Services segment decreased to 38.5% in Q1 2023 from 45.2% in Q1 2022, attributed to lower utilization and project margins[104]. - IT Staffing Services segment gross margin fell to 21.6% in Q1 2023 from 22.9% in Q1 2022, primarily due to a $0.4 million reduction in permanent placement fees[105]. Operating Expenses - Total SG&A expenses increased to $12.9 million in Q1 2023, representing 23.5% of total revenues, compared to $12.6 million or 21.1% in Q1 2022[106]. - General and administrative expenses rose by $1.6 million in Q1 2023, driven by higher executive compensation and legal expenses[109]. Tax and Income - The total provision for income taxes for Q1 2023 was $218,000, a decrease of 76.1% from $915,000 in Q1 2022[71]. - Domestic income before income taxes for Q1 2023 was $2,080,000, down 37.2% from $3,315,000 in Q1 2022[70]. - Income tax expense for Q1 2023 was $218,000, with an effective tax rate of 45.5%, up from $915,000 and 28.2% in Q1 2022, due to valuation allowances related to foreign NOLs[108]. Cash Flow and Liquidity - Cash provided by operating activities was $3.1 million in Q1 2023, compared to $1.6 million in Q1 2022, with net income of $0.3 million[113]. - As of March 31, 2023, the company had cash balances of $9.1 million and $31.5 million of borrowing capacity under its credit facility[110]. - Accounts receivable "days sales outstanding" (DSOs) improved to 61 days as of March 31, 2023, down three days from the previous year[111]. - Cash used in investing activities was ($7,000) in Q1 2023, compared to ($646,000) in Q1 2022, reflecting a decrease in capital expenditures[114]. Shareholder Actions - The Company authorized a share repurchase program of up to 500,000 shares on February 8, 2023, with no shares repurchased in Q1 2023[74]. - During Q1 2023, the Company granted 19,924 restricted share units and 100,000 stock options at a strike price of $11.53[57]. - Stock-based compensation expense for Q1 2023 was $835,000, up from $526,000 in Q1 2022, reflecting an increase of 58.6%[58]. - The Company issued 17,804 shares in Q1 2023 compared to 90,933 shares in Q1 2022, indicating a decrease of 80.5%[58]. - As of March 31, 2023, there were 492,565 shares available for purchase under the Employee Stock Purchase Plan[61]. Debt and Liabilities - As of March 31, 2023, the Company had total lease liabilities of $3,444,000, down from $3,798,000 as of December 31, 2022[50]. - The Company had outstanding borrowings under the term loan of $0 as of March 31, 2023, down from $1.1 million at December 31, 2022[69]. - The Company prepaid $7.6 million of the outstanding term loan in August 2022, bringing the balance to zero by January 3, 2023[64]. - The Company deferred $4.6 million of the employer's share of social security tax under the CARES Act, with no balance reflected in the Consolidated Balance Sheets as of March 31, 2023[53]. Audit and Compliance - The Company’s Canadian subsidiary is currently under audit by Revenue Canada for the years 2018 and 2019[73]. - The company adopted ASU 2021-08 on January 1, 2023, with no material impact on financial statements, reflecting ongoing compliance with accounting standards[82]. Economic Conditions - Economic uncertainty continued to impact demand for IT Staffing Services in Q1 2023, with reduced client investment in new projects[94].

Mastech Digital, Inc. (NYSE:MHH) Q1 2023 Results Earnings Conference Call May 3, 2023 9:00 AM ET Company Participants Jennifer Lacey - Manager, Legal Affairs Jack Cronin - Chief Financial Officer Vivek Gupta - President and Chief Executive Officer Michael Fleishman - Chief Executive Officer, Data and Analytics Services Conference Call Participants Lisa Thompson - Zacks Investment Research Marc Riddick - Sidoti & Company Ross Davisson - Banneton Capital Operator Greetings. And welcome to the Mastech Digital ...

Part I [Business](index=3&type=section&id=Item%201.%20Business) Mastech Digital provides Digital Transformation IT Services through Data and Analytics and IT Staffing segments, serving a global client base - The company operates through two reportable segments: Data and Analytics Services and IT Staffing Services, deriving nearly **100% of its revenue** from these services[11](index=11&type=chunk) - Mastech Digital has grown through strategic acquisitions, including Hudson IT's staffing business (2015), InfoTrellis's data and analytics division (2017), and AmberLeaf's customer experience consulting firm (2020)[21](index=21&type=chunk)[23](index=23&type=chunk)[25](index=25&type=chunk) [Operating Segments](index=5&type=section&id=Item%201.%20Business%23Operating%20Segments) Operations are divided into Data and Analytics Services for data modernization and IT Staffing Services for skilled personnel - The Data and Analytics Services segment, branded Mastech InfoTrellis, focuses on data modernization, including data management, engineering, data science, customer experience consulting, and cloud services. It targets large corporations with project sizes ranging from **$500,000 to multi-million dollar Center of Excellence contracts**[32](index=32&type=chunk)[36](index=36&type=chunk)[41](index=41&type=chunk) Data and Analytics Services - 2022 Revenue by Industry | Industry Vertical | Revenue Percentage | | :--- | :--- | | Financial Services | 37% | | Manufacturing | 21% | | Retail | 16% | | Healthcare | 16% | | Government | 5% | | Other | 5% | - The IT Staffing Services segment provides contract staffing for digital technologies (cloud, mobile, analytics) and mainstream IT roles. It utilizes a flexible sales model, including a centralized telesales approach and a local branch service model, to serve a diverse client base[13](index=13&type=chunk)[48](index=48&type=chunk)[57](index=57&type=chunk) IT Staffing Services - Billable Consultants by Industry (as of Dec 31, 2022) | Industry Vertical | Consultant Percentage | | :--- | :--- | | Financial Services | 53% | | Healthcare | 9% | | Government | 8% | | Telecom | 7% | | Technology | 6% | | Retail | 5% | | Other | 12% | [Company Profile](index=11&type=section&id=Item%201.%20Business%23Company%20Profile) Mastech Digital employs 1,695 professionals and 324 subcontractors, leveraging an established client base in competitive markets - As of December 31, 2022, the company had a total of **1,695 employees**, with **1,071 in North America** and **624 offshore**, supplemented by **324 subcontracted professionals**[61](index=61&type=chunk) - The company competes with major firms like Cognizant, TCS, Deloitte, and Accenture in Data and Analytics, and a wide range of firms in the fragmented IT Staffing market[66](index=66&type=chunk) - Key strengths include an established client base, operational excellence via global delivery models, minority-owned business certification, an attractive financial profile, and deep expertise in high-demand digital transformation skills[68](index=68&type=chunk)[69](index=69&type=chunk)[73](index=73&type=chunk) [Government Regulation](index=14&type=section&id=Item%201.%20Business%23Government%20Regulation) Operations are subject to U.S. immigration laws, with H1-B visa changes posing risks to talent supply and profitability - As of December 31, 2022, approximately **27% of the company's workforce** was working under Mastech Digital sponsored H1-B temporary work permits[81](index=81&type=chunk) - Potential legislative changes to the H1-B visa program could negatively impact revenues and profits by affecting the number of available visas or increasing the prevailing wage requirements for H1-B employees[81](index=81&type=chunk) [Risk Factors](index=14&type=section&id=Item%201A.