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
MARCH 31, 2018 AND 2017
(Unaudited)
1.
|
Description of Business and Basis of Presentation:
|
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 includes 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.
Reflective of 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, Enterprise Data Integration, Big Data and Analytics, and Digital Transformation, with such services delivered using
on-site
and offshore resources.
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 include data management, analytics, cloud, mobility, social and artificial intelligence. 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.
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, 2017, included in our Annual Report on Form
10-K
filed with the SEC on March 23, 2018. Additionally, our operating results for the three months ended March 31, 2018 are not necessarily indicative of the results that can be expected for the
year ending December 31, 2018 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.
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, 2017 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 three months ended March 31, 2018.
7
Segment Reporting
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 and IT Staffing Services.
2.
|
Revenue from Contracts with Customers
|
As of January 1, 2018, the Company adopted
Accounting Standards Update (ASU)
2014-09,
Revenue from Contracts with Customers, using the modified retrospective method. The core principle of the new standard is that a company
should recognize revenue to depict the transfer of promised services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those services. The implementation of the new standard had no
impact on the measurement of recognition of revenue of prior periods and we expect the impact of this new standard to be immaterial to us on an ongoing basis. Additional disclosures have been added in accordance with the ASU.
The Company recognizes revenue on
time-and-material
contracts
as services are performed and expenses are incurred.
Time-and-material
contracts typically bill at an agreed-upon hourly rate, plus
out-of-pocket
expense reimbursement.
Out-of-pocket
expense reimbursement amounts vary by assignment, but on average represent
less than 2% of total revenues. Revenue is earned on a per transaction or labor hour basis, as that amount directly corresponds to the value of the Companys performance. Revenue recognition is negatively impacted by holidays and consultant
vacation and sick days.
The Company recognizes revenue on fixed price contracts as services are rendered and uses a cost-based input
method to measure progress. Determining a measure of progress requires management to make judgments that affect the timing of revenue recognized. Under the cost-based input method, the extent of progress towards completion is measured based on the
ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues, including estimated fees or profits, are recorded proportionally as costs are incurred. The company has determined that the
cost-based input method provides a faithful depiction of the transfer of goods or services to the customer. Estimated losses are recognized immediately in the period in which current estimates indicate a loss. We record deferred revenues when cash
payments are received or due in advance of our performance, including amounts which may be refundable.
We do not sell, lease or otherwise
market computer software or hardware, and essentially 100
% of our revenue is derived from the sale of data and analytics, IT staffing and
digital transformation services. We expense sales commissions in the same period in which revenues are realized. These costs are recorded within sales and marketing expenses.
Our data and analytics services segment provides specialized capabilities in delivering data management and analytics services to customers
globally. This business offers project-based consulting services in the areas of Master Data Management, Enterprise Data Integration, Data and Analytics and Digital Transformation, which can be delivered using onsite and offshore resources.
Our IT staffing business combines technical expertise with business process experience to deliver a broad range of services in digital and
mainstream technologies. Our digital technology stack includes data management and analytics, cloud, mobility, social and automation. Our mainstream technologies include business intelligence / data warehousing; web services; enterprise resource
planning & customer resource management; and
e-Business
solutions. We work with businesses and institutions with significant
IT-spend
and recurring staffing
needs. We also support smaller organizations with their project focused temporary IT staffing requirements.
The following
table depicts the disaggregation of our revenues by contract type and operating segment:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(Amounts in millions)
|
|
Data and Analytics Services Segment
|
|
|
|
|
Time-and-material
Contracts
|
|
$
|
5.6
|
|
|
$
|
|
|
Fixed-price Contracts
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal Data and Analytics Services
|
|
$
|
6.6
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
IT Staffing Services Segment
|
|
|
|
|
|
|
|
|
Time-and-material
Contracts
|
|
$
|
36.7
|
|
|
$
|
33.0
|
|
Fixed-price Contracts
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
Subtotal IT Staffing Services
|
|
$
|
36.7
|
|
|
$
|
33.1
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
43.3
|
|
|
$
|
33.1
|
|
|
|
|
|
|
|
|
|
|
8
For the three months ended March 31, 2018, the Company had one client (CGI = 12.1%) that
exceeded 10% of total revenues. For the three months ended March 31, 2017, the Company had the same one client (CGI = 13.0%) that exceeded 10% of total revenues.
