MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis should be read in conjunction with our Consolidated Financial Statements and accompanying Notes included in this Annual Report on Form 10-K.
This Management's Discussion and Analysis contains forward-looking statements that involve risks, uncertainties, and assumptions as described under the heading "Forward-Looking Statements" included in Part I of this Annual Report on Form 10-K. Our actual results could differ materially from those anticipated by these forward-looking statements as a result of many factors, including those discussed under "Item 1A. Risk Factors" and elsewhere in this Annual Report on Form 10-K.
Overview:
We are a provider of Digital Transformation IT Services to mostly large and medium-sized organizations.
Our portfolio of offerings includes data management and analytics services, other Digital Transformation services, such as digital learning services, and IT staffing services.
We operate in two reporting segments - Data and Analytics Services and IT Staffing Services. Our data and analytics services are marketed on a global basis under the brand "Mastech InfoTrellis" and are delivered largely on a project basis with on-site and offshore resources. These capabilities and expertise were acquired through our acquisition of InfoTrellis and enhanced and expanded subsequent to the acquisition. In October 2020, we acquired AmberLeaf Partners, Inc. ("AmberLeaf"), a Chicago-based customer experience consulting firm. This acquisition enhanced our capabilities in customer experience strategy and managed services offerings for a variety of Cloud-based enterprise applications across sales, marketing and customer services organizations. Our IT staffing business combines technical expertise with business process experience to deliver a broad range of staffing services in digital and mainstream technologies, as well as our other Digital Transformation services.
Both business segments provide their services across various industry verticals, including: financial services; government; healthcare; manufacturing; retail; technology; telecommunications; and transportation. In our Data and Analytics Services segment we evaluate our revenues and gross profits largely by service line. In our IT Staffing Services segment, we evaluate our revenues and gross profits largely by sales channel responsibility. This analysis within both our reporting segments is multi-purposed and includes technologies employed, client relationships, and geographic locations.
Beginning in the 2026 fiscal year, the Company plans to revise its segment structure to align with changes in how the Chief Operating Decision Maker ("CODM") will be evaluating operating performance and allocating resources. These changes are driven by the Company's operating strategy, which aligns the organization around account-centric management, industry-focused leadership, and an integrated approach to Talent and Services offerings.
Under the revised structure, the Company intends to transition from its current reportable segments of Data and Analytics and IT Staffing Services to the newly formed Talent and Services segments. The revised segment structure is expected to be effective for external reporting beginning in the 2026 fiscal year pending finalization of the Company's analysis under ASC 280. Any changes to the Company's segment reporting in future periods will include recasting prior period segment information in accordance with ASC 280.
Economic Trends and Outlook
Our business, particularly within our IT Staffing Services segment, is closely correlated with general North American economic conditions and employment levels. Demand for our services typically increases during periods of economic expansion and strengthening labor markets, and declines during periods of economic contraction or reduced hiring activity. During 2025, hiring activity across certain technology and professional services sectors remained cautious, as clients continued to evaluate discretionary spending and workforce needs in light of broader economic uncertainty and elevated interest rates. These conditions contributed to reduced demand for our staffing and related services, resulting in lower revenue in both of our business segments compared to the prior year. Although overall labor market conditions have eased compared to prior years, compensation levels for certain specialized IT roles remain elevated. In a softer demand environment, competitive pricing conditions also affected our gross margins.
Looking ahead, demand for our services is expected to remain influenced by overall economic growth, corporate hiring trends, and client confidence levels. Continued macroeconomic uncertainty or reduced business investment could further impact project
activity and staffing demand in future periods.
In addition to general economic conditions in the markets we serve, a significant portion of our revenue is derived from a limited number of clients (see Item 1A, the Risk Factor entitled "Our revenues are highly concentrated, and the loss of a significant client would adversely affect our business and revenues"). As a result, our operating results may be materially influenced by the financial performance, hiring activity, and business priorities of these clients. Changes in spending levels or project activity by one or more significant clients may cause our results to vary from broader economic trends in a given period.
Within our IT Staffing Services segment, a meaningful portion of revenue is generated through strategic relationships with systems integrators. In addition, many large end users utilize managed service providers ("MSPs") to oversee contractor engagement and pricing. These intermediated delivery models may reduce pricing flexibility and could continue to exert pressure on our gross margins.
Demand for expertise in emerging and advanced technologies, including cloud computing, cybersecurity, artificial intelligence, data analytics, and automation, continues to influence client investment priorities across both of our business segments. While these areas present potential opportunities, demand for these skill sets can be uneven and highly dependent on client budgets and project timing. In addition, the availability of qualified professionals in certain specialized areas remains limited, which can affect fulfillment rates, compensation levels, and margins.
Results of Operations
We operate and report our business in two reporting segments - Data and Analytics Services and IT Staffing Services.