%20Risk%20Factors) The company faces operational, regulatory, economic, and stock-related risks, including client concentration, cybersecurity, and H1-B visa changes - A significant portion of revenue comes from a limited number of clients. In 2022, the top ten clients accounted for approximately **53% of total revenues**, making the company vulnerable to the loss of a major client[100](index=100&type=chunk) - The company experienced a cybersecurity breach in Q3 2022, which impacted two clients and resulted in a pre-tax loss reserve of **$450,000**[122](index=122&type=chunk) - Approximately **27% of the workforce** is on company-sponsored H1-B visas, making the business highly sensitive to changes in U.S. immigration regulations[133](index=133&type=chunk) - The company's ownership is highly concentrated, with co-founders Sunil Wadhwani and Ashok Trivedi beneficially owning approximately **59% of the outstanding common stock** as of December 31, 2022[154](index=154&type=chunk) [Unresolved Staff Comments](index=28&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reports no unresolved staff comments from the SEC - None[158](index=158&type=chunk) [Properties](index=28&type=section&id=Item%202.%20Properties) The company leases all principal properties, including headquarters in Moon Township, PA, and key operational offices globally Principal Leased Properties as of December 31, 2022 | Location | Principal Use | Occupying Business Segment | Approximate Square Footage | | :--- | :--- | :--- | :--- | | Moon Township, PA | Corporate headquarters & operations | IT Staffing | 11,500 | | Chicago, IL | Executive, sales and recruiting | IT Staffing | 2,300 | | Atlanta, GA | Sales and marketing | Data and Analytics | 2,700 | | Toronto, Canada | HR, sales, marketing and delivery | Data and Analytics | 3,800 | | NOIDA, India | Sales and recruiting office | IT Staffing | 39,900 | | Chennai, India | Sales and delivery center | Data and Analytics | 35,400 | [Legal Proceedings](index=28&type=section&id=Item%203.%20Legal%20Proceedings) The company is involved in various lawsuits, but management expects no material adverse effect on financial position - Management believes that the disposition of ongoing legal proceedings will not have a material adverse effect on the company's financial condition[160](index=160&type=chunk) [Mine Safety Disclosures](index=28&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not applicable[161](index=161&type=chunk) Part II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=28&type=section&id=Item%205.%20Market%20for%20the%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) Mastech Digital's common stock trades on NYSE American (MHH); the company does not pay recurring dividends but authorized a share repurchase program - The company's common stock trades on the NYSE American under the symbol **MHH**[163](index=163&type=chunk) - A share repurchase program for up to **500,000 shares** of common stock over a two-year period was authorized by the Board of Directors on February 8, 2023[165](index=165&type=chunk) - Under the 2019 Employee Stock Purchase Plan, **23,789 shares** were purchased in 2022 at an average price of **$11.53 per share**[166](index=166&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=29&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) In 2022, total revenues grew 9% to **$242.2 million**, but consolidated gross margin decreased to **26.1%**, while liquidity remained strong with **$7.1 million** cash [Results of Operations](index=30&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations%23Results%20of%20Operations) In 2022, revenues increased 9% to **$242.2 million**, but gross margin percentage declined to **26.1%**, impacted by higher SG&A expenses Revenues & Gross Margin by Segment (2020-2022) | Revenues (in millions) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Data and Analytics Services | $40.6 | $38.3 | $30.2 | | IT Staffing Services | $201.6 | $183.7 | $163.9 | | **Total Revenues** | **$242.2** | **$222.0** | **$194.1** | | **Gross Margin %** | | | | | Data and Analytics Services | 41.5% | 48.4% | 50.5% | | IT Staffing Services | 23.0% | 22.3% | 22.1% | | **Total Gross Margin %** | **26.1%** | **26.8%** | **26.6%** | - In 2022, total revenues increased **9%** year-over-year, but gross margin percentage decreased by **70 basis points** to **26.1%**, primarily due to lower utilization and margin pressure in the Data and Analytics segment[182](index=182&type=chunk)[184](index=184&type=chunk) - SG&A expenses in 2022 included a **$0.4 million** reserve for a cyber-security breach and **$1.0 million** in severance expenses, which were not present in 2021[187](index=187&type=chunk) - In 2021, SG&A expenses included a credit of **$2.9 million** from the revaluation of a contingent consideration liability related to the AmberLeaf acquisition[187](index=187&type=chunk)[196](index=196&type=chunk) [Liquidity and Capital Resources](index=35&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations%23Liquidity%20and%20Capital%20Resources) The company ended 2022 with **$6.0 million** net cash and **$32 million** borrowing capacity, generating **$12.6 million** from operations Cash Flow Activities (2020-2022) | Cash Flows Activities (in millions) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Operating activities | $12.6 | $5.2 | $21.2 | | Investing activities | ($0.8) | ($2.1) | ($9.6) | | Financing activities | ($10.4) | ($4.1) | ($6.7) | - In 2022, the company reduced its outstanding bank debt by **$12 million** and ended the year with **$7.1 million** in cash and cash equivalents[198](index=198&type=chunk) - Accounts receivable 'days sales outstanding' (DSO) was **59 days** at year-end 2022, an improvement from **61 days** at year-end 2021[199](index=199&type=chunk) [Critical Accounting Policies and Estimates](index=37&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations%23Critical%20Accounting%20Policies%20and%20Estimates) Management identifies critical accounting policies including Revenue Recognition, Accounts Receivable, Goodwill Impairment, Business Combinations, and Income Taxes - Revenue on fixed-price contracts is recognized over time using a cost-based input method, requiring management judgment on total estimated costs to completion[218](index=218&type=chunk) - Goodwill is tested for impairment annually on October 1st or more frequently, comparing fair value (estimated using discounted cash flows) to carrying value[225](index=225&type=chunk) - The contingent consideration liability from the AmberLeaf acquisition was revalued to **zero** in 2021, resulting in a **$2.9 million** credit to SG&A expenses[242](index=242&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=42&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risks relate to interest rate changes on variable debt and foreign currency fluctuations from international subsidiaries - A hypothetical **10% increase** in interest rates on the company's variable debt would result in an approximate **$10,000** increase in annual interest expense[250](index=250&type=chunk) - A hypothetical **10% change** in overall foreign currency rates in 2022 would have had an approximate **$65,000** impact on the consolidated financial statements[252](index=252&type=chunk) [Financial