The Companys top ten clients represented approximately 45% and 47% of total revenues for the three months ended March 31, 2018 and
2017, respectively.
The following table presents our revenue from external customers disaggregated by geography, based on the work
location of our customers:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(Amounts in millions)
|
|
United States
|
|
$
|
42.0
|
|
|
$
|
33.1
|
|
Canada
|
|
|
1.1
|
|
|
|
|
|
India and other
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
43.3
|
|
|
$
|
33.1
|
|
|
|
|
|
|
|
|
|
|
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 $861,000. 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.
To fund 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.
On April 20, 2018, we entered
into an amendment to the Credit Agreement. Refer to Note 16 Subsequent Event to our Condensed Consolidated Financial Statements included in Item 1 herein for further details regarding this amendment.
9
The acquisition was accounted for using the acquisition method of accounting. The acquisition
method of accounting requires that the assets acquired and liabilities assumed be measured at their fair value as of the closing date.
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
|
|
|
(861
|
)
|
Estimated payout of contingent consideration (1)
|
|
|
17,125
|
|
|
|
|
|
|
Total Fair Value of Consideration
|
|
$
|
52,014
|
|
|
|
|
|
|
(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 $17.1 million.
|
The cash purchase price at closing was paid with funds obtained from the following sources:
|
|
|
|
|
(in thousands)
|
|
Amounts
|
|
Cash balances 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
|
|
|
|
|
|
|
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. Goodwill is expected to be largely deductible for tax purposes. The fair value of net assets acquired is as follows:
|
|
|
|
|
(in thousands)
|
|
Amounts
|
|
Current Assets
|
|
$
|
6,909
|
|
Fixed Assets and Other
|
|
|
215
|
|
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
|
|
|
27,417
|
|
Current liabilities
|
|
|
(2,389
|
)
|
|
|
|
|
|
Net Assets Acquired
|
|
$
|
52,014
|
|
|
|
|
|
|
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 approachrelief from
royalty method. All identifiable intangibles are considered level 3 inputs under the fair value measurement and disclosure guidance.
The
Company incurred $2.0 million of transaction costs related to the acquisition in 2017. No transaction costs were incurred for the three months ended March 31, 2018 and 2017.
10
Included in the Condensed Consolidated Statement of Operations for the three months ended
March 31, 2018 are revenues of $6.6 million and net income of $0.9 million applicable to the InfoTrellis operations acquired on July 13, 2017.
The following reflects the Companys unaudited pro forma results had the results of InfoTrellis been included for all periods presented:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(Amounts in thousands)
|
|
Revenue
|
|
$
|
43,333
|
|
|
$
|
38,713
|
|
Net income
|
|
$
|
1,380
|
|
|
$
|
854
|
|
Earnings per share-diluted
|
|
$
|
0.25
|
|
|
$
|
0.16
|
|
The information above does not reflect all of the operating efficiencies or inefficiencies that may have
resulted from the InfoTrellis acquisition in those periods prior to such acquisition. Therefore, the unaudited pro forma information above is not necessarily indicative of results that would have been achieved had the business been combined during
all periods presented.
4.
|
Goodwill and Other Intangible Assets, net
|
Goodwill related to our June 15, 2015
acquisition of Hudson Global Resources 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.
