The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017 AND 2016
(Unaudited)
1.
|
Description of Business and Basis of Presentation:
|
References in this Quarterly Report
on Form
10-Q
to we, our, Mastech Digital, Mastech or the Company refer collectively to Mastech Digital, Inc. and its wholly-owned operating
subsidiaries, which are included in these Condensed Consolidated Financial Statements (the Financial Statements).
Description of Business
We are a provider of Digital Transformation IT Services.
Our portfolio of offerings include Data Management and Analytics services; other digital transformation services such as Salesforce.com, SAP
HANA, and Digital Learning services; and IT staffing services that span across digital and mainstream technologies.
Following our recent
acquisition of the services division of Canada-based InfoTrelllis, Inc., we have added specialized capabilities in delivering data management and analytics services to our customers globally. This business offers project-based consulting services in
the areas of Master Data Management, Data Integration, and Big Data, with such services delivered using
on-site
and offshore resources.
We also offer other digital transformation services focused on providing CRM on the cloud through Salesforce.com; driving IT efficiencies
through SAP HANA; and using digital methods to enhance organizational learning.
Our IT staffing business combines technical expertise
with business process experience to deliver a broad range of staffing services in digital and mainstream technologies. Our digital technologies stack includes Data Management & Analytics, Cloud, Mobility, Social and Automation.
We work with businesses and institutions with significant IT spending and recurring staffing service needs. We also support smaller organizations with their project focused temporary IT staffing requirements.
Recent Developments
On July 13, 2017, the Company completed its acquisition of the services division of Canada-based InfoTrellis, Inc., a project-based
consulting services company with specialized capabilities in data management and analytics. The acquisition is expected to significantly strengthen Mastech Digitals capabilities to offer consulting and project-based delivery of digital
transformation services. InfoTrellis, Inc. is headquartered in Toronto, Canada, with offices in Austin, Texas and a global delivery center in Chennai, India.
The transaction is valued at $55 million, with $35.75 million paid in cash at closing (subject to working capital adjustments) and
$19.25 million deferred over the next two years. The deferred purchase price is contingent upon the acquired business generating specified EBIT (earnings before interest and taxes) targets during the two years following closing.
The funding for the transaction consisted of a combination of debt and equity. A new $65 million credit facility the Company established
on July 13, 2017 with PNC Bank, N.A. (PNC) provided debt financing for the transaction, refinancing of the Companys existing debt with PNC and additional borrowing capacity for the future. The equity financing was completed
through a $6.0 million private placement of newly-issued shares of the Companys common stock to Mastechs founders and majority shareholders, Ashok Trivedi and Sunil Wadhwani. Pursuant to the terms of the share purchase agreements
executed in connection with the private placement of these shares, the Company agreed to sell such shares at a price per share equal to the greater of $7.00 or the closing price for the common stock on July 10, 2017 (two business days after the
July 7, 2017 announcement of the transaction), which was $6.35 per share. Accordingly, the common stock was sold on July 13, 2017 at a price per share equal to $7.00. The terms of the private placement were negotiated and approved by a
Special Committee of the Companys independent directors, which retained counsel and an independent financial advisor.
On
July 13, 2017 and July 19, 2017, the Company filed with the Securities and Exchange Commission Current Reports on Form
8-K
providing additional details on this acquisition and the financing
arrangements. On September 27, 2017, the Company filed an Amendment to its July 19, 2017 Current Report on Form
8-K
solely to include the financial statements and financial information required under
Item 9.01 of Form 8-K, which statements and information were excluded from the original Form
8-K
in reliance on paragraphs (a)(4) and (b)(2) of Item 9.01 of Form 8-K.
7
Accounting Principles
The accompanying Financial Statements have been prepared by management in accordance with U.S. generally accepted accounting principles
(GAAP) for interim financial information and applicable rules and regulations of the Securities and Exchange Commission (the SEC). Accordingly, they do not include all of the information and disclosures required by U.S. GAAP
for complete consolidated financial statements. In the opinion of management, all adjustments, consisting principally of normal recurring adjustments, considered necessary for a fair presentation have been included. The preparation of financial
statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the Financial Statements and the accompanying notes. Actual results could differ from these estimates. These Financial
Statements should be read in conjunction with the Companys audited consolidated financial statements and accompanying notes for the year ended December 31, 2016, included in our Annual Report on Form
10-K
filed with the SEC on March 24, 2017 and the Current Reports on Form
8-K
filed with the SEC on July 13, 2017, July 19, 2017 and September 27,
2017. Additionally, our operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that can be expected for the year ending December 31, 2017 or for any other period.
Principles of Consolidation
The Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany transactions and
balances have been eliminated in consolidation.
Reclassification
As Discussed in Note 16, Recently Issued Accounting Standards, the Company adopted ASU
2015-17
Balance Sheet Classification of Deferred Taxes on a retrospective basis during the first quarter of 2017. Accordingly, the impact of this retrospective adoption was a reclassification of $26,000 of
non-current
deferred tax liabilities and $280,000 of current deferred tax assets as a net
non-current
asset of $254,000 as of December 31, 2016. This presentation
conforms to the September 30, 2017 balance sheet.
Critical Accounting Policies
Please refer to Note 1 Summary of Significant Accounting Policies of the Consolidated Financial Statements and
Managements Discussion and Analysis of Financial Condition and Results of OperationsCritical Accounting Policies and Estimates in our Annual Report on Form
10-K
for the year ended
December 31, 2016 for a more detailed discussion of our significant accounting policies and critical accounting estimates. There were no material changes to these critical accounting policies during the nine months ended September 30, 2017
except for the policy related to contingent consideration associated with the InfoTrellis acquisition, as detailed below:
Contingent
Consideration:
In connection with the InfoTrellis acquisition, the Company may be required to pay future consideration that is
contingent upon the achievement of specified earnings before interest and taxes (EBIT) objectives. As of the acquisition date, the Company recorded a contingent consideration liability representing the estimated fair value of the
contingent consideration that is expected to be paid. The fair value of the contingent consideration liability was estimated by utilizing a probability weighted simulation model to determine the fair value of contingent consideration. We re-measure
this liability each reporting period and record changes in the fair value through a separate line item without our consolidated statements of operations. Increases or decreases in the fair value of the contingent consideration liability can result
from changes in discount periods and rates, as well as changes in the timing and amount of revenue and earnings estimates or in the timing of likelihood of achieving contractual milestones.