Statements and Supplementary Data](index=42&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents the company's audited consolidated financial statements, including the independent auditor's unqualified opinion and critical audit matters [Report of Independent Registered Public Accounting Firm](index=45&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data%23Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm) UHY LLP issued an unqualified opinion on the financial statements, identifying goodwill valuation as a Critical Audit Matter - The auditor's opinion states that the financial statements present fairly, in all material respects, the consolidated financial position of the company[263](index=263&type=chunk) - The valuation of the **$32.5 million** goodwill balance was identified as a Critical Audit Matter, requiring significant auditor judgment to evaluate management's forecasts[269](index=269&type=chunk)[270](index=270&type=chunk) [Consolidated Financial Statements](index=47&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data%23Consolidated%20Financial%20Statements) The consolidated financial statements show total assets of **$108.9 million** in 2022, with net income of **$8.7 million** and **$12.6 million** cash from operations Consolidated Balance Sheet Highlights (in thousands) | | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total current assets | $53,174 | $53,905 | | Goodwill, net | $32,510 | $32,510 | | Intangible assets, net | $15,773 | $18,760 | | **Total assets** | **$108,879** | **$114,068** | | Total current liabilities | $19,557 | $26,844 | | Total long-term debt | $0 | $8,700 | | **Total liabilities** | **$22,876** | **$39,640** | | **Total shareholders' equity** | **$86,003** | **$74,428** | Consolidated Statement of Operations Highlights (in thousands, except EPS) | | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Revenues | $242,238 | $222,012 | $194,101 | | Gross profit | $63,183 | $59,444 | $51,539 | | Income from operations | $12,199 | $17,610 | $13,403 | | **Net income** | **$8,712** | **$12,221** | **$9,861** | | **Diluted EPS** | **$0.72** | **$1.02** | **$0.83** | [Notes to Consolidated Financial Statements](index=52&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data%23Notes%20to%20Consolidated%20Financial%20Statements) Notes detail accounting policies, revenue disaggregation, the AmberLeaf acquisition, goodwill, credit facility terms, stock-based compensation, and segment data - The top ten clients accounted for **53% of total revenues** in 2022, with one client, CGI, representing **22.2% of total revenues**[359](index=359&type=chunk) - The October 2020 acquisition of AmberLeaf had a total fair value of consideration of **$12.5 million**, with **$2.9 million** in contingent consideration later written down to zero in 2021[366](index=366&type=chunk) - As of December 31, 2022, the company had **$1.1 million** outstanding on its term loan and **$31.8 million** of unused borrowing capacity on its revolver[382](index=382&type=chunk) - Total stock-based compensation expense was **$2.2 million** in 2022, with **$7.4 million** of unrecognized expense related to non-vested stock options remaining[409](index=409&type=chunk) [Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=77&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[438](index=438&type=chunk) [Controls and Procedures](index=77&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2022 - Management concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this report[440](index=440&type=chunk) - Management concluded that the Company's internal control over financial reporting was effective as of December 31, 2022, based on the COSO-2013 framework[443](index=443&type=chunk) [Other Information](index=78&type=section&id=Item%209B.%20Other%20Information) The company reports no other information - None[445](index=445&type=chunk) Part III [Directors, Executive Officers and Corporate Governance](index=79&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information on directors, executive officers, and corporate governance is incorporated by reference from the 2023 proxy statement - Required information is incorporated by reference from the Company's definitive proxy statement for the Annual Meeting of Shareholders scheduled for May 10, 2023[449](index=449&type=chunk) [Executive Compensation](index=79&type=section&id=Item%2011.%20Executive%20Compensation) Information regarding executive and director compensation is incorporated by reference from the 2023 proxy statement - Required information is incorporated by reference from the Proxy Statement under headings such as 'Compensation Discussion And Analysis' and 'Summary Compensation Table'[451](index=451&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters](index=79&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Shareholder%20Matters) Information on security ownership and equity compensation plans is incorporated by reference from the 2023 proxy statement - Required information is incorporated by reference from the Proxy Statement under the headings 'Equity Compensation Plan Information' and 'Security Ownership of Certain Beneficial Owners and Management'[452](index=452&type=chunk)[453](index=453&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=79&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information on related person transactions and director independence is incorporated by reference from the 2023 proxy statement - Required information is incorporated by reference from the Proxy Statement under the headings 'Board Committees and Meetings' and 'Policies and Procedures for Approving Related Person Transactions'[454](index=454&type=chunk) [Principal Accountant Fees and Services](index=79&type=section&id=Item%2014.%20Principal%20Accountant%20Fees%20and%20Services) Information regarding principal accountant fees and services is incorporated by reference from the 2023 proxy statement - Required information is incorporated by reference from the Proxy Statement under the heading 'Independent Registered Public Accountants'[455](index=455&type=chunk) Part IV [Exhibits and Financial Statement Schedules](index=80&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists financial statements, schedules, and exhibits filed as part of the Form 10-K, including consolidated financial statements Schedule II — Valuation and Qualifying Accounts (in thousands) | Allowance for Doubtful Accounts | Balance at beginning of period | Charged to expense | Recoveries/ (Write offs) | Balance at end of period | | :--- | :--- | :--- | :--- | :--- | | Year ended Dec 31, 2022 | $375 | $50 | $19 | $444 | | Year ended Dec 31, 2021 | $413 | $130 | ($168) | $375 | | Year ended Dec 31, 2020 | $338 | $— | $75 | $413 | [Signatures](index=86&type=section&id=Signatures) The report is duly signed by the company's President, CEO, CFO, and Board of Directors as of March 27, 2023

Mastech Digital, Inc. (NYSE:MHH) Q4 2022 Earnings Conference Call February 8, 2023 9:00 AM ET Company Participants Jennifer Lacey - Manager, Legal Affairs Vivek Gupta - Chief Executive Officer Jack Cronin - Chief Financial Officer Michael Fleishman - Chief Executive Officer, Data and Analytics Services Conference Call Participants Lisa Thompson - Zacks Investment Research Timothy Call - The Capital Management Corporation Marc Riddick - Sidoti Operator Greetings, and welcome to the Mastech Digital, Inc. Four ...

