Mastech Digital(MHH) - 2020 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides a comprehensive overview of the company's financial performance, condition, and related disclosures for the reporting period ITEM 1. FINANCIAL STATEMENTS This section presents the unaudited condensed consolidated financial statements, including statements of operations, balance sheets, and cash flows, with detailed notes on business operations, revenue, and financial policies Condensed Consolidated Statements of Operations (Unaudited) This table presents the unaudited condensed consolidated statements of operations, detailing revenues, gross profit, income from operations, and net income for the three and six months ended June 30, 2020 and 2019 Condensed Consolidated Statements of Operations (Amounts in thousands, except per share data) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenues | $47,583 | $48,472 | $98,008 | $93,671 | | Gross profit | $12,656 | $12,054 | $25,375 | $22,889 | | Income from operations | $3,614 | $8,579 | $6,090 | $10,449 | | Net income | $2,969 | $5,958 | $4,838 | $6,922 | | Basic EPS | $0.26 | $0.54 | $0.43 | $0.63 | | Diluted EPS | $0.25 | $0.53 | $0.41 | $0.62 | Condensed Consolidated Statements of Comprehensive Income (Unaudited) This table presents the unaudited condensed consolidated statements of comprehensive income, including net income and other comprehensive loss, for the three and six months ended June 30, 2020 and 2019 Condensed Consolidated Statements of Comprehensive Income (Amounts in thousands) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income | $2,969 | $5,958 | $4,838 | $6,922 | | Total other comprehensive (loss), net of taxes | $(19) | $(34) | $(355) | $(65) | | Total comprehensive income | $2,950 | $5,924 | $4,483 | $6,857 | Condensed Consolidated Balance Sheets (Unaudited) This table presents the unaudited condensed consolidated balance sheets, detailing assets, liabilities, and shareholders' equity as of June 30, 2020, and December 31, 2019 Condensed Consolidated Balance Sheets (Amounts in thousands) | Metric | June 30, 2020 | December 31, 2019 | | :--------------------------------- | :------------ | :---------------- | | Cash and cash equivalents | $4,743 | $2,981 | | Total current assets | $37,175 | $36,930 | | Total assets | $88,582 | $90,584 | | Total current liabilities | $20,113 | $19,091 | | Total liabilities | $35,323 | $44,304 | | Total shareholders' equity | $53,259 | $46,280 | Condensed Consolidated Statements of Shareholders' Equity (Unaudited) This table presents the unaudited condensed consolidated statements of shareholders' equity, showing changes in common stock, retained earnings, and total equity from December 31, 2019, to June 30, 2020 Condensed Consolidated Statements of Shareholders' Equity (Amounts in thousands) | Metric | Balances, December 31, 2019 | Balances, June 30, 2020 | | :--------------------------- | :-------------------------- | :---------------------- | | Common Stock | $127 | $130 | | Additional Paid-in Capital | $21,939 | $24,432 | | Retained Earnings | $28,759 | $33,597 | | Treasury Stock | $(4,187) | $(4,187) | | Accumulated Other Comprehensive Income (loss) | $(358) | $(713) | | Total Shareholders' Equity | $46,280 | $53,259 | - Net income for the six months ended June 30, 2020, contributed $4,838 thousand to retained earnings[18] - Stock-based compensation expense for the six months ended June 30, 2020, was $1,068 thousand[18] Condensed Consolidated Statements of Cash Flows (Unaudited) This table presents the unaudited condensed consolidated statements of cash flows, detailing net cash from operating, investing, and financing activities for the six months ended June 30, 2020 and 2019 Condensed Consolidated Statements of Cash Flows (Amounts in thousands) | Metric | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--------------------------------- | :----------------------------- | :----------------------------- | | Net cash flows provided by operating activities | $11,575 | $8,753 | | Net cash flows (used in) investing activities | $(135) | $(501) | | Net cash flows (used in) financing activities | $(9,373) | $(5,722) | | Net change in cash and cash equivalents | $1,762 | $2,575 | | Cash and cash equivalents, end of period | $4,743 | $3,869 | Notes to Condensed Consolidated Financial Statements (Unaudited) This section provides detailed notes to the unaudited condensed consolidated financial statements, offering critical context on accounting policies, business segments, and financial instruments 1. Description of Business and Basis of Presentation This note describes