Segment Reporting
Subsequent to
the July 13, 2017 closing of the InfoTrellis acquisition, the Company has two reportable segments, in accordance with ASC Topic 280 Disclosures About Segments of an Enterprise and Related Information, Data and Analytics Services (which
segment represents the acquired InfoTrellis business) and IT Staffing Services.
8
On July 7, 2017, Mastech Digital, Inc., through its
wholly-owned subsidiaries Mastech InfoTrellis, Inc., Mastech InfoTrellis Digital, Ltd., Mastech Digital Data, Inc. and Mastech Digital Private Limited (collectively, the Company Entities), entered into two Asset Purchase Agreements and a
Share Purchase Agreement (collectively, the Purchase Agreements) to acquire substantially all of the assets comprising the consulting services business in the areas of master data management, data integration and big data (the
Acquired Business) of InfoTrellis Inc., InfoTrellis, Inc. and 2291496 Ontario Inc., including all outstanding shares of InfoTrellis India Private Limited (collectively, InfoTrellis). The aforementioned transaction was closed
on July 13, 2017.
Under the terms of the Purchase Agreements, the Company Entities paid at the closing of the acquisition
$35.75 million in cash, less certain working capital adjustments which totaled $930,000. The Purchase Agreements also provided for contingent consideration of $19.25 million in deferred cash payments, with up to $8.25 million payable
if the EBIT of the Acquired Business for the
12-month
period beginning on August 1, 2017 (the Actual Year 1 EBIT) equals $10.0 million and up to $11.0 million payable if the EBIT of
the Acquired Business for the
12-month
period beginning on August 1, 2018 (the Actual Year 2 EBIT) equals $10.7 million. The deferred amount payments are subject to adjustments under the
terms of the Purchase Agreements based upon, among other items, the amount of the Actual Year 1 EBIT and the amount of the Actual Year 2 EBIT.
In support of the acquisition, the Company entered into a new credit agreement on July 13, 2017 with PNC Bank, National Association, as
administrative agent, swing loan lender and issuing lender, PNC Capital Markets LLC, as sole lead arranger and sole book runner, and certain financial institutions party thereto as lenders. The Credit Agreement provides for a total aggregate
commitment of $65.0 million, consisting of (i) a revolving credit facility in an aggregate principal amount not to exceed $27.5 million, subject to increases to an aggregate amount not to exceed $37.5 million upon satisfaction of
certain conditions; (ii) a $30.5 million term loan facility; and (iii) a $7.0 million delayed draw term loan facility to be used exclusively toward contingent consideration payments. In addition, the Company entered into
Securities Purchase Agreements with Ashok Trivedi and Sunil Wadhwani (collectively, the Investors) on July 7, 2017 pursuant to which the Company issued and sold an aggregate 857,144 shares (the Shares) of its common
stock, par value $0.01 per share (the Common Stock), to the Investors on July 13, 2017 for $6.0 million in aggregate gross proceeds (the Private Placement Transactions). The Company used the proceeds from the
Private Placement Transactions to fund a portion of the cash paid at the closing of the acquisition.
The following table summarizes the
fair value of consideration for the Acquired Business on the July 13, 2017 closing date:
|
|
|
|
|
(in thousands)
|
|
Amounts
|
|
Cash purchase price at closing
|
|
$
|
35,750
|
|
Working capital adjustments
|
|
|
(930
|
)
|
Estimated payout of contingent consideration (1)
|
|
|
17,125
|
|
|
|
|
|
|
Total Fair Value of Consideration
|
|
$
|
51,945
|
|
|
|
|
|
|
(1)
|
Based on a valuation conducted by an independent third party, the fair value of contingent consideration at the closing date was determined to be $17,125,000.
|
The cash purchase price at closing was paid with funds obtained from the following sources:
|
|
|
|
|
(in thousands)
|
|
Amounts
|
|
Cash balance on hand
|
|
$
|
341
|
|
Sale of common stock in a private placement transactions
|
|
|
6,000
|
|
Term loan debt facility
|
|
|
30,500
|
|
Revolving line of credit
|
|
|
9,000
|
|
Payoff of previous credit facility
|
|
|
(10,091
|
)
|
|
|
|
|
|
Cash paid at Closing
|
|
$
|
35,750
|
|
|
|
|
|
|
9
The preliminary allocation of the purchase price was based on estimates of the fair value of
assets acquired and liabilities assumed as of July 13, 2017, as set forth below. The excess purchase price over the fair values of the net tangible assets and identifiable intangible assets was recorded as goodwill, which includes value
associated with the assembled workforce. All goodwill is expected to be deductible for tax purposes. The valuation of net assets acquired is as follows:
|
|
|
|
|
(in thousands)
|
|
Amounts
|
|
Current Assets
|
|
$
|
6,841
|
|
Fixed Assets and Other
|
|
|
286
|
|
Identifiable intangible assets:
|
|
|
|
|
Client relationships
|
|
|
16,671
|
|
Covenant
not-to-compete
|
|
|
761
|
|
Trade name
|
|
|
1,221
|
|
Technology
|
|
|
1,209
|
|
|
|
|
|
|
Total identifiable intangible assets
|
|
|
19,862
|
|
Goodwill
|
|
|
27,345
|
|
Current liabilities
|
|
|
(2,389
|
)
|
|
|
|
|
|
Net Assets Acquired
|
|
$
|
51,945
|
|
|
|
|
|
|
The fair value of identifiable intangible assets has been estimated using the income approach through a
discounted cash flow analysis. Specifically, the Company used the income approach through an excess earnings analysis to determine the fair value of client relationships. The value applied to the covenant
not-to-compete
was based on an income approach using a with or without analysis of this covenant in place. The trade name and technology were valued using the income approach relief from
royalty method. All identifiable intangibles are considered level 3 inputs under the fair value measurement and disclosure guidance.