Mastech Digital, Inc. (NYSE:MHH) Q3 2022 Earnings Conference Call November 2, 2022 9:00 AM ET Company Participants Jennifer Lacey - Manager, Legal Affairs Vivek Gupta - Chief Executive Officer Jack Cronin - Chief Financial Officer Conference Call Participants Lisa Thompson - Zacks Marc Riddick - Sidoti Operator Greetings and welcome to the Mastech Digital Inc. Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this co ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2022 ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 001-34099 MASTECH DIGITAL, INC. (Exact name of registrant as specified in its charter) PENNSYLVANIA 26-2753540 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Ident ...

Mastech Digital Incorporated (NYSE:MHH) Q2 2022 Earnings Conference Call August 3, 2022 9:00 AM ET Company Participants Jennifer Lacey - Head of Legal & Admin Vivek Gupta - President & Chief Executive Officer John Cronin - Chief Financial Officer & Corporate Secretary Ganeshan Venkateshwaran - Chief Executive Officer of Mastech InfoTrellis Conference Call Participants Lisa Thompson - Zacks Investment Research Tim Call - The Capital Management Corporation Marc Riddick - Sidoti Operator Greetings. Welcome to ...

PART I. FINANCIAL INFORMATION [ITEM 1. FINANCIAL STATEMENTS](index=3&type=section&id=ITEM%201.%20FINANCIAL%20STATEMENTS) This section presents the unaudited condensed consolidated financial statements for the three months ended March 31, 2022 and 2021 [Condensed Consolidated Statements of Operations (Unaudited)](index=3&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations%20(Unaudited)) Operations Overview | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :--- | :--- | :--- | | Revenues | $59,755 | $49,775 | | Cost of revenues | 43,823 | 36,971 | | Gross profit | 15,932 | 12,804 | | Selling, general and administrative expenses | 12,625 | 10,935 | | Income from operations | 3,307 | 1,869 | | Interest income (expense), net | (114) | (195) | | Other income (expense), net | 54 | (37) | | Income before income taxes | 3,247 | 1,637 | | Income tax expense | 915 | 443 | | Net income | $2,332 | $1,194 | | Basic EPS | $0.20 | $0.10 | | Diluted EPS | $0.19 | $0.10 | [Condensed Consolidated Statements of Comprehensive Income (Unaudited)](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income%20(Unaudited)) Comprehensive Income | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :--- | :--- | :--- | | Net income | $2,332 | $1,194 | | Foreign currency translation adjustments | (147) | (19) | | Net unrealized gain on interest-rate swap contracts | — | 35 | | Total comprehensive income | $2,185 | $1,201 | [Condensed Consolidated Balance Sheets (Unaudited)](index=5&type=section&id=Condensed%20Consolidated%20Balance%20Sheets%20(Unaudited)) Balance Sheet Summary | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :--- | :--- | :--- | | **ASSETS** | | | | Total current assets | $57,214 | $53,905 | | Net equipment, enterprise software, and leasehold improvements | 3,540 | 3,038 | | Operating lease right-of-use assets | 5,033 | 4,894 | | Goodwill, net of impairment | 32,510 | 32,510 | | Intangible assets, net of amortization | 17,968 | 18,760 | | Total assets | $116,776 | $113,702 | | **LIABILITIES AND SHAREHOLDERS' EQUITY** | | | | Total current liabilities | $26,802 | $26,844 | | Total liabilities | 38,744 | 39,274 | | Total shareholders' equity | 78,032 | 74,428 | | Total liabilities and shareholders' equity | $116,776 | $113,702 | [Condensed Consolidated Statements of Shareholders' Equity (Unaudited)](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Shareholders'%20Equity%20(Unaudited)) Shareholders' Equity Changes (Q1 2022) | Metric | Balances, December 31, 2021 (in thousands) | Balances, March 31, 2022 (in thousands) | | :--- | :--- | :--- | | Common Stock | $131 | $133 | | Additional Paid-in Capital | 28,250 | 29,667 | | Retained Earnings | 50,841 | 53,173 | | Treasury Stock | (4,187) | (4,187) | | Accumulated Other Comprehensive Income (Loss) | (607) | (754) | | Total Shareholders' Equity | $74,428 | $78,032 | | Net income | — | 2,332 | | Other comprehensive (loss), net of taxes | — | (147) | | Stock-based compensation expense | — | 526 | | Stock options exercised | — | 893 | Shareholders' Equity Changes (Q1 2021) | Metric | Balances, December 31, 2020 (in thousands) | Balances, March 31, 2021 (in thousands) | | :--- | :--- | :--- | | Common Stock | $130 | $130 | | Additional Paid-in Capital | 25,509 | 26,231 | | Retained Earnings | 38,620 | 39,814 | | Treasury Stock | (4,187) | (4,187) | | Accumulated Other Comprehensive Income (Loss) | (539) | (532) | | Total Shareholders' Equity | $59,533 | $61,456 | | Net income | — | 1,194 | | Other comprehensive gain, net of taxes | — | 7 | | Stock-based compensation expense | — | 621 | | Stock options exercised | — | 101 | [Condensed Consolidated Statements of Cash Flows (Unaudited)](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows%20(Unaudited)) Cash Flow Summary | Activity | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :--- | :--- | :--- | | Net cash flows provided by operating activities | $1,563 | $774 | | Net cash flows (used in) investing activities | (646) | (191) | | Net cash flows (used in) financing activities | (207) | (999) | | Effect of exchange rate changes on cash and cash equivalents | (147) | (19) | | Net change in cash and cash equivalents | 563 | (435) | | Cash and cash equivalents, end of period | $7,185 | $7,242 | [Notes to Condensed Consolidated Financial Statements (Unaudited)](index=8&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements%20(Unaudited)) Details the company's accounting policies, revenue recognition, segment performance, and other key financial disclosures [1. Description of Business and Basis of Presentation](index=8&type=section&id=1.