The Company is amortizing the identifiable intangible assets on a straight-line basis over estimated average lives
ranging from 3 to 12 years. Identifiable intangible assets were comprised of the following as of March 31, 2018 and December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
(Amounts in thousands)
|
|
Amortization
Period (In Years)
|
|
|
Gross Carrying
Value
|
|
|
Accumulative
Amortization
|
|
|
Net Carrying
Value
|
|
IT staffing services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Client relationships
|
|
|
12
|
|
|
$
|
7,999
|
|
|
$
|
1,861
|
|
|
$
|
6,138
|
|
Covenant-not-to-compete
|
|
|
5
|
|
|
|
319
|
|
|
|
178
|
|
|
|
141
|
|
Trade name
|
|
|
3
|
|
|
|
249
|
|
|
|
232
|
|
|
|
17
|
|
Data and analytics services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Client relationships
|
|
|
12
|
|
|
|
16,671
|
|
|
|
983
|
|
|
|
15,688
|
|
Covenant-not-to-compete
|
|
|
5
|
|
|
|
761
|
|
|
|
108
|
|
|
|
653
|
|
Trade name
|
|
|
5
|
|
|
|
1,221
|
|
|
|
173
|
|
|
|
1,048
|
|
Technology
|
|
|
7
|
|
|
|
1,209
|
|
|
|
122
|
|
|
|
1,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Intangible Assets
|
|
|
|
|
|
$
|
28,429
|
|
|
$
|
3,657
|
|
|
$
|
24,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
(Amounts in thousands)
|
|
Amortization
Period (In Years)
|
|
|
Gross Carrying
Value
|
|
|
Accumulative
Amortization
|
|
|
Net Carrying
Value
|
|
IT staffing services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Client relationships
|
|
|
12
|
|
|
$
|
7,999
|
|
|
$
|
1,694
|
|
|
$
|
6,305
|
|
Covenant-not-to-compete
|
|
|
5
|
|
|
|
319
|
|
|
|
162
|
|
|
|
157
|
|
Trade name
|
|
|
3
|
|
|
|
249
|
|
|
|
211
|
|
|
|
38
|
|
Data and analytics services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Client relationships
|
|
|
12
|
|
|
|
16,671
|
|
|
|
636
|
|
|
|
16,035
|
|
Covenant-not-to-compete
|
|
|
5
|
|
|
|
761
|
|
|
|
70
|
|
|
|
691
|
|
Trade name
|
|
|
5
|
|
|
|
1,221
|
|
|
|
112
|
|
|
|
1,109
|
|
Technology
|
|
|
7
|
|
|
|
1,209
|
|
|
|
79
|
|
|
|
1,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Intangible Assets
|
|
|
|
|
|
$
|
28,429
|
|
|
$
|
2,964
|
|
|
$
|
25,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
Amortization expense for the three months ended March 31, 2018 and 2017 totaled $693,000 and
$203,000, respectively and is included in selling, general and administrative expenses in the Condensed Consolidated Statement of Operations.
The estimated aggregate amortization expense for intangible assets for the years ending December 31, 2018 through 2022 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
|
(Amounts in thousands)
|
|
Amortization expense
|
|
$
|
2,727
|
|
|
$
|
2,689
|
|
|
$
|
2,654
|
|
|
$
|
2,625
|
|
|
$
|
2,443
|
|
5.
|
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, 2017.
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.
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 three months ended March 31, 2018 and 2017. Mastech Digitals
total contributions to the Retirement Plan for the three months ended March 31, 2018 and 2017 related to the former Hudson IT employees totaled approximately $21,000 and $30,000, respectively.
7.
|
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 months ended March 31, 2018, the Company granted 12,690 restricted share units and 90,000 stock options at a strike price of $14.92 under the Plan. During the three
months ended March 31, 2017, no grants were made under the Plan. As of March 31, 2018 and December 31, 2017, there were 29,000 shares and 132,000, respectively available for future grant under the Plan.
Stock-based compensation expense for the three months ended March 31, 2018 and 2017 was $105,000 and $107,000, respectively, and is
included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.
During the three months
ended March 31, 2018 and 2017, the Company issued 1,113 and 0 shares, respectively, related to the exercising of stock options.
12
On July 13, 2017, the Company entered into a Credit Agreement (the
Credit Agreement) with PNC Bank, as administrative agent, swing loan lender and issuing lender, 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 $27.5 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 five 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, with the maturity date payment equal to the outstanding amount of the loan on that date. The Delayed Draw Term Loan may be used through the date of the final contingent consideration
payment (referred to as the final 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 London Interbank Offered Rate (LIBOR), 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 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 March 31, 2018, 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 life of the facility. Debt financing costs of $373,000 and $395,000 (net of amortization) as
of March 31, 2018 and December 31, 2017, respectively, are presented as reductions in long-term debt in the Companys Condensed Consolidated Balance Sheets.