For
the three and nine months ended September 30, 2017, the Company recorded transaction costs related to the acquisition of $1.7 million and $2.0 million, respectively. These costs are included in selling, general and administrative
expenses in the accompanying Condensed Consolidated Statement of Operations.
Included in the Condensed Consolidated Statement of
Operations for the three and nine month periods ended September 30, 2017 were revenues of $4.1 million and net income of approximately $0.5 million applicable to the InfoTrellis operations.
The following reflects the Companys unaudited pro forma results as though the acquisition occurred as of the beginning of each period
presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
(Amounts in Thousands)
|
|
|
(Amounts in Thousands)
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenue
|
|
$
|
39,815
|
|
|
$
|
41,149
|
|
|
$
|
118,317
|
|
|
$
|
117,916
|
|
Net income
|
|
$
|
(78
|
)
|
|
$
|
2,633
|
|
|
$
|
1,523
|
|
|
$
|
4,878
|
|
Earnings per share-diluted
|
|
$
|
(0.01
|
)
|
|
$
|
0.49
|
|
|
$
|
0.28
|
|
|
$
|
0.92
|
|
The information above does not reflect any operating efficiencies or inefficiencies that may have resulted
from the InfoTrellis acquisition. Therefore, this information is not necessarily indicative of results that would have been achieved had the business been combined during the periods presented or the results that the Company will experience going
forward.
3.
|
Goodwill and Other Intangible Assets, net
|
Goodwill related to our June 15, 2015
acquisition of Hudson Global Resource Managements U.S. IT staffing business (Hudson IT) totaled $8.4 million. Goodwill related to or July 13, 2017 acquisition of the services division of InfoTrellis totaled
$27.4 million.
10
The Company is amortizing the identifiable intangible assets on a straight-line basis over
estimated average lives ranging from 3 to 12 years. Intangible assets were comprised of the following as of September 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
(Amounts in Thousands)
|
|
Amortization
Period (In Years)
|
|
|
Gross Carrying
Value
|
|
|
Accumulative
Amortization
|
|
|
Net Carrying
Value
|
|
IT staffing services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Client relationships
|
|
|
12
|
|
|
$
|
7,999
|
|
|
$
|
1,528
|
|
|
$
|
6,471
|
|
Covenant-not-to-compete
|
|
|
5
|
|
|
|
319
|
|
|
|
146
|
|
|
|
173
|
|
Trade name
|
|
|
3
|
|
|
|
249
|
|
|
|
190
|
|
|
|
59
|
|
Data and analytics services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Client relationships
|
|
|
12
|
|
|
$
|
16,671
|
|
|
$
|
289
|
|
|
$
|
16,382
|
|
Covenant-not-to-compete
|
|
|
5
|
|
|
|
761
|
|
|
|
32
|
|
|
|
729
|
|
Trade name
|
|
|
5
|
|
|
|
1,221
|
|
|
|
51
|
|
|
|
1,170
|
|
Technology
|
|
|
7
|
|
|
|
1,209
|
|
|
|
36
|
|
|
|
1,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Intangible Assets
|
|
|
|
|
|
$
|
28,429
|
|
|
$
|
2,272
|
|
|
$
|
26,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
(Amounts in Thousands)
|
|
Amortization
Period (In Years)
|
|
|
Gross Carrying
Value
|
|
|
Accumulative
Amortization
|
|
|
Net Carrying
Value
|
|
IT staffing services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Client relationships
|
|
|
12
|
|
|
$
|
7,999
|
|
|
$
|
1,027
|
|
|
$
|
6,972
|
|
Covenant-not-to-compete
|
|
|
5
|
|
|
|
319
|
|
|
|
99
|
|
|
|
220
|
|
Trade name
|
|
|
3
|
|
|
|
249
|
|
|
|
128
|
|
|
|
121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Intangible Assets
|
|
|
|
|
|
$
|
8,567
|
|
|
$
|
1,254
|
|
|
$
|
7,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for the three and nine month periods ended September 30, 2017 was $611,000 and
$1.0 million, respectively, and is included in selling, general and administrative expenses in the Condensed Consolidated Statement of Operations. For the three and nine month periods ended September 30, 2016 amortization expense was
$204,000 and $610,000, respectively.
The estimated aggregate amortization expense for intangible assets for the years ending
December 31, 2017 through 2021 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
|
(Amounts in Thousands)
|
|
Amortization expense
|
|
$
|
1,711
|
|
|
$
|
2,727
|
|
|
$
|
2,689
|
|
|
$
|
2,654
|
|
|
$
|
2,625
|
|
4.
|
Commitments and Contingencies
|
Lease Commitments
The Company rents certain office space and equipment under
non-cancelable
leases which provide for
future minimum rental payments. Total lease commitments have not materially changed from the amounts disclosed in the Companys Annual Report on Form
10-K
for the year ended December 31, 2016.
Contingencies
In
the ordinary course of our business, the Company is involved in a number of lawsuits and administrative proceedings. While uncertainties are inherent in the final outcome of these matters, the Companys management believes, after consultation
with legal counsel, that the disposition of these proceedings should not have a material adverse effect on our financial position, results of operations or cash flows.
11
The Company provides an Employee Retirement Savings Plan (the
Retirement Plan) under Section 401(k) of the Internal Revenue Code of 1986, as amended (the Code), that covers substantially all U.S. based salaried employees. Concurrent with the acquisition of Hudson IT, the Company
expanded employee eligibility under the Retirement Plan to include all U.S. based
W-2
hourly employees. Employees may contribute a percentage of eligible compensation to the Retirement Plan, subject to certain
limits under the Code. For Hudson IT employees enrolled in the Hudson Employee Retirement Savings Plan under the Code at the acquisition date, the Company provides a matching contribution of 50% of the first 6% of the participants contributed
pay, subject to vesting based on the combined tenure with Hudson and Mastech Digital. For all other employees, the Company did not provide for any matching contributions for the nine months ended September 30, 2017 and 2016. Mastech
Digitals total contributions to the Retirement Plan for the three and nine months ended September 30, 2017 related to the former Hudson IT employees totaled approximately $21,000 and $75,000 respectively. Mastech Digitals
contributions to the retirement plan for the three and nine months ended September 30, 2016 related to the Hudson IT employees totaled $27,000 and $82,000, respectively.