%20Description%20of%20Business%20and%20Basis%20of%20Presentation) - Mastech Digital, Inc. provides **Digital Transformation IT Services** to large and medium-sized organizations[26](index=26&type=chunk) - The company's offerings include data management and analytics services, digital learning services, and IT staffing services[27](index=27&type=chunk) - The Data and Analytics Services segment expanded through acquisitions of InfoTrellis (2017) and AmberLeaf Partners (2020), enhancing capabilities in data management, engineering, science, and customer experience consulting[28](index=28&type=chunk) - The IT Staffing Services segment delivers a broad range of staffing services in digital (data management, analytics, cloud, AI) and mainstream technologies[29](index=29&type=chunk) [2. Revenue from Contracts with Customers](index=9&type=section&id=2.%20Revenue%20from%20Contracts%20with%20Customers) - Revenue is primarily derived from data and analytics, IT staffing, and digital transformation services, recognized over time for time-and-material and fixed-price contracts[35](index=35&type=chunk)[36](index=36&type=chunk)[38](index=38&type=chunk) Revenue by Segment and Contract Type | Segment | Contract Type | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :--- | :--- | :--- | :--- | | Data and Analytics Services | Time-and-material | $6,181 | $5,854 | | | Fixed-price | 3,971 | 2,940 | | **Subtotal D&A Services** | | **$10,152** | **$8,794** | | IT Staffing Services | Time-and-material | $49,399 | $40,981 | | | Fixed-price | 204 | — | | **Subtotal IT Staffing Services** | | **$49,603** | **$40,981** | | **Total Revenues** | | **$59,755** | **$49,775** | - One client (CGI) accounted for **17.8% of total revenues in Q1 2022** (15.0% in Q1 2021), and the top ten clients represented approximately 51% and 47% of total revenues for the three months ended March 31, 2022 and 2021, respectively[43](index=43&type=chunk)[44](index=44&type=chunk) Revenue by Geography | Geography | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :--- | :--- | :--- | | United States | $58,347 | $47,942 | | Canada | 1,019 | 1,264 | | India and other | 389 | 569 | | **Total** | **$59,755** | **$49,775** | [3. Goodwill and Other Intangible Assets, Net](index=10&type=section&id=3.%20Goodwill%20and%20Other%20Intangible%20Assets%2C%20Net) - Goodwill primarily stems from the acquisitions of Hudson IT ($8.4M), InfoTrellis ($27.4M, with a $9.7M impairment in 2018), and AmberLeaf ($6.4M)[46](index=46&type=chunk) Net Carrying Value of Intangible Assets | Intangible Asset Category | Amortization Period (Years) | Net Carrying Value (March 31, 2022, in thousands) | Net Carrying Value (December 31, 2021, in thousands) | | :--- | :--- | :--- | :--- | | IT Staffing Services: | | | | | Client relationships | 12 | $3,471 | $3,638 | | Covenant-not-to-compete | 5 | — | — | | Trade name | 3 | — | — | | Data and Analytics Services: | | | | | Client relationships | 12 | 12,730 | 13,138 | | Covenant-not-to-compete | 5 | 353 | 413 | | Trade name | 5 | 414 | 500 | | Technology | 7 | 1,000 | 1,071 | | **Total Intangible Assets** | | **$17,968** | **$18,760** | - Amortization expense for intangible assets was **$792,000 for Q1 2022** and $793,000 for Q1 2021, included in SG&A expenses[48](index=48&type=chunk) [4. Leases](index=11&type=section&id=4.%20Leases) - The company leases office facilities and equipment under noncancelable operating leases, with an average initial term of four years and a weighted average remaining term of **3.8 years**[50](index=50&type=chunk) Lease Assets and Liabilities | Lease Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :--- | :--- | :--- | | Long-term operating lease right-of-use assets | $5,033 | $4,894 | | Short-term operating lease liability | $1,571 | $1,479 | | Long-term operating lease liability | 3,677 | 3,706 | | Total liabilities | $5,248 | $5,185 | - Rental expense for Q1 2022 and Q1 2021 was **$0.4 million** each period[54](index=54&type=chunk) [5. Payroll Tax Liability](index=12&type=section&id=5.%20Payroll%20Tax%20Liability) - The company deferred **$2.3 million** in employer's share of social security tax under the CARES Act, due by December 31, 2022, and reflected as part of current liabilities[56](index=56&type=chunk) [6. Commitments and Contingencies](index=12&type=section&id=6.%20Commitments%20and%20Contingencies) - Management believes that the disposition of ongoing lawsuits and administrative proceedings will **not have a material adverse effect** on the company's financial position, results of operations, or cash flows[57](index=57&type=chunk) [7. Employee Benefit Plan](index=12&type=section&id=7.%20Employee%20Benefit%20Plan) - The company offers a 401(k) Retirement Plan to U.S. based salaried and W-2 hourly employees, but **did not provide matching contributions** for the three months ended March 31, 2022 and 2021[58](index=58&type=chunk) [8. Stock-Based Compensation](index=12&type=section&id=8.%20Stock-Based%20Compensation) - Under the Stock Incentive Plan, **11,304 restricted share units and 400,000 stock options were granted in Q1 2022**, compared to 11,955 restricted share units and 270,000 stock options in Q1 2021[59](index=59&type=chunk) - Stock-based compensation expense was **$526,000 for Q1 2022** and $621,000 for Q1 2021, included in SG&A expenses[60](index=60&type=chunk) - The Employee Stock Purchase Plan allows eligible employees to purchase common stock at a 15% discount, with **516,399 shares available** as of March 31, 2022[61](index=61&type=chunk)[62](index=62&type=chunk)[63](index=63&type=chunk) [9. Credit Facility](index=13&type=section&id=9.%20Credit%20Facility) - The company has a **$53.1 million credit facility** with PNC Bank, comprising a $40 million revolving credit facility (Revolver) and a $13.1 million term loan facility (Term Loan)[64](index=64&type=chunk) - The Term Loan requires quarterly installments of **$1.1 million** through October 1, 2024[66](index=66&type=chunk) - As of March 31, 2022, outstanding borrowings under the Revolver were **$0 million** (unused capacity of $35.5 million), and under the Term Loan were **$12.0 million**[71](index=71&type=chunk) [10. Income Taxes](index=14&type=section&id=10.