As of March 31, 2018 and December 31, 2017, the Companys outstanding borrowings under the Revolver totaled $11.0 million
and $9.0 million, respectively; and unused borrowing capacity available was approximately $13.5 million and $13 million, respectively. The Companys outstanding borrowings under the term loan were $28.6 million and
$29.5 million at March 31, 2018 and December 31, 2017, respectively. The Company believes the eligible borrowing base on the revolver will not fall below current outstanding borrowings for a period of time exceeding one year and has
classified the $11.0 million net outstanding debt balance at March 31, 2018, as long-term.
13
On April 20, 2018, we entered into an amendment to the Credit Agreement. Refer to Note 16
Subsequent Event to our Condensed Consolidated Financial Statements included in Item 1 herein for further details regarding this amendment.
The components of income before income taxes, as shown in the accompanying
Financial Statements, consisted of the following for the three months ended March 31, 2018 and, 2017:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(Amounts in thousands)
|
|
Income before income taxes:
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
1,297
|
|
|
$
|
197
|
|
Foreign
|
|
|
629
|
|
|
|
125
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
1,926
|
|
|
$
|
322
|
|
|
|
|
|
|
|
|
|
|
The Company has foreign subsidiaries in Canada and India, both of which generate revenues from foreign
clients. Additionally, the Company has foreign subsidiaries in Canada and India which provide services to its U.S. operations. Accordingly, the Company allocates a portion of its income to these subsidiaries based on a transfer pricing
model and reports such income as foreign in the above table.
The provision for income taxes, as shown in the accompanying Financial
Statements, consisted of the following for the three months ended March 31, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(Amounts in thousands)
|
|
Current provision:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
324
|
|
|
$
|
67
|
|
State
|
|
|
90
|
|
|
|
8
|
|
Foreign
|
|
|
171
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
Total current provision
|
|
|
585
|
|
|
|
117
|
|
|
|
|
|
|
|
|
|
|
Deferred provision (benefit):
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(33
|
)
|
|
|
3
|
|
State
|
|
|
(9
|
)
|
|
|
1
|
|
Foreign
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred provision (benefit)
|
|
|
(39
|
)
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes
|
|
$
|
546
|
|
|
$
|
121
|
|
|
|
|
|
|
|
|
|
|
The Tax Cut and Jobs Act of 2017 (the Tax Act) enacted on December 22, 2017 introduced
significant changes to U.S. income tax law. Effective 2018, the Tax Act reduced the U.S. statutory tax rate from 34% to 21% and created new taxes on certain
foreign-sourced
earnings and certain intercompany
payments.
We have not fully completed our accounting for the income tax effects of the Tax Act. As discussed in the SEC Staff Accounting
Bulletin No. 118, the accounting for the Tax Act should be completed within one year from the Tax Act enactment. During the three months ended March 31, 2018, we have made no adjustments to the provisional amounts recorded at
December 31, 2017. Any adjustments to the provisional amounts recorded at December 31, 2017 will be reflected upon the completion of our accounting for the Tax Act.
14
The reconciliation of income taxes computed using the statutory U.S. income tax rate and the
provision for income taxes for the three months ended March 31, 2018 and 2017 were as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2018
|
|
|
Three Months Ended
March 31, 2017
|
|
Income taxes computed at the federal statutory rate
|
|
$
|
404
|
|
|
|
21.0
|
%
|
|
$
|
109
|
|
|
|
34.0
|
%
|
State income taxes, net of federal tax benefit
|
|
|
81
|
|
|
|
4.2
|
|
|
|
9
|
|
|
|
2.8
|
|
Excess tax benefits from stock options/restricted shares
|
|
|
(2
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
Difference in income tax rate on foreign earnings/other
|
|
|
63
|
|
|
|
3.3
|
|
|
|
3
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
546
|
|
|
|
28.4
|
%
|
|
$
|
121
|
|
|
|
37.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
Three Months Ended
March 31, 2018
|
|
Balance as of December 31, 2017
|
|
$
|
95
|
|
Additions related to current period
|
|
|
|
|
Additions related to prior periods
|
|
|
|
|
Reductions related to prior periods
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2018
|
|
$
|
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.
10.
|
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 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 Consolidated Statements of Operations as interest expense.