6.
|
Stock-Based Compensation
|
In 2008, the Company adopted a Stock Incentive Plan (the
Plan) which, as amended, provides that up to 1,400,000 shares of the Companys Common Stock shall be allocated for issuance to directors, officers and key personnel. Grants under the Plan can be made in the form of stock options,
stock appreciation rights, performance shares or stock awards. During the three and nine months ended September 30, 2017, the Company granted no shares under the Plan. During the three and nine months ended September 30, 2017 there were
12,000 stock options forfeited due to the
non-achievement
of performance targets. These shares are available for future grants under the Plan. During the three and nine months ended September 30, 2016,
there were 85,000 and 335,000 stock options grants made under the Plan. As of September 30, 2017 and December 31, 2016, there were 126,000 shares and 114,000 shares, respectively, available for future grant under the Plan.
Stock-based compensation expense for the three months ended September 30, 2017 and 2016 was $70,000 and $113,000, respectively, and for
the nine months ended September 30, 2017 and 2016 was $285,000 and $298,000, respectively. Stock-based compensation expense is included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.
During the three and nine months ended September 30, 2017, the Company issued 6,250 and 100,388 shares, respectively, related to the
vesting of restricted stock and the exercising of stock options. During the three and nine months ended September 30, 2016, the Company issued 71,250 and 75,750 shares, respectively, related to the exercise of stock options and vesting of
restricted stock and performance shares.
On July 13, 2017, the Company entered into a Credit Agreement (the
Credit Agreement) with PNC Bank, National Association , as administrative agent, swing loan lender and issuing lender (PNC Bank), PNC Capital Markets LLC, as sole lead arranger and sole book-runner, and certain financial
institution parties thereto as lenders (the Lenders). The Credit Agreement provides for a total aggregate commitment of $65 million, consisting of (i) a revolving credit facility (the Revolver) in an aggregate
principal amount not to exceed $27 million (subject to increase by up to an additional $10 million upon satisfaction of certain conditions); (ii) a $30.5 million term loan facility (the Term Loan); and a (iii)
$7.0 million delayed draw term loan facility (the Delayed Draw Term Loan), as more fully described in Exhibit 10.1 to the Companys Form
8-K,
filed with the SEC on July 19, 2017.
The Revolver expires in three years and includes swing loan and letter of credit
sub-limits
in
the aggregate amount not to exceed $3.0 million for swing loans and $5.0 million for letters of credit. Borrowings under the Revolver may be denominated in U.S. dollars or Canadian dollars. The maximum borrowings in U.S. dollars may not
exceed the sum of 85% of eligible U.S. accounts receivable and 60% of eligible U.S. unbilled receivables, less a reserve amount established by the administrative agent. The maximum borrowings in Canadian dollars may not exceed the lesser of (i)
$10.0 million; and (ii) the sum of 85% of eligible Canadian receivables, plus 60% of eligible Canadian unbilled receivables, less a reserve amount established by the administrative agent.
Amounts borrowed under the Term Loan are required to be repaid in consecutive quarterly installments commencing on October 1, 2017
through and including July 1, 2022 and on the maturity date of July 13, 2022. The principal amount of each quarterly installment payable on the Term Loan equals the product of $30.5 million, multiplied by (i) 3.125% for quarterly
installments due on October 1, 2017 through and including July 1, 2018; (ii) 3.75% for quarterly installments payable on October 1, 2018 through and including July 1, 2021; and (iii) 5.00% for quarterly installments payable on
October 1, 2021 through and including the maturity date. The Delayed Draw Term Loan may be used through the date of the final contingent consideration payment (referred to as the final
12
Deferred Amount Payment in the Credit Agreement) on no more than two separate occasions in borrowing multiples of $1.0 million up to the lesser of contingent consideration earned
or $7.0 million. Amounts borrowed under the Delayed Draw Term Loan will be payable in consecutive quarterly installments commencing on the first payment date after disbursement of such borrowings. The principal amount of each quarterly
installment payable of each Delayed Draw Term Loan equals the product of the original balance of such Loan, multiplied by (i) 3.75% for quarterly installments due on October 1, 2018 through and including July 1, 2021; and (ii) 5.00% for
quarterly installments payable on October 1, 2021 through and including the maturity date, with the maturity date payment equal to the outstanding amount of the loan on that date.
Borrowings under the revolver and the term loans, at the Companys election, bear interest at either (a) the higher of PNCs
prime rate or the federal funds rate plus 0.50%, plus an applicable margin determined based upon the Companys senior leverage ratio or (b) an adjusted LIBOR rate, plus an applicable margin determined based upon the Companys senior
leverage ratio. The applicable margin on the base rate is between 0.50% and 1.25% on revolver borrowings and between 1.75% and 2.50% on term loans. The applicable margin on the adjusted LIBOR rate is between 1.50% and 2.25% on revolver borrowings
and between 2.75% and 3.50% on term loans. A 20 to 30 basis point per annum commitment fee on the unused portion of the revolver facility and the delayed draw term loan is charged and due monthly in arrears. The applicable commitment fee is
determined based upon the Companys senior leverage ratio.
The Company pledged substantially all of its assets in support of the
Credit Agreement. The credit agreement contains standard financial covenants, including, but not limited to, covenants related to the Companys senior leverage ratio and fixed charge ratio (as defined under the credit agreement) and limitations
on liens, indebtedness, guarantees, contingent liabilities, loans and investments, distributions, leases, asset sales, stock repurchases and mergers and acquisitions. As of September 30, 2017, the Company was in compliance with all provisions
under the facility.