%20Income%20Taxes) Income Before Taxes by Source | Income Before Taxes | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :--- | :--- | :--- | | Domestic | $3,315 | $1,881 | | Foreign | (68) | (244) | | **Total** | **$3,247** | **$1,637** | Components of Income Tax Provision | Income Tax Provision | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :--- | :--- | :--- | | Current provision | $209 | $461 | | Deferred provision (benefit) | 623 | (50) | | Change in valuation allowance | 83 | 32 | | **Total provision for income taxes** | **$915** | **$443** | - The effective tax rate was **28.2% for Q1 2022**, up from 27.1% in Q1 2021, primarily due to an increase in the tax valuation allowance related to foreign net operating losses in Singapore and the UK[73](index=73&type=chunk)[74](index=74&type=chunk) [11. Derivative Instruments and Hedging Activities](index=15&type=section&id=11.%20Derivative%20Instruments%20and%20Hedging%20Activities) - The company previously used interest-rate swap contracts to convert variable debt to a fixed rate, but these contracts **matured on April 1, 2021**, and had no value as of March 31, 2022[76](index=76&type=chunk) Derivative Impact (Q1 2021) | Derivative Impact (Q1 2021, in thousands) | Amount of Gain recognized in OCI (Effective Portion) | Location of Gain reclassified from Accumulated OCI to Income (Effective Portion) | Amount of Gain reclassified from Accumulated OCI to Income (Effective Portion) | | :--- | :--- | :--- | :--- | | Interest-Rate Swap Contracts | $35 | Interest Expense | $34 | [12. Fair Value Measurements](index=15&type=section&id=12.%20Fair%20Value%20Measurements) - As of March 31, 2022, and December 31, 2021, the company had **no balances related to interest-rate swap contracts** or contingent consideration liabilities, as the swap matured and contingent consideration was revalued to zero[78](index=78&type=chunk) [13. Shareholders' Equity](index=15&type=section&id=13.%20Shareholders'%20Equity) - **No shares were purchased** to satisfy employee tax obligations related to the Stock Incentive Plan during the three months ended March 31, 2022 and 2021[79](index=79&type=chunk) [14. Earnings Per Share](index=16&type=section&id=14.%20Earnings%20Per%20Share) - Basic EPS is calculated based on net income divided by weighted average common shares outstanding, while diluted EPS includes the potential dilution from stock options using the treasury stock method[80](index=80&type=chunk) - **No anti-dilutive stock options** were excluded from diluted EPS computation in Q1 2022, compared to 150,000 in Q1 2021[81](index=81&type=chunk) [15. Business Segments and Geographic Information](index=16&type=section&id=15.%20Business%20Segments%20and%20Geographic%20Information) - The company operates in two segments: **Data and Analytics Services** (Mastech InfoTrellis) and **IT Staffing Services**[82](index=82&type=chunk)[83](index=83&type=chunk)[84](index=84&type=chunk) Segment Revenues and Gross Margin | Segment | Revenues (Q1 2022, in thousands) | Revenues (Q1 2021, in thousands) | Gross Margin % (Q1 2022) | Gross Margin % (Q1 2021) | | :--- | :--- | :--- | :--- | :--- | | Data and Analytics Services | $10,152 | $8,794 | 45.2% | 45.7% | | IT Staffing Services | 49,603 | 40,981 | 22.9% | 21.4% | | **Total** | **$59,755** | **$49,775** | **26.7%** | **25.7%** | Segment Operating Income | Segment Operating Income | Q1 2022 (in thousands) | Q1 2021 (in thousands) | | :--- | :--- | :--- | | Data and Analytics Services | $972 | $394 | | IT Staffing Services | 3,127 | 2,268 | | **Subtotal** | **$4,099** | **$2,662** | [16. Recently Issued Accounting Standards](index=17&type=section&id=16.%20Recently%20Issued%20Accounting%20Standards) - The company adopted ASU 2021-10 (Government Assistance) on January 1, 2022, with **no material impact**[87](index=87&type=chunk) - ASU 2021-08 (Business Combinations: Accounting for Contract Assets and Liabilities) is effective after December 15, 2022, and is **not expected to have a material impact**[88](index=88&type=chunk) [ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](index=17&type=section&id=ITEM%202.%20MANAGEMENT'S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) Provides management's perspective on financial performance, highlighting revenue growth, margin improvements, and liquidity [Overview](index=18&type=section&id=Overview) - Mastech Digital provides Digital Transformation IT Services, including data management and analytics, digital learning, and IT staffing services[95](index=95&type=chunk) - The company operates in two segments: **Data and Analytics Services** (Mastech InfoTrellis) and **IT Staffing Services**, serving various industry verticals[96](index=96&type=chunk)[97](index=97&type=chunk) [Economic Trends and Outlook](index=18&type=section&id=Economic%20Trends%20and%20Outlook) - Business outlook is **highly correlated to North American economic conditions**; demand for services increases with economic expansion and declines during slowdowns[99](index=99&type=chunk) - The company is hopeful that COVID-19 concerns will be less impactful in 2022, but acknowledges uncertainty from variants, inflationary pressures, and potential recessionary conditions[99](index=99&type=chunk) - **Supply-side challenges for skilled IT professionals**, especially in advanced technologies (social, cloud, analytics, mobility, automation), are expected to persist in 2022[99](index=99&type=chunk)[102](index=102&type=chunk) - The Data and Analytics Services segment addresses customer needs through a 'Center of Excellence' offering, bundling total requirements under multi-year contracts[103](index=103&type=chunk) [Results