Prior to July 13, 2017, the Company had outstanding interest-rate swap contracts related to term loan borrowings under the Companys previous credit agreement. The fair value of the interest-rate swap contracts at March 31, 2018 and
December 31, 2017 was an asset of $131,000 and $9,000, respectively, and is reflected in the Condensed Consolidated Balance Sheets as other current assets.
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 March 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Rate Swap Contract
|
|
$
|
122
|
|
|
|
Interest Expense
|
|
|
$
|
(14
|
)
|
|
|
Interest Expense
|
|
|
$
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 March 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Rate Swap Contract
|
|
$
|
11
|
|
|
|
Interest Expense
|
|
|
$
|
(6
|
)
|
|
|
Interest Expense
|
|
|
$
|
|
|
Information on the location and amounts of derivative fair values in the Condensed Consolidated Balance Sheets (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
Derivative Instruments
|
|
Balance Sheet Location
|
|
|
Fair Value
|
|
|
Balance Sheet Location
|
|
|
Fair Value
|
|
Interest-Rate Swap Contracts
|
|
|
Other Current Assets
|
|
|
$
|
131
|
|
|
|
Other Current Assets
|
|
|
$
|
9
|
|
The estimated amount of pretax (losses) as of March 31, 2018 that is expected to be reclassified from
other comprehensive income (loss) into earnings within the next 12 months is approximately ($50,000).
11.
|
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
March 31, 2018 and December 31, 2017, the Company carried the following financial assets (liabilities) at fair value measured on a recurring basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of March 31, 2018
|
|
(Amounts in thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Interest-Rate Swap Contracts
|
|
$
|
|
|
|
$
|
131
|
|
|
$
|
|
|
|
$
|
131
|
|
Contingent consideration liability
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(17,125
|
)
|
|
$
|
(17,125
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of December 31, 2017
|
|
(Amounts in thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Interest-Rate Swap Contracts
|
|
$
|
|
|
|
$
|
9
|
|
|
$
|
|
|
|
$
|
9
|
|
Contingent consideration liability
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(17,125
|
)
|
|
$
|
(17,125
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
16
The Company purchases shares to satisfy employee tax
obligations related to its Stock Incentive Plan. During the three months ended March 31, 2018 and 2017, no purchases were made to satisfy employee tax obligations related to the vesting of restricted stock.
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 months ended March 31, 2018, there were 90,000 anti-dilutive
stock options excluded from the computation of diluted earnings per share. For the three months ended March 31, 2017, there were 250,000 anti-dilutive stock options excluded from the computation of diluted earnings per share.
17
14.
|
Business Segments 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 staffing services in digital and mainstream technologies; 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.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(Amounts in thousands)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Data and analytics services
|
|
$
|
6,572
|
|
|
$
|
|
|
IT staffing services
|
|
|
36,761
|
|
|
|
33,100
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
43,333
|
|
|
$
|
33,100
|
|
|
|
|
|
|
|
|
|
|
Gross Margin %:
|
|
|
|
|
|
|
|
|
Data and analytics services
|
|
|
44.3
|
%
|
|
|
|
|
IT staffing services
|
|
|
20.0
|
%
|
|
|
18.8
|
%
|
|
|
|
|
|
|
|
|
|
Total gross margin %
|
|
|
23.7
|
%
|
|
|
18.8
|
%
|
|
|
|
|
|
|
|
|
|
Segment operating income:
|
|
|
|
|
|
|
|
|
Data and analytics services
|
|
$
|
1,775
|
|
|
$
|
|
|
IT staffing services
|
|
|
1,356
|
|
|
|
606
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
3,131
|
|
|
|
606
|
|
Amortization of acquired intangible assets
|
|
|
(693
|
)
|
|
|
(203
|
)
|
Interest expenses and other, net
|
|
|
(512
|
)
|
|
|
(81
|
)
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
1,926
|
|
|
$
|
322
|
|
|
|
|
|
|
|
|
|
|
Below is a reconciliation of segment total assets to consolidated total assets:
|
|
|
|
|
|
|
|
|
|
|
At March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(Amounts in thousands)
|
|
Total assets:
|
|
|
|
|
|
|
|
|
Data and analytics services
|
|
$
|
53,174
|
|
|
$
|
|
|
IT staffing services
|
|
|
45,881
|
|
|
|
41,575
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
99,055
|
|
|
$
|
41,575
|
|
|
|
|
|
|
|
|
|
|
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Below is geographic information related to our revenues from external customers:
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|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(Amounts in thousands)
|
|
United States
|
|
$
|
42,017
|
|
|
$
|
33,100
|
|
Canada
|
|
|
1,085
|
|
|
|
|
|
India and Other
|
|
|
231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
43,333
|
|
|
$
|
33,100
|
|
|
|
|
|
|
|
|
|
|
15.