Mastech Digital's business as a provider of Digital Transformation IT Services and Staffing, operating in two reportable segments - Mastech Digital is a provider of Digital Transformation IT Services and Staffing, offering data management and analytics, Salesforce.com, Digital Learning, and IT staffing services[25] - The company operates in two reportable segments: Data and Analytics Services and IT Staffing Services[32] 2. Revenue from Contracts with Customers This note details revenue disaggregation by segment, contract type, and geography for the three and six months ended June 30, 2020 and 2019 Revenue Disaggregation by Segment and Contract Type (Amounts in thousands) | Segment | Contract Type | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------ | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Data and Analytics Services | Time-and-material | $3,685 | $4,777 | $7,812 | $8,763 | | | Fixed-price | $3,087 | $1,877 | $6,320 | $3,659 | | IT Staffing Services | Time-and-material | $40,811 | $41,818 | $83,876 | $81,249 | | | Fixed-price | — | — | — | — | | Total Revenues | | $47,583 | $48,472 | $98,008 | $93,671 | Revenue Disaggregation by Geography (Amounts in thousands) | Geography | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :---------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | United States | $46,777 | $47,208 | $96,127 | $91,318 | | Canada | $734 | $802 | $1,595 | $1,443 | | India and Other | $72 | $462 | $286 | $910 | | Total Revenues | $47,583 | $48,472 | $98,008 | $93,671 | 3. Goodwill and Other Intangible Assets, net This note provides details on goodwill and other intangible assets, including acquisition-related amounts, impairment, and estimated amortization expense - Goodwill includes $8.4 million from the 2015 Hudson IT acquisition and $27.4 million from the 2017 InfoTrellis acquisition, with a $9.7 million impairment recorded in 2018 for InfoTrellis[43] Total Intangible Assets (Net Carrying Value, Amounts in thousands) | Date | Total Intangible Assets | | :----------- | :---------------------- | | June 30, 2020 | $18,708 | | December 31, 2019 | $20,050 | Estimated Aggregate Amortization Expense for Intangible Assets (Amounts in thousands) | Year Ended December 31, | Amortization Expense | | :---------------------- | :------------------- | | 2020 | $2,654 | | 2021 | $2,625 | | 2022 | $2,443 | | 2023 | $2,229 | | 2024 | $2,149 | 4. Leases This note outlines the company's lease accounting, including balance sheet classification of right-of-use assets and liabilities, and future minimum rental payments Balance Sheet Classification of Lease Asset and Related Lease Liability (Amounts in thousands) | Metric | June 30, 2020 | December 31, 2019 | | :-------------------------------- | :------------ | :---------------- | | Long-term operating lease right-of-use assets | $3,978 | $4,617 | | Short-term operating lease liability | $1,295 | $1,396 | | Long-term operating lease liability | $2,760 | $3,321 | | Total Liabilities | $4,055 | $4,717 | Future Minimum Rental Payments for Operating Leases (Amounts in thousands) | Year | Amount as of June 30, 2020 | | :-------------------- | :------------------------- | | 2020 (remainder) | $824 | | 2021 | $1,208 | | 2022 | $1,104 | | 2023 | $1,057 | | 2024 | $287 | | Total | $4,480 | | Less: Imputed interest | $(425) | | Present value of operating lease liabilities | $4,055 | 5. Commitments and Contingencies This note addresses the company's commitments and contingencies, including management's assessment of the impact of ongoing legal proceedings - 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[54] 6. Employee Benefit Plan This note describes the company's 401(k) Employee Retirement Savings Plan and recent changes to the 401(k) match policy - The company provides a 401(k) Employee Retirement Savings Plan covering substantially all U.S. based salaried and W-2 hourly employees[55] - Effective January 1, 2020, the company eliminated the 401(k) match for former Hudson IT employees[55] 7. Stock-Based Compensation This note details the company's stock-based compensation plans, including the Stock Incentive Plan amendment and Employee Stock Purchase Plan - The Stock Incentive Plan was amended on May 13, 2020, to increase the number of authorized shares by 1,000,000, to a total of 4,900,000 shares[56] Stock-Based Compensation Expense (Amounts in thousands) | Period | 2020 | 2019 | | :-------------------- | :----- | :----- | | Three months ended June 30 | $612 | $267 | | Six months ended June 30 | $1,100 | $503 | - The Employee Stock Purchase Plan allows eligible employees to purchase common