of Operations for the Three Months Ended March 31, 2022 as Compared to the Three Months Ended March 31, 2021](index=19&type=section&id=Results%20of%20Operations%20for%20the%20Three%20Months%20Ended%20March%2031%2C%202022%20as%20Compared%20to%20the%20Three%20Months%20Ended%20March%2031%2C%202021) The company reported strong year-over-year revenue growth, improved gross margins, and operational leverage [Revenues](index=19&type=section&id=Revenues) Revenue by Segment | Segment | Q1 2022 Revenues (in millions) | Q1 2021 Revenues (in millions) | YoY Growth | | :--- | :--- | :--- | :--- | | Data and Analytics Services | $10.2 | $8.8 | 15% | | IT Staffing Services | $49.6 | $41.0 | 21% | | **Total Revenues** | **$59.8** | **$49.8** | **20%** | - Data and Analytics Services revenue growth was due to improved backlog, despite Q1 2022 bookings of **$11.8 million** being lower than Q1 2021's $15.8 million (which included multi-year orders)[105](index=105&type=chunk) - IT Staffing Services revenue increase was driven by a **higher number of billing consultants** (1,295 in Q1 2022 vs. 1,162 in Q1 2021) and an increased average bill rate ($78.99/hour in Q1 2022 vs. $75.12/hour in Q1 2021)[106](index=106&type=chunk) [Gross Margins](index=19&type=section&id=Gross%20Margins) Gross Profit and Margin Analysis | Metric | Q1 2022 | Q1 2021 | Change (bps) | | :--- | :--- | :--- | :--- | | Total Gross Profit (in millions) | $15.9 | $12.8 | +24% | | Total Gross Margin % | 26.7% | 25.7% | +100 bps | | Data and Analytics Services Gross Margin % | 45.2% | 45.7% | -50 bps | | IT Staffing Services Gross Margin % | 22.9% | 21.4% | +150 bps | - The overall gross margin improvement was due to higher revenue levels in the high-margin Data and Analytics Services segment and **improved gross margins in IT Staffing Services**[107](index=107&type=chunk) - IT Staffing Services gross margin improvement was largely due to **higher permanent placement fees**, improved utilization, and revenues from higher-margin offshore staffing services[109](index=109&type=chunk) [Selling, General and Administrative ("S,G&A") Expenses](index=20&type=section&id=Selling%2C%20General%20and%20Administrative%20(%22S%2CG%26A%22)%20Expenses) SG&A Expenses by Segment | S,G&A Category | Q1 2022 (in millions) | Q1 2021 (in millions) | | :--- | :--- | :--- | | Data and Analytics Services Segment | | | | Sales and Marketing | $1.9 | $1.8 | | Operations | 0.6 | 0.8 | | Amortization of Acquired Intangible Assets | 0.6 | 0.6 | | General & Administrative | 1.1 | 1.0 | | **Subtotal D&A Services** | **$4.2** | **$4.2** | | IT Staffing Services Segment | | | | Sales and Marketing | $2.5 | $1.8 | | Operations | 2.8 | 2.0 | | Amortization of Acquired Intangible Assets | 0.2 | 0.2 | | General & Administrative | 2.9 | 2.7 | | **Subtotal IT Staffing Services** | **$8.4** | **$6.7** | | **Total S,G&A Expenses** | **$12.6** | **$10.9** | - Total SG&A expenses increased to $12.6 million (**21.1% of revenues**) in Q1 2022 from $10.9 million (21.9% of revenues) in Q1 2021, showing a decrease as a percentage of revenue[110](index=110&type=chunk) - Increases in sales and operations expenses were primarily due to staff additions, higher commissions/bonuses, and increased variable expenses to support revenue growth[111](index=111&type=chunk) [Other Income / (Expense) Components](index=21&type=section&id=Other%20Income%20%2F%20(Expense)%20Components) - Q1 2022 saw net interest expense of **($114,000)** and foreign exchange gains of **$54,000**, compared to net interest expense of ($195,000) and foreign exchange losses of ($37,000) in Q1 2021[113](index=113&type=chunk) - Lower interest expense in Q1 2022 was due to **debt repayments**[113](index=113&type=chunk) [Income Tax Expense](index=21&type=section&id=Income%20Tax%20Expense) - Income tax expense for Q1 2022 was **$915,000 (28.2% effective tax rate)**, up from $443,000 (27.1% effective tax rate) in Q1 2021[114](index=114&type=chunk) - The higher effective tax rate in Q1 2022 was mainly due to an increase in the tax valuation allowance related to **foreign net operating losses** in Singapore and the UK[114](index=114&type=chunk) [Liquidity and Capital Resources](index=21&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintains a strong liquidity position with adequate cash and borrowing capacity to meet its operational needs [Financial Conditions and Liquidity](index=21&type=section&id=Financial%20Conditions%20and%20Liquidity) - As of March 31, 2022, net bank debt (bank debt less cash) was **$4.8 million**, with approximately **$35.5 million of unused borrowing capacity** under the credit facility[115](index=115&type=chunk) - Accounts receivable 'days sales outstanding' (DSOs) was **64 days** at March 31, 2022, one day lower than Q1 2021[116](index=116&type=chunk) - Management believes current cash, operating cash flows, and credit facility availability are **adequate for business needs** and debt service over the next twelve months, excluding acquisitions[117](index=117&type=chunk) [Cash flows provided by (used in) operating activities](index=21&type=section&id=Cash%20flows%20provided%20by%20(used%20in)%20operating%20activities) - Cash provided by operating activities increased to **$1.6 million** in Q1 2022 from $0.8 million in Q1 2021[118](index=118&type=chunk) - Q1 2022 operating cash flows included net income of $2.3 million, non-cash charges of $2.1 million, and an increase in operating working capital of ($2.8 million)[118](index=118&type=chunk) [Cash flows (used in) investing activities](index=21&type=section&id=Cash%20flows%20(used%20in)%20investing%20activities) - Cash used in investing activities increased to **($646,000)** in Q1 2022 from ($191,000) in Q1 2021[119](index=119&type=chunk) - The increase in capital expenditures was for the Chennai delivery center in India and the implementation of Oracle Cloud for the Data and Analytics