In connection with securing the commitments under the Credit Agreement, the Company paid a commitment fee and
incurred deferred financing costs totaling $435,000, which were capitalized and are being amortized as interest expense over the lives of the facilities. Debt financing costs of $411,000 and $59,000 (net of amortization) as of September 30,
2017 and December 31, 2016, respectively, are presented as reductions in long-term debt in the Companys Condensed Consolidated Balance Sheets. The deferred financing costs outstanding at December 31, 2016 previously presented in other
assets, have been reclassified to conform to the current period presentation.
At Closing the Company borrowed $9.0 million under the
Revolver and $30.5 million under the Term Loan which were used to repay all borrowings under the previous credit facility with PNC and to pay a portion of the acquisition consideration and transaction expenses. The Companys net
outstanding borrowings as of September 30, 2017 under the Revolver totaled $12.9 million and unused borrowing capacity available was approximately $10 million. The Companys outstanding borrowings under the term loan were
$30.5 million at September 30, 2017. As of September 30, 2017, the Company believed the eligible borrowing base on the revolver would not fall below current outstanding borrowings for a period of time exceeding one year and has
classified the $12.9 million net outstanding debt balance at September 30, 2017 as long-term.
The components of income before income taxes, as shown in the accompanying
Financial Statements, consisted of the following for the three and nine months ended September 30, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(Amounts in Thousands)
|
|
|
(Amounts in Thousands)
|
|
Income before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
(507
|
)
|
|
$
|
1,359
|
|
|
$
|
417
|
|
|
$
|
2,685
|
|
Foreign
|
|
|
272
|
|
|
|
115
|
|
|
|
546
|
|
|
|
331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
(235
|
)
|
|
$
|
1,474
|
|
|
$
|
963
|
|
|
$
|
3,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
The Company has foreign subsidiaries in Canada and India both of which generate revenues
from foreign clients. Additionally, the India subsidiaries provide services to both the Canadian and U.S. operating entities and the Company allocates a portion of its income to these subsidiaries based on a transfer pricing model. No
provision for U.S. income taxes has been made for the undistributed earnings of its Indian and Canadian subsidiaries as of September 30, 2017, as those earnings are expected to be permanently reinvested outside the U.S. If these foreign
earnings were to be repatriated in the future, the U.S. tax liability may be reduced by any foreign income taxes previously paid on such earnings, which would make this U.S. tax liability immaterial. The determination of the amount of unrecognized
deferred tax liability related to these earnings is not practicable.
The provision for income taxes, as shown in the accompanying
Financial Statements, consisted of the following for the three and nine months ended September 30, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(Amounts in Thousands)
|
|
|
(Amounts in Thousands)
|
|
Current provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(240
|
)
|
|
$
|
310
|
|
|
$
|
(78
|
)
|
|
$
|
820
|
|
State
|
|
|
(36
|
)
|
|
|
25
|
|
|
|
(13
|
)
|
|
|
89
|
|
Foreign
|
|
|
64
|
|
|
|
39
|
|
|
|
157
|
|
|
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current provision (benefit)
|
|
|
(212
|
)
|
|
|
374
|
|
|
|
66
|
|
|
|
1,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
80
|
|
|
|
155
|
|
|
|
100
|
|
|
|
102
|
|
State
|
|
|
11
|
|
|
|
21
|
|
|
|
14
|
|
|
|
13
|
|
Foreign
|
|
|
22
|
|
|
|
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred provision
|
|
|
113
|
|
|
|
176
|
|
|
|
136
|
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision (benefit) for income taxes
|
|
$
|
(99
|
)
|
|
$
|
550
|
|
|
$
|
202
|
|
|
$
|
1,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The reconciliation of income taxes computed using the statutory U.S. income tax rate and the provision for
income taxes for the three and nine months ended September 30, 2017 and 2016 were as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, 2017
|
|
|
Three Months Ended
September 30, 2016
|
|
Income taxes computed at the federal statutory rate
|
|
$
|
(80
|
)
|
|
|
(34.0
|
)%
|
|
$
|
501
|
|
|
|
34.0
|
%
|
State income taxes, net of federal tax benefit
|
|
|
(25
|
)
|
|
|
(10.6
|
)
|
|
|
46
|
|
|
|
3.1
|
|
Excess tax benefits from stock options/restricted shares
|
|
|
10
|
|
|
|
4.2
|
|
|
|
|
|
|
|
|
|
Other net
|
|
|
(4
|
)
|
|
|
(1.7
|
)
|
|
|
3
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(99
|
)
|
|
|
(42.1
|
)%
|
|
$
|
550
|
|
|
|
37.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30, 2017
|
|
|
Nine Months Ended
September 30, 2016
|
|
Income taxes computed at the federal statutory rate
|
|
$
|
327
|
|
|
|
34.0
|
%
|
|
$
|
1,025
|
|
|
|
34.0
|
%
|
State income taxes, net of federal tax benefit
|
|
|
17
|
|
|
|
1.8
|
|
|
|
102
|
|
|
|
3.4
|
|
Excess tax benefits from stock options/restricted shares
|
|
|
(145
|
)
|
|
|
(15.1
|
)
|
|
|
|
|
|
|
|
|
Other net
|
|
|
3
|
|
|
|
0.3
|
|
|
|
9
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
202
|
|
|
|
21.0
|
%
|
|
$
|
1,136
|
|
|
|
37.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
A reconciliation of the beginning and ending amounts of unrecognized tax benefits related to
uncertain tax positions, including interest and penalties, are as follows:
|
|
|
|
|
(Amounts in thousands)
|
|
Nine Months Ended
September 30, 2017
|
|
Balance as of December 31, 2016
|
|
$
|
128
|
|
Additions related to current period
|
|
|
|
|
Additions related to prior periods
|
|
|
|
|
Reductions related to prior periods
|
|
|
(33
|
)
|
|
|
|
|
|
Balance as of September 30, 2017
|
|
$
|
95
|
|
|
|
|
|
|
Although it is difficult to anticipate the final outcome of these uncertain tax positions, the Company
believes that the total amount of unrecognized tax benefits could be reduced by approximately $40,000 during the next twelve months due to the expiration of the statutes of limitation.