stock at a 15% discount to the lower of the fair market value on the initial or final trading dates of each six-month offering period[62] 8. Credit Facility This note describes the company's credit agreement with PNC Bank, including revolving credit and term loan facilities, and compliance status - The company has a Credit Agreement with PNC Bank for a total aggregate commitment of $60 million, including a $22.5 million revolving credit facility and a $30.5 million term loan facility[64] - As of June 30, 2020, the company was in compliance with all provisions under the credit facility[68] Outstanding Borrowings (Amounts in thousands) | Facility | June 30, 2020 | December 31, 2019 | | :-------------------- | :------------ | :---------------- | | Revolving Credit Facility | $5,000 | $9,500 | | Term Loan Facility | $9,700 | $16,000 | 9. Income Taxes This note provides details on income before income taxes, total provision for income taxes, and effective tax rates for the reporting periods Income Before Income Taxes (Amounts in thousands) | Period | Domestic (2020) | Foreign (2020) | Total (2020) | Domestic (2019) | Foreign (2019) | Total (2019) | | :-------------------- | :-------------- | :------------- | :----------- | :-------------- | :------------- | :----------- | | Three months ended June 30 | $3,028 | $429 | $3,457 | $1,219 | $6,853 | $8,072 | | Six months ended June 30 | $5,353 | $354 | $5,707 | $2,166 | $7,222 | $9,388 | Total Provision for Income Taxes and Effective Tax Rate (Amounts in thousands) | Period | Total Provision (2020) | Effective Tax Rate (2020) | Total Provision (2019) | Effective Tax Rate (2019) | | :-------------------- | :--------------------- | :------------------------ | :--------------------- | :------------------------ | | Three months ended June 30 | $488 | 14.1% | $2,114 | 26.2% | | Six months ended June 30 | $869 | 15.2% | $2,466 | 26.3% | - The lower effective tax rate in 2020 was largely due to excess tax benefits related to the exercise of stock options and the vesting of restricted share units[74] 10. Derivative Instruments and Hedging Activities This note describes the company's use of an interest-rate swap as a cash flow hedging instrument and its fair value - The company uses a 44-month interest-rate swap to convert variable interest rate debt to a fixed rate of 1.99% on an initial notional amount of $15.0 million, designated as a cash flow hedging instrument[76] Fair Value of Interest-Rate Swap Contracts (Liability, Amounts in thousands) | Date | Fair Value | | :---------------- | :--------- | | June 30, 2020 | $112 | | December 31, 2019 | $43 | 11. Fair Value Measurements This note presents fair value measurements, specifically for interest-rate swap contracts and the revaluation of contingent consideration liability Fair Value of Interest-Rate Swap Contracts (Level 2, Amounts in thousands) | Date | Fair Value | | :---------------- | :--------- | | June 30, 2020 | $(112) | | December 31, 2019 | $(43) | - During the three months ended June 30, 2019, the company revalued the contingent consideration liability related to the InfoTrellis acquisition, resulting in a $6.1 million reduction[81] 12. Shareholders' Equity This note provides information on changes in shareholders' equity, including common stock and treasury stock transactions - The company did not purchase any shares to satisfy employee tax obligations related to its Stock Incentive Plan during the six months ended June 30, 2020[82] 13. Earnings Per Share This note explains the calculation of basic and diluted earnings per share, including the impact of anti-dilutive stock options - Basic EPS is based on net income divided by weighted average common shares outstanding; diluted EPS reflects potential dilution from stock options using the treasury stock method[83] - For the three and six months ended June 30, 2020, there were zero anti-dilutive stock options excluded from diluted EPS computation, compared to 1.0 million in the corresponding 2019 periods[84] 14. Business Segments and Geographic Information This note disaggregates revenues and gross margins by the company's Data and Analytics Services and IT Staffing Services segments Revenues by Segment (Amounts in thousands) | Segment | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Data and Analytics Services | $6,772 | $6,654 | $14,132 | $12,422 | | IT Staffing Services | $40,811 | $41,818 | $83,876 | $81,249 | | Total revenues | $47,583 | $48,472 | $98,008 | $93,671 | Gross Margin % by Segment | Segment | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Data and Analytics Services | 52.2% | 46.1% | 49.5% | 