|
Recently Issued Accounting Standards
|
Recently Adopted Accounting Pronouncements
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. The Company adopted the new guidance on January 1, 2018, using the
modified retrospective method, with no impact on its 2017 and 2018 financial statements. The cumulative effect of initially applying the new guidance had no impact on the opening balance of retained earnings as of January 1, 2018. The Company
does not expect the new guidance to have a material impact on its financial statements in future periods. Additional disclosures have been included in Note 2 in accordance with the requirements of the new guidance.
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 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We adopted this ASU on January 1, 2018 with no material impact on our consolidated financial
statements.
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. The Company
adopted this ASU on January 1, 2018 with no material impact on its consolidated financial statements.
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 ASU 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 ASU are
effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The Company adopted this ASU on January 1, 2018 with no material impact on its consolidated financial
statements.
In March 2018, the FASB issued ASU
2018-05,
Income Taxes (Topic 740);
Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. This ASU provides accounting and disclosure guidance relating to the Tax Cuts and Jobs Act pursuant to the issuance of SEC Staff Accounting Bulletin
No. 118. The guidance allows a company to report provisional amounts when reasonable estimates are determinable for certain income tax effects relating to the Act. These provisional amounts may give rise to new current or deferred taxes based
on certain provisions within the Act, as well as adjustments to existing current or deferred taxes that existed prior to the Acts enactment date. In the fourth quarter of 2017, the Company incurred an estimated
one-time,
non-cash
19
charge of $372,000 related to the enactment of the Act. The charge related to the
re-measurement
of the Companys deferred tax assets arising from a
lower U.S. corporate tax rate of $294,000 and a $78,000 charge related to a
one-time
transition tax applicable to the new dividend exemption system related to foreign earnings. The provisional estimates
recorded at December 31, 2017 were not adjusted during the three months ended March 31, 2018. Any adjustments will be reflected upon completion of our accounting for the Tax Act within one year from the Tax Act enactment.
Recent Accounting Pronouncements not yet adopted
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). ASU
2016-02
is effective for annual and interim periods beginning after December 15, 2018 and early adoption is permitted. 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 March 31, 2018 approximated
$2.7 million.
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.
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 ASU 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 ASU 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 ASU. The Company does not expect this ASU to have a material impact on its financial statements.
In February 2018, the FASB issued ASU
2018-02,
Income Statement Reporting Comprehensive
Income (Topic 220); Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this ASU allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax
effects resulting from the Tax Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Act and will improve the usefulness of information reported to financial statement users. The amendments in this ASU are effective
for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted in any interim period after issuance of the ASU. 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.
On April 20, 2018, we entered into an amendment to our Credit
Agreement dated as of July 13, 2017. This amendment: (i) reduces the aggregate commitment amount of the revolving credit facility from $27.5 million to $22.5 million, which amount is subject to increase to an aggregate commitment
amount not exceeding $32.5 million upon satisfaction of certain conditions; (ii) increases the aggregate commitment amount of the swing loan subfacility under the revolving credit facility from $3.0 million to $5.0 million; and
(iii) amends the financial covenant in the Credit Agreement related to the Companys leverage ratio (as defined in the Credit Agreement) by increasing the maximum permitted leverage ratio for each of the fiscal quarters ending on or prior
to September 30, 2019. Our desired results of entering into this amendment were to increase our financial flexibility; lower our unused line fees and improve the mechanics of how we manage our cash balances.
On April 25, 2018, the Company filed with the Securities and Exchange Commission, a current report on Form
8-K
providing additional details of this amendment.
20