9.
|
Derivative Instruments and Hedging Activities
|
Interest Rate Risk Management
Concurrent with the Companys July 13, 2017 borrowings under its new credit facility, the Company entered into a 44month
interest-rate swap to convert the debts variable interest rate to a fixed rate of interest. Under the swap contracts, the Company pays interest at a fixed rate of 1.99% and receives interest at a variable rate equal to the daily U.S. LIBOR
rate on a notional amount of $15,000,000. These swap contracts have been designated as cash flow hedging instruments and qualified as effective hedges at inception under ASC Topic 815, Derivatives and Hedging. These contracts are
recognized on the balance sheet at fair value. The effective portion of the changes in fair value on these instruments is recorded in other comprehensive income (loss) and is reclassified into the Condensed Consolidated Statements of Operations as
interest expense in the same period in which the underlying hedge transaction affects earnings. Changes in the fair value of interest-rate swap contracts deemed ineffective are recognized in the Condensed Consolidated Statements of Operations as
interest expense. The fair value of the interest-rate swap contracts at September 30, 2017 was a liability of $99,000 and is reflected in the Condensed Consolidated Balance Sheet as other current liabilities.
The effect of derivative instruments on the Condensed Consolidated Statements of Operations and Comprehensive Income are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in ASC Topic 815 Cash Flow Hedging
Relationships
|
|
Amount of
Gain / (Loss)
recognized in
OCI on
Derivatives
|
|
|
Location of
Gain / (Loss)
reclassified from
Accumulated
OCI
to
Income
(Expense)
|
|
|
Amount of
Gain / (Loss)
reclassified
from
Accumulated
OCI
to
Income
(Expense)
|
|
|
Location of
Gain / (Loss)
reclassified in
Income
(Expense)
on
Derivatives
|
|
|
Amount of
Gain / (Loss)
recognized in
Income
(Expense)
on Derivatives
|
|
|
|
(Effective
Portion)
|
|
|
(Effective
Portion)
|
|
|
(Effective
Portion)
|
|
|
(Ineffective Portion/Amounts
excluded from
effectiveness
testing)
|
|
For the Three Months Ended September 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Rate Swap Contract
|
|
$
|
(99
|
)
|
|
|
Interest Expense
|
|
|
$
|
(20
|
)
|
|
|
Interest Expense
|
|
|
$
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Rate Swap Contract
|
|
$
|
(87
|
)
|
|
|
Interest Expense
|
|
|
$
|
(30
|
)
|
|
|
Interest Expense
|
|
|
$
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Rate Swap Contract
|
|
$
|
18
|
|
|
|
Interest Expense
|
|
|
$
|
(10
|
)
|
|
|
Interest Expense
|
|
|
$
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Rate Swap Contract
|
|
$
|
(17
|
)
|
|
|
Interest Expense
|
|
|
$
|
(32
|
)
|
|
|
Interest Expense
|
|
|
$
|
|
|
15
Information on the location and amounts of derivative fair values in the Condensed Consolidated Balance Sheets
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Derivative Instruments
|
|
Balance Sheet Location
|
|
Fair Value
|
|
|
Balance Sheet Location
|
|
Fair Value
|
|
Interest-Rate Swap Contracts
|
|
Other Current
Liabilities
|
|
$
|
99
|
|
|
Other Current
Liabilities
|
|
$
|
12
|
|
The estimated amount of pretax losses as of September 30, 2017 that is expected to be reclassified from
other comprehensive income (loss) into earnings within the next 12 months is approximately $80,000.
10.
|
Fair Value Measurements
|
The Company has adopted the provisions of ASC 820, Fair
Value Measurements and Disclosures (ASC 820), related to certain financial and nonfinancial assets and liabilities. ASC 820 establishes the authoritative definition of fair value; sets out a framework for measuring fair value;
and expands the required disclosures about fair value measurements. The valuation techniques required by ASC 820 are based on observable and unobservable inputs using the following three-tier hierarchy:
|
|
|
Level 1 - Inputs are observable quoted prices (unadjusted) in active markets for identical assets and liabilities.
|
|
|
|
Level 2 - Inputs are observable, other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and
liabilities in markets that are not active; or other inputs that are directly or indirectly observable in the marketplace.
|
|
|
|
Level 3 - Inputs are unobservable that are supported by little or no market activity.
|
At
September 30, 2017 and December 31, 2016, the Company carried the following financial (liabilities) at fair value measured on a recurring basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of September 30, 2017
|
|
(Amounts in thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Interest-Rate Swap Contracts
|
|
$
|
|
|
|
$
|
(99
|
)
|
|
$
|
|
|
|
$
|
(99
|
)
|
Contingent consideration liability
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(17,125
|
)
|
|
$
|
(17,125
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of December 31, 2016
|
|
(Amounts in thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Interest-Rate Swap Contracts
|
|
$
|
|
|
|
$
|
(12
|
)
|
|
$
|
|
|
|
$
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of interest rate swap contracts are based on quoted prices for similar instruments from a
commercial bank, and therefore, the fair value measurement is considered to be within level 2. The fair value of the contingent consideration liability was estimated by utilizing a probability weighted simulation model to determine the fair value of
contingent consideration, and therefore, the fair value measurement is considered to be within level 3.
On July 7, 2017 the Company entered into Securities
Purchase Agreements with Ashok Trivedi and Sunil Wadhwani pursuant to which the Company agreed to sell to each the number of shares of Common Stock equal to $3.0 million divided by the greater of (i) $7.00 per share of Common Stock and
(ii) the closing price of the Common Stock on the NYSE American on July 10, 2017, which was $6.35 per share. On July 13, 2017, the Closing Date of the Companys acquisition of InfoTrellis services division, the Company
issued and sold an aggregate of 857,144 shares of Common Stock to Ashok Trivedi and Sunil Wadhwani for $6.0 million in aggregate gross proceeds. The Company used the proceeds from the private placement to fund a portion of the closing date
purchase price of the InfoTrellis acquisition.