Services segment[119](index=119&type=chunk) [Cash flows provided by (used in) financing activities](index=21&type=section&id=Cash%20flows%20provided%20by%20(used%20in)%20financing%20activities) - Cash used in financing activities was **($0.2 million)** in Q1 2022, consisting of $1.1 million in debt repayments partially offset by $0.9 million from stock option exercises[120](index=120&type=chunk) - In Q1 2021, cash used in financing activities was ($1.0 million), with $1.1 million in debt repayments offset by $0.1 million from stock option exercises[120](index=120&type=chunk) [Off-Balance Sheet Arrangements](index=21&type=section&id=Of%20-Balance%20Sheet%20Arrangements) - The company **does not have any off-balance sheet arrangements**[121](index=121&type=chunk) [Inflation](index=22&type=section&id=Inflation) - Inflation **did not have a significant impact** on operations for the periods presented, with efforts to control costs and adjust billing rates to mitigate effects[122](index=122&type=chunk) - High inflation levels could lead to higher interest rates, increasing borrowing costs[122](index=122&type=chunk) [Seasonality](index=22&type=section&id=Seasonality) - Operations are generally not affected by seasonal fluctuations, but consultant billable hours are impacted by national holidays and vacations, leading to **lower utilization in the fourth quarter**[123](index=123&type=chunk) - Assignment completions tend to be higher near year-end, affecting revenue and gross profit in the subsequent quarter[123](index=123&type=chunk) [Recently Issued Accounting Standards](index=22&type=section&id=Recently%20Issued%20Accounting%20Standards) - Recent accounting pronouncements are detailed in Note 16 to the financial statements[124](index=124&type=chunk) [ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK](index=22&type=section&id=ITEM%203.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) Outlines the company's exposure to market risks, primarily from interest rate changes and currency fluctuations [Interest Rates](index=22&type=section&id=Interest%20Rates) - As of March 31, 2022, the company had **$12.0 million in outstanding variable-rate debt** under its credit facility[126](index=126&type=chunk) - A hypothetical **10% increase in interest rates** would increase annual interest expense by approximately **$36,000**[126](index=126&type=chunk) - The company had **no interest-rate hedge vehicles** outstanding as of March 31, 2022[126](index=126&type=chunk) [Currency Fluctuations](index=22&type=section&id=Currency%20Fluctuations) - The reporting currency is the U.S. dollar; functional currencies for Indian and European subsidiaries are local currencies, with translation adjustments recorded in accumulated other comprehensive income (loss)[127](index=127&type=chunk) - Gains and losses from foreign currency transactions **have not been material**, and a hypothetical 10% change in foreign currency rates would not materially impact consolidated financial statements[127](index=127&type=chunk) [ITEM 4. Controls and Procedures](index=22&type=section&id=ITEM%204.%20Controls%20and%20Procedures) Confirms the effectiveness of disclosure controls and procedures with no material changes to internal controls [Disclosure Controls and Procedures](index=22&type=section&id=Disclosure%20Controls%20and%20Procedures) - The company maintains disclosure controls and procedures designed to ensure timely and accurate reporting of information required under the Securities Exchange Act of 1934[128](index=128&type=chunk) - As of March 31, 2022, the CEO and CFO concluded that the company's disclosure controls and procedures **were effective**[129](index=129&type=chunk) - Disclosure controls provide **reasonable, not absolute, assurance** and are subject to inherent limitations[130](index=130&type=chunk) [Changes in Internal Control over Financial Reporting](index=23&type=section&id=Changes%20in%20Internal%20Control%20over%20Financial%20Reporting) - There were **no material changes** in the company's internal control over financial reporting during the quarter ended March 31, 2022[131](index=131&type=chunk) PART II. OTHER INFORMATION [ITEM 1. Legal Proceedings](index=23&type=section&id=ITEM%201.%20Legal%20Proceedings) States that ongoing legal proceedings are not expected to have a material adverse effect on the company - Management believes ongoing legal proceedings will **not materially adversely affect** financial position, results of operations, or cash flows[133](index=133&type=chunk) [ITEM 1A. Risk Factors](index=23&type=section&id=ITEM%201A.%20Risk%20Factors) There have been no material changes to previously disclosed risk factors - **No material changes** to risk factors from the Annual Report on Form 10-K for the year ended December 31, 2021[134](index=134&type=chunk) [ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=23&type=section&id=ITEM%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section is not applicable for the reporting period - **Not applicable** for this reporting period[135](index=135&type=chunk) [ITEM 6. Exhibits](index=24&type=section&id=ITEM%206.%20Exhibits) Lists the exhibits filed with the Form 10-Q, including Sarbanes-Oxley certifications and XBRL documents - Includes certifications pursuant to Sections 302 and 906 of the **Sarbanes-Oxley Act of 2002** by the Chief Executive Officer and Chief Financial Officer[136](index=136&type=chunk) - Contains various XBRL (eXtensible Business Reporting Language) documents for interactive data filing[136](index=136&type=chunk) [SIGNATURES](index=25&type=section&id=SIGNATURES) The report is duly signed by the company's Chief Executive Officer and Chief Financial Officer - The report was signed by Vivek Gupta (Chief Executive Officer) and John J. Cronin, Jr. (Chief Financial Officer) on **May 11, 2022**[138](index=138&type=chunk)[139](index=139&type=chunk)[140](index=140&type=chunk)