45.8% | | IT Staffing Services | 22.4% | 21.5% | 21.9% | 21.2% | | Total gross margin % | 26.6% | 24.9% | 25.9% | 24.4% | 15. Recently Issued Accounting Standards This note outlines recently adopted and issued accounting standards, assessing their impact on the company's consolidated financial statements - The company adopted ASU 2017-04 (Goodwill Impairment), ASU 2018-13 (Fair Value Measurement Disclosures), ASU 2018-15 (Cloud Computing Implementation Costs), and ASU 2019-04 (Codification Improvements) on January 1, 2020, with no material impact on its consolidated financial statements[90][92][93][94] - ASU 2019-12 (Income Taxes) and ASU 2020-04 (Reference Rate Reform) are not yet adopted but are not expected to have a material impact on the financial statements[95][96] ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of financial condition and results, highlighting the COVID-19 pandemic's impact on revenue and gross margins, alongside discussions on liquidity and the Accelerated Filer transition Recent Developments This section discusses recent developments, including the impact of the COVID-19 pandemic on operations and the implications of becoming an Accelerated Filer - The COVID-19 pandemic materially impacted Q2 2020 performance, causing a decline of 65 billable consultants in IT Staffing Services and deferral of several projects in Data and Analytics Services[104] - The company expects future operating results to be negatively impacted by delays in customer purchases, limitations on expansion, pricing pressure, and potential customer loss due to COVID-19[105] - Mastech Digital will be classified as an Accelerated Filer next year, requiring an audited assessment of internal controls over financial reporting, which will significantly increase administrative costs[106] Overview This section provides an overview of Mastech Digital's business, including its Digital Transformation IT Services and two reporting segments - Mastech Digital provides Digital Transformation IT Services, including data management and analytics, Salesforce.com, Digital Learning, and IT staffing for digital and mainstream technologies[107] - The company operates in two reporting segments: Data and Analytics Services (marketed as Mastech InfoTrellis) and IT Staffing Services, serving various industry verticals[108][110] Economic Trends and Outlook This section discusses economic trends and outlook, highlighting the correlation with North American conditions, account concentration, and challenges in advanced technologies - The business outlook is highly correlated to North American economic conditions; the COVID-19 pandemic has materially changed the positive outlook for 2020 to negative[111] - Account concentration with a limited number of clients may cause results to deviate from prevailing U.S. economic trends[112] - Strategic relationships with systems integrators and managed service providers (MSPs) may pressure IT staffing gross margins[113] - Growth in advanced technologies (social, cloud, analytics, mobility, automation) offers opportunities but faces acute supply-side challenges for skilled IT professionals[114] Results of Operations for the Three Months Ended June 30, 2020 as Compared to the Three Months Ended June 30, 2019 This section analyzes the company's financial performance for the three months ended June 30, 2020, compared to the prior year, focusing on revenue, gross margins, and expenses Revenues This section details revenue performance for the three months ended June 30, 2020, by reportable segment, highlighting year-over-year changes Revenues by Reportable Segment (Amounts in millions) | Segment | June 30, 2020 | June 30, 2019 | | :------------------------ | :------------ | :------------ | | Data and Analytics Services | $6.8 | $6.7 | | IT Staffing Services | $40.8 | $41.8 | | Total revenues | $47.6 | $48.5 | - Total revenues declined 2% year-over-year, with IT Staffing Services decreasing by 2.4% and Data and Analytics Services increasing by 1.8%[115] - IT Staffing Services revenue decline was due to a lower billable consultant headcount (1,035 in Q2 2020 vs. 1,113 in Q2 2019), partially offset by a higher average bill rate ($76.91/hour in Q2 2020 vs. $74.76/hour in Q2 2019)[119] Gross Margins This section analyzes gross margins by reporting segment for the three months ended June 30, 2020, highlighting improvements and contributing factors Gross Margin by Reporting Segment | Segment | June 30, 2020 | June 30, 2019 | | :------------------------ | :------------ | :------------ | | Data and Analytics Services | 52.2% | 46.1% | | IT Staffing Services | 22.4% | 