The Company had a Share Repurchase Program in place that expired on December 22,
2016. During the nine months ended September 30, 2016 no shares were repurchased under a share repurchase program. During the three and nine months ended September 30, 2017, the Company purchased 0 and 1,159 shares, respectively, at a
share price of $6.42 to satisfy employee tax obligations related to the vesting of restricted stock. During the three and nine months ended September 30, 2016, the Company purchased 1,158 shares to satisfy employee tax obligations related to
the vesting of restricted shares at an average price of $6.80
16
12.
|
Revenue Concentration
|
For the three months ended September 30, 2017, the Company
had two clients that exceeded 10% of total revenues (CGI = 12.5% and Accenture = 11.7%). For the three months ended September 30, 2016, the Company had one client that exceeded 10% of total revenues (CGI = 11.0%). For the nine months ended
September 30, 2017, the Company had two clients that exceeded 10% of total revenues (CGI = 13.1% and Accenture 10.5%). For the nine months ended September 30, 2016, the Company had no clients that exceeded 10% of total revenues.
The Companys top ten clients represented approximately 47% and 45% of total revenues for the three months ended September 30, 2017
and 2016, respectively. For the nine months ended September 30, 2017 and 2016, the Companys top ten clients represented approximately 48% and 44% of total revenues, respectively.
The computation of basic earnings per share is based on the
Companys net income divided by the weighted average number of common shares outstanding. Diluted earnings per share reflect the potential dilution that could occur if outstanding stock options were exercised. The dilutive effect of stock
options was calculated using the treasury stock method.
For the three and nine months ended September 30, 2017, there were no
anti-dilutive stock options excluded from the computation of diluted earnings per share. For the three and nine months ended September 30, 2016, there were 4,759 and 200,014 anti-dilutive stock options excluded from the computation of diluted
earnings per share.
During the nine month period ending September 30, 2017, the
Company incurred no severance costs. During the three and nine months ended September 30, 2016, the Company incurred severance costs of $0 and $780,000
(pre-tax),
respectively, related to several changes
in executive leadership.
15.
|
Business Segment and Geographic Information
|
Our reporting segments are: 1) Data and
Analytics Services; and 2) IT Staffing Services.
The data and analytics services segment was acquired through the July 13, 2017
acquisition of the services division of Canada-based InfoTrellis, Inc. This segment is a project-based consulting services business with specialized capabilities in data management and analytics. The business is marketed as Mastech InfoTrellis and
utilizes a dedicated sales team with deep subject matter expertise. Mastech InfoTrellis has offices in Toronto, Canada and Austin, Texas and a global delivery center in Chennai, India. Project-based delivery reflects a combination of
on-site
resources and offshore resources out of the Companys delivery center in Chennai. Assignments are secured on both a time and material and fixed price basis.
The IT staffing services segment offers (a) staffing services in digital and mainstream technologies; and (b) digital transformation
services focused on providing CRM on the cloud through Salesforce.com; driving IT efficiencies through SAP HANA; and using digital methods to enhance organizational learning. These services are marketed using a common sales force and delivered via
our global recruitment center. While the vast majority of our assignments are based on time and materials, we do have the capabilities to deliver our digital transformation services on a fixed price basis.
17
Below are the operating results of our reporting segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(Amounts in Thousands)
|
|
|
(Amounts in Thousands)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data and analytics services
|
|
$
|
4,069
|
|
|
$
|
|
|
|
$
|
4,069
|
|
|
$
|
|
|
IT staffing services
|
|
|
35,159
|
|
|
|
34,263
|
|
|
|
103,345
|
|
|
|
99,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
39,228
|
|
|
$
|
34,263
|
|
|
$
|
107,414
|
|
|
$
|
99,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data and analytics services
|
|
$
|
1,060
|
|
|
$
|
|
|
|
$
|
1,060
|
|
|
$
|
|
|
IT staffing services
|
|
|
1,520
|
|
|
|
1,798
|
|
|
|
3,577
|
|
|
|
4,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
2,580
|
|
|
|
1,798
|
|
|
|
4,637
|
|
|
|
4,003
|
|
|
|
|
|
|
Amortization of acquired intangible assets
|
|
|
(611
|
)
|
|
|
(204
|
)
|
|
|
(1,018
|
)
|
|
|
(610
|
)
|
Acquisition transaction expenses
|
|
|
(1,754
|
)
|
|
|
|
|
|
|
(2,019
|
)
|
|
|
|
|
Interest expenses and other, net
|
|
|
(450
|
)
|
|
|
(120
|
)
|
|
|
(637
|
)
|
|
|
(377
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
(235
|
)
|
|
$
|
1,474
|
|
|
$
|
963
|
|
|
$
|
3,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Below is a reconciliation of segment total assets to consolidated total assets:
|
|
|
|
|
|
|
|
|
|
|
At September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Amounts in Thousands)
|
|
Total assets:
|
|
|
|
|
|
|
|
|
Data and analytics services
|
|
$
|
56,178
|
|
|
$
|
|
|
IT staffing services
|
|
|
42,796
|
|
|
|
42,974
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
98,974
|
|
|
$
|
42,974
|
|
|
|
|
|
|
|
|
|
|
Below is geographic information related to our revenues from external customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(Amounts in Thousands)
|
|
|
(Amounts in Thousands)
|
|
United States
|
|
$
|
38,142
|
|
|
$
|
34,263
|
|
|
$
|
106,328
|
|
|
$
|
99,606
|
|
Canada
|
|
|
716
|
|
|
|
|
|
|
|
716
|
|
|
|
|
|
Other
|
|
|
370
|
|
|
|
|
|
|
|
370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
39,228
|
|
|
$
|
34,263
|
|
|
$
|
107,414
|
|
|
$
|
99,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16.
|
Recently Issued Accounting Standards
|
Recently Adopted Accounting Pronouncements
In November 2015, the FASB issued ASU
2015-17,
Balance Sheet Classification of Deferred
Taxes. The Company adopted ASU
2015-17
which amends existing guidance to require presentation of deferred tax asset and liabilities as
non-current
within a
classified balance sheet. This guidance was adopted, on a retrospective basis, at March 31, 2017. Prior periods were adjusted to conform to the current period presentation.
