
Part I Business 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 services11 - 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)212325 Operating Segments 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 contracts323641 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 base134857 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 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 professionals61 - 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 market66 - 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 skills686973 Government Regulation 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 permits81 - 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 employees81 Risk Factors 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 client100 - The company experienced a cybersecurity breach in Q3 2022, which impacted two clients and resulted in a pre-tax loss reserve of $450,000122 - Approximately 27% of the workforce is on company-sponsored H1-B visas, making the business highly sensitive to changes in U.S. immigration regulations133 - 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, 2022154 Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None158 Properties 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 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 condition160 Mine Safety Disclosures This item is not applicable to the company - Not applicable161 Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 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 MHH163 - 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, 2023165 - Under the 2019 Employee Stock Purchase Plan, 23,789 shares were purchased in 2022 at an average price of $11.53 per share166 Management's Discussion and Analysis of Financial Condition and Results of Operations 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 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 segment182184 - 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 2021187 - In 2021, SG&A expenses included a credit of $2.9 million from the revaluation of a contingent consideration liability related to the AmberLeaf acquisition187196 Liquidity and Capital Resources 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 equivalents198 - Accounts receivable 'days sales outstanding' (DSO) was 59 days at year-end 2022, an improvement from 61 days at year-end 2021199 Critical Accounting Policies and Estimates 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 completion218 - Goodwill is tested for impairment annually on October 1st or more frequently, comparing fair value (estimated using discounted cash flows) to carrying value225 - The contingent consideration liability from the AmberLeaf acquisition was revalued to zero in 2021, resulting in a $2.9 million credit to SG&A expenses242 Quantitative and Qualitative Disclosures About Market Risk 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 expense250 - A hypothetical 10% change in overall foreign currency rates in 2022 would have had an approximate $65,000 impact on the consolidated financial statements252 Financial Statements and Supplementary Data 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 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 company263 - The valuation of the $32.5 million goodwill balance was identified as a Critical Audit Matter, requiring significant auditor judgment to evaluate management's forecasts269270 Consolidated Financial Statements 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 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 revenues359 - 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 2021366 - 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 revolver382 - Total stock-based compensation expense was $2.2 million in 2022, with $7.4 million of unrecognized expense related to non-vested stock options remaining409 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None438 Controls and Procedures 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 report440 - Management concluded that the Company's internal control over financial reporting was effective as of December 31, 2022, based on the COSO-2013 framework443 Other Information The company reports no other information - None445 Part III Directors, Executive Officers and Corporate Governance 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, 2023449 Executive Compensation 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 Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters 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'452453 Certain Relationships and Related Transactions, and Director Independence 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 Principal Accountant Fees and Services 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 Part IV Exhibits and Financial Statement Schedules 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 The report is duly signed by the company's President, CEO, CFO, and Board of Directors as of March 27, 2023