21.5% | | Total gross margin | 26.6% | 24.9% | - Total gross profits increased by $0.6 million to $12.7 million, with gross margin as a percentage of revenue improving by 170 basis points to 26.6%[120] - Data and Analytics Services achieved a record gross margin of 52.2% due to higher billable consultant utilization and higher-valued client assignments[121] Selling, General and Administrative ("S,G&A") Expenses This section details S,G&A expenses for the three months ended June 30, 2020, explaining the significant increase compared to the prior year S,G&A Expenses (Amounts in millions) | Category | June 30, 2020 | June 30, 2019 | | :-------------------------------- | :------------ | :------------ | | Data and Analytics Services Subtotal | $2.8 | $(3.8) | | IT Staffing Services Subtotal | $6.2 | $7.3 | | Total S,G&A Expenses | $9.0 | $3.5 | - The significant increase in total S,G&A expenses from $3.5 million in Q2 2019 to $9.0 million in Q2 2020 was primarily due to the absence of a $6.1 million credit from the revaluation of contingent consideration in the prior year[124] - Sales and operations expenses in the IT Staffing Services segment decreased due to austerity measures implemented in response to the COVID-19 pandemic[128] Other Income / (Expense) Components This section outlines other income and expense components for the three months ended June 30, 2020, including interest income/expense Other Income / (Expense) Components (Amounts in thousands) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :-------------------------- | :------------------------------- | :------------------------------- | | Interest income (expense), net | $(198) | $(468) | | Other income (expense), net | $41 | $(39) | - Lower interest expense in Q2 2020 was reflective of debt repayments in 2019 and H1 2020, and a lower effective interest rate[125] Income Tax Expense This section details income tax expense and the effective tax rate for the three months ended June 30, 2020, explaining the lower rate Income Tax Expense and Effective Tax Rate (Amounts in thousands) | Period | Income Tax Expense | Effective Tax Rate | | :-------------------- | :----------------- | :----------------- | | Three months ended June 30, 2020 | $488 | 14.1% | | Three months ended June 30, 2019 | $2,114 | 26.2% | - The lower effective tax rate in Q2 2020 largely reflected excess tax benefits related to the exercise of stock options and the vesting of restricted share units[126] Results of Operations for the Six Months Ended June 30, 2020 as Compared to the Six Months Ended June 30, 2019 This section analyzes the company's financial performance for the six months ended June 30, 2020, compared to the prior year, focusing on revenue, gross margins, and expenses Revenues This section details revenue performance for the six months ended June 30, 2020, by reportable segment, highlighting year-over-year changes and COVID-19 impact Revenues by Reportable Segment (Amounts in millions) | Segment | June 30, 2020 | June 30, 2019 | | :------------------------ | :------------ | :------------ | | Data and Analytics Services | $14.1 | $12.4 | | IT Staffing Services | $83.9 | $81.3 | | Total revenues | $98.0 | $93.7 | - Total revenues increased 5% year-over-year, with Data and Analytics Services growing 14% and IT Staffing Services growing 3%[127] - The COVID-19 pandemic materially impacted the billable consultant base in IT Staffing, leading to a decline of 132 consultants, though mitigated by a higher average bill rate[130] Gross Margins This section analyzes gross margins by reporting segment for the six months ended June 30, 2020, highlighting improvements and contributing factors Gross Margin by Reporting Segment | Segment | June 30, 2020 | June 30, 2019 | | :------------------------ | :------------ | :------------ | | Data and Analytics Services | 49.5% | 45.8% | | IT Staffing Services | 21.9% | 21.2% | | Total gross margin | 25.9% | 24.4% | - Total gross profits increased to $25.4 million, with gross margin as a percentage of revenue improving by 150 basis points to 25.9%, driven by higher margins in both segments and a favorable revenue mix[131] - Data and Analytics Services improved gross margin due to higher valued assignments, better billable consultant utilization, and less pass-through travel revenues due to the pandemic[132] Selling, General and Administrative ("S,G&A") Expenses This section details S,G&A expenses for the six months ended June 30, 2020, explaining the significant increase compared to the prior year S,G&A Expenses (Amounts in millions) | Category | June 30, 2020 | June 30, 2019 | | :-------------------------------- | :------------ | :------------ | | Data and Analytics Services Subtotal | $5.9 | $(1.7) | | IT Staffing Services Subtotal | $13.4 | $14.1 | | Total S,G&A Expenses | $19.3 | $12.4 | - Total S,G&A expenses increased from $12.4 million in H1 2019 to $19.3 million in H1 2020, primarily due to the absence of a $6.1 million credit from the revaluation of contingent consideration in the prior year[134] - Sales and operations expenses in the IT Staffing Services segment decreased due to austerity measures and lower activity-based expenses in response to the COVID-19 pandemic[136] Other Income / (Expense) Components This section outlines other income and expense components for the six months ended June 30, 2020, including interest income/expense Other Income / (Expense) Components (Amounts in thousands) | Metric | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------------- | :----------------------------- | :----------------------------- | | Interest income (expense), net | $(477) | $(1,007) | | Other income (expense), net | $94 | $(54) | - Lower interest expense in H1 2020 was reflective of debt repayments in 2019 and H1 2020, and a lower effective interest rate[135] Income Tax Expense This section details income tax expense and the effective tax rate for the six months ended June 30, 2020, explaining the lower rate Income Tax Expense and Effective Tax Rate (Amounts in thousands) | Period | Income Tax Expense | Effective Tax Rate | | :-------------------- | :----------------- | :----------------- | | Six months ended June 30, 2020 | $869 | 15.2% | | Six months ended June 30, 2019 | $2,466 | 26.3% | - The lower effective tax rate in H1 2020 largely reflected excess tax benefits related to the exercise of stock options and the vesting of restricted share units[137] Liquidity and Capital Resources This section discusses the company's liquidity and capital resources, including net bank debt, unused borrowing capacity, and cash flow adequacy Financial Conditions and Liquidity This section details the company's financial condition and liquidity, including net bank debt, unused borrowing capacity, and accounts receivable DSOs - As of June 30, 2020, the company had net bank debt of $10.0 million and approximately $17.3 million of unused borrowing capacity under its credit facility[138] - Accounts receivable 'days sales outstanding' (DSOs) improved to 59 days at June 30, 2020, a 1-day improvement from March 31, 2020[139] - Management believes that cash from operating activities, cash balances, and credit facility availability will be adequate to fund business needs and debt service for the next twelve months, excluding acquisitions[140] Cash flows provided by (used in) operating activities This section analyzes net cash flows from operating activities, highlighting the increase in 2020 due to net income and working capital changes Net Cash Flows Provided by Operating Activities (Amounts in thousands) | Period | 2020 | 2019 | | :-------------------- | :----- | :----- | | Six months ended June 30 | $11,575 | $8,753 | - The increase in operating cash flow in 2020 was driven by net income, non-cash charges, and a decrease in operating working capital due to improved DSOs and higher payroll-related accruals[141] Cash flows (used in) investing activities This section analyzes net cash flows from investing activities, noting the decline in cash used due to lower capital expenditures Net Cash Flows (Used in) Investing Activities (Amounts in thousands) | Period | 2020 | 2019 | | :-------------------- | :----- | :----- | | Six months ended June 30 | $(135) | $(501) | - The decline in cash used in investing activities in 2020 was primarily due to lower capital expenditures, as material system upgrade expenditures from 2019 were not incurred[142] Cash flows (used in) financing activities This section analyzes net cash flows from financing activities, highlighting the increase in cash used due to higher net debt payments Net Cash Flows (Used in) Financing Activities (Amounts in thousands) | Period | 2020 | 2019 | | :-------------------- | :------- | :------- | | Six months ended June 30 | $(9,373) | $(5,722) | - Increased cash used in financing activities due to higher net debt payments on term loan and revolving credit line ($10.8 million), partially offset by proceeds from common stock issuance[143] Off-Balance Sheet Arrangements This section confirms that the company does not have any off-balance sheet arrangements - The company does not have any off-balance sheet arrangements[144] Inflation This section discusses the impact of inflation on the company's