In March, 2016, the FASB issued ASU
2016-09
Compensation Stock Compensation (Topic 718) -
Improvements to Employee Share-Based Payment Accounting. The FASB issued this ASU as part of its Simplification Initiative, which has the objective of identifying, evaluating, and improving areas of GAAP for which cost and
complexity can be reduced while maintaining
18
or improving the usefulness of the information provided to users of financial statements. The areas for simplification in this ASU involve several aspects of the accounting for share-based
payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments in this ASU are effective for annual periods beginning after
December 15, 2016 and, accordingly, we adopted this ASU on January 1, 2017. The adoption of this ASU resulted in the recognition of a $10,000 expense and a $145,000 benefit in our provision for income taxes for the three and nine months
ended September 30, 2017.
Recent Accounting Pronouncements not yet adopted
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)
2014-09,
Revenue from Contracts with Customers, which provides for a single five-step model to be applied to all revenue contracts with customers. The new guidance also requires additional financial
statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. Entities can use either a retrospective approach or a cumulative effect adjustment
approach to implement the guidance. In 2015, the FASB issued a deferral of the effective date of the guidance to 2018, with early adoption permitted in 2017. In 2016, the FASB issued ASU
2016-08,
ASU
2016-10,
ASU
2016-12
and ASU
2016-20
to amend ASU
2014-09
for technical corrections and
improvements and to clarify the implementation guidance for 1) principal versus agent considerations, 2) identifying performance obligations, 3) the accounting for licenses of intellectual property and 4) narrow scope improvements on assessing
collectability, presentation of sales taxes,
non-cash
consideration and completed contracts and contract modifications at transition and based on our preliminary assessment which is subject to change, the
Company does not expect the adoption to have a material impact on its consolidated financial statements.
In January 2016, the FASB issued
ASU
2016-01,
Financial Instruments Overall (Subtopic
825-10)
- Recognition and Measurement of Financial Assets and Financial Liabilities, which amends
certain aspects of recognition, measurement, presentation and disclosure of financial instruments. This amendment requires all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than
those accounted for under the equity method of accounting or those that result in consolidation of the investee). This standard will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal
years. We are evaluating the impact the adoption of ASU
2016-01
will have on our consolidated financial statements.
In February 2016, the FASB issued ASU
No. 2016-02,
Leases (Topic 842). The main
difference between the current requirement under GAAP and ASU
2016-02
is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases. ASU
2016-02
requires that a lessee recognize in the statement of financial position a liability to make lease payments (the lease liability) and a
right-of-use
asset representing its right to use the underlying asset for the lease term (other than leases that meet the definition of a short-term lease). The
liability will be equal to the present value of the lease payment. The lease asset will be based on the liability, subject to adjustment, such as for initial direct costs. For income statement purposes, the FASB retained a dual model, requiring
leases to be classified as either operating or finance. Operating leases will result in straight-line expense (similar to current operating leases), while finance leases will result in a front-loaded expense pattern (similar to current capital
leases). The classification of these leases will be based on the criteria that are largely similar to those applied in current lease accounting. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and
direct financing leases. ASU
2016-02
is effective for annual and interim periods beginning after December 15, 2018 and early adoption is permitted. ASU
2016-02
must
be adopted using a modified retrospective transition and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented. We are currently assessing the
potential impact of ASU
2016-02
and expect adoption will have a material impact on our consolidated financial condition and results of operations. Contractual obligations on lease arrangements as of
September 30, 2017 approximated $3.0 million.
In August 2016, the FASB issued ASU
2016-15
Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments. Current GAAP either is unclear or does not include specific guidance on eight specific
cash flow classification issues included in the amendments in this ASU. The ASU addresses these cash flow issues with the objective of reducing the existing diversity in practice. The amendments in this ASU are effective for fiscal years beginning
after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of this ASU to have a material impact on its consolidated
financial statements.
In January 2017, the FASB issued ASU
2017-04,
Intangibles
Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment, which removes the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. Under this ASU, a goodwill impairment will
now be the amount by which a reporting units carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU
2017-04
is effective for annual and interim periods beginning
January 1, 2020, with early adoption permitted, and applied prospectively. We do not expect ASU
2017-04
to have a material impact on our financial statements.
19
In May 2017, the FASB issued ASU
2017-09,
Compensation Stock Compensation (Topic 718): Scope of Modification Accounting. Entities have defined the term modification in a broad manner resulting in diversity in modification accounting practice. The amendments in
this Update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendments in this Update are effective for all entities for annual periods, and
interim periods within those annual periods, beginning after December 15, 2017. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In July 2017, the FASB issued ASU
2017-11,
Earnings Per Share (Topic 260); Distinguishing
Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815). This update addresses I. Accounting for Certain Financial Instruments with Down Round Features and II. Replacement of the Indefinite Deferral for Mandatorily Redeemable
Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. The amendments in Part I of this Update change the classification analysis of certain equity-linked financial
instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when
assessing whether the instrument is indexed to an entitys own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. The amendments in Part II of this Update recharacterize the indefinite
deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect. The amendments in Part I of this Update are effective for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any
adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company does not expect this ASU to have a material impact on its financial statements.
In August 2017, the FASB issued ASU
2017-12,
Derivatives and Hedging (Topic 815); Targeted
Improvements to Accounting for Hedging Activities. The amendments in this Update better align an entitys risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement
guidance for qualifying hedging relationships and the presentation of hedge results. To meet that objective, the amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and
presentation of the effects of the hedging instrument and the hedged item in the financial statements. The amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal
years. Early application is permitted in any interim period after issuance of the Update. The Company does not expect this ASU to have a material impact on its financial statements.
A variety of proposed or otherwise potential accounting standards are currently under consideration by standard-setting organizations and
certain regulatory agencies. Because of the tentative and preliminary nature of such proposed standards, management has not yet determined the effect, if any, that the implementation of such proposed standards would have on the Companys
consolidated financial statements.
20