operations, noting no significant effect for the periods presented - The company believes that inflation did not have a significant impact on its results of operations for the periods presented and aims to minimize future effects by controlling operating costs and adjusting billing rates[145] Seasonality This section describes the impact of seasonality on the company's operations, particularly regarding billable hours and assignment completions - The company's operations are generally not affected by seasonal fluctuations, but billable hours are impacted by national holidays and vacation policies, leading to lower utilization and higher benefit costs in the fourth quarter[147] - Assignment completions tend to be higher near the end of the calendar year, which largely impacts revenue and gross profit performance during the subsequent quarter[147] Recently Issued Accounting Standards This section refers to Note 15 for details on recently issued accounting pronouncements - Details on recent accounting pronouncements are described in Note 15 to the accompanying financial statements[148] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section outlines the company's exposure to market risks, primarily foreign currency exchange rate variations from global operations, noting no currency hedging since 2016 - The company's cash flows and earnings are subject to fluctuations due to currency exchange rate variations, stemming from its global recruitment and delivery centers[149] - The company has not engaged in currency hedging activities since 2016[149] ITEM 4. CONTROLS AND PROCEDURES This section details the company's disclosure controls and procedures, confirming their effectiveness as of June 30, 2020, with no material changes in internal control over financial reporting Disclosure Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and procedures as of June 30, 2020, as concluded by the CEO and CFO - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of June 30, 2020[151] Changes in Internal Control over Financial Reporting This section states that there were no material changes in the company's internal control over financial reporting during the quarter ended June 30, 2020 - There has been no material change in the company's internal control over financial reporting during the quarter ended June 30, 2020[153] PART II. OTHER INFORMATION This section provides additional information beyond financial statements, including legal proceedings, risk factors, equity sales, and exhibits ITEM 1. Legal Proceedings This section confirms the company's involvement in ordinary course legal proceedings, with management believing no material adverse effect on financial position or results - Management believes that ongoing legal and administrative proceedings will not materially adversely affect the company's financial position, results of operations, or cash flows[155] ITEM 1A. Risk Factors This section updates risk factors, emphasizing the new risks associated with the company's transition to an Accelerated Filer status, including increased costs and potential impact on investor confidence - No material changes from previously disclosed risk factors, except for an update regarding the company's transition to being an Accelerated Filer[156] - The transition to an Accelerated Filer status will require an audited assessment of internal controls over financial reporting, which will be time-consuming and costly, and could negatively affect the market price of common stock if material weaknesses are disclosed[156] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports no common stock repurchases during the quarter ended June 30, 2020, and confirms the absence of a publicly announced share repurchase program - No common stock was repurchased during the quarter ended June 30, 2020[157] - The company does not have a publicly announced share repurchase program in place as of June 30, 2020[157] ITEM 6. Exhibits This section lists exhibits filed with the Form 10-Q, including employment agreements, stock incentive plan amendments, and Sarbanes-Oxley Act certifications - Exhibits include Schedule A-4 and A-9 to Executive Employment Agreements, Fourth Amendment to Mastech Digital, Inc. Stock Incentive Plan, and Certifications pursuant to Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002[159][160] SIGNATURES This section contains the signatures of the Chief Executive Officer and Chief Financial Officer, certifying the report filing on August 7, 2020 - The report was signed by Vivek Gupta, Chief Executive Officer, and John J. Cronin, Jr., Chief Financial Officer, on August 7, 2020[164]