Below is a tabular presentation of revenues and gross profit margins by segment for the periods discussed:
Revenues & Gross Margin by Segment
(Revenues in millions)
Years Ended December 31, | ||||||||||||
Revenues | 2025 | 2024 | 2023 | |||||||||
Data and Analytics Services | $ | 33.3 | $ | 36.6 | $ | 34.4 | ||||||
IT Staffing Services | 158.1 | 162.3 | 166.7 | |||||||||
Total Revenues | $ | 191.4 | $ | 198.9 | $ | 201.1 | ||||||
Gross Margin % | ||||||||||||
Data and Analytics Services | 46.2 | % | 49.1 | % | 43.5 | % | ||||||
IT Staffing Services | 24.0 | % | 23.2 | % | 21.6 | % | ||||||
Total Gross Margin %(1) | 27.9 | % | 27.9 | % | 25.4 | % | ||||||
(1) Gross margin differences between the supplemental segment and consolidated results primarily reflect non-allocated severance expense of $0.3 million recorded in cost of goods sold during the third quarter of 2025.
Below is a tabular presentation of operating expenses by sales and marketing, operations, general and administrative, amortization of acquired intangible assets, employment-related claim, net of recoveries, goodwill impairment, severance expense and finance and accounting transition for the periods discussed:
Selling, General & Administrative ("SG&A") Expense Details
(Amounts in millions)
Years Ended December 31, | ||||||||||||
Selling, General & Administrative Expenses | 2025 | 2024 | 2023 | |||||||||
Data and Analytics Services Segment | ||||||||||||
Sales and Marketing | $ | 6.8 | $ | 7.3 | $ | 6.5 | ||||||
Operations | 0.6 | 0.7 | 1.3 | |||||||||
General & Administrative | 8.2 | 6.7 | 8.9 | |||||||||
Subtotal Data and Analytics Services | 15.6 | 14.7 | 16.7 | |||||||||
IT Staffing Services Segment | ||||||||||||
Sales and Marketing | 7.4 | 9.1 | 8.3 | |||||||||
Operations | 7.0 | 8.8 | 8.6 | |||||||||
General & Administrative | 15.8 | 14.4 | 13.1 | |||||||||
Subtotal IT Staffing Services | 30.2 | 32.3 | 30.0 | |||||||||
Amortization of Acquired Intangible Assets | $ | 2.6 | $ | 2.7 | $ | 2.8 | ||||||
Employment-related Claim, net of Recoveries | - | - | 3.1 | |||||||||
Goodwill Impairment | - | - | 5.3 | |||||||||
Severance Expense | 2.8 | 2.1 | 2.4 | |||||||||
Finance and Accounting Transition Expense | 1.9 | - | - | |||||||||
Total SG&A Expenses | $ | 53.1 | $ | 51.8 | $ | 60.3 | ||||||
2025 Compared to 2024
Revenues
Revenues for the year ended December 31, 2025 totaled $191.4 million, compared to $198.9 million for the year ended December 31, 2024. This 3.8% decline in total revenues reflected a decrease in revenues of 9.1% in our Data and Analytics Services segment and a 2.6% revenue decrease in our IT Staffing Services segment.
Our Data and Analytics Services segment's 2025 revenues decreased to $33.3 million from $36.6 million in 2024. This decrease was largely due to a decrease in client spending on existing projects and lower bookings performance in 2025. Bookings in 2025 totaled $34.8 million, compared to $41.0 million reported in 2024.
Our IT Staffing Services segment's 2025 revenues declined modestly, compared to 2024 revenues due to a lower average level of billable consultants during the the year compared to 2024. We ended 2025 with 840 billable consultants, compared to 1,008 billable consultants at the end of 2024, a decrease of 16.7%. Our average IT staffing bill rate for 2025 totaled $86.10 per hour compared to $82.77 per hour in 2024. This bill rate increase was due to higher rates on new assignments and was reflective of the type of skill sets that we deployed. Permanent placement / fee revenues totaled $0.8 million in 2025, compared to $0.9 million a year ago.
In 2025, we had three clients that exceeded 10% of total revenues (Fidelity = 16.7%, Populus = 12.1% and CGI = 10.8%). In 2024, we had two client that exceeded 10% of total revenues (CGI = 14.5% and Populas = 10.7%). Our top ten clients represented 58% of total revenues in 2025 and 54% of total revenues in 2024. Additionally, our largest industry vertical, financial services, represented approximately 54% of total revenues in 2025, compared to approximately 49% in 2024.
Gross Margin
Gross profit decreased to $53.1 million in 2025, compared to $55.6 million in 2024, a decrease of 4.6% on a year-over-basis. Gross profit as a percentage of revenue totaled 27.7% in both 2025, compared to 27.9% in 2024. Excluding the $0.3 million of severance expense, gross profit as a percentage of revenue was 27.9% for 2025.
Gross margins from our Data and Analytics Services segment in 2025 were 46.2%, which was 290-basis points lower than the 49.1% gross margins that we achieved in 2024. The decrease reflected lower utilization rates through 2025 when compared to 2024, as well as a few key project ends. Including the $0.3 million of severance expense, gross margins were 45.4% for our Data and Analytics Services segment for 2025.
Gross margins in our IT Staffing Services segment were 24.0% in 2025, compared to 23.2% in 2024. This 80-basis point increase was primarily due to higher bill rates during 2025 when compared to 2024.
Selling, General and Administrative ("SG&A") Expenses
SG&A expenses in 2025 totaled $53.1 million and represented 27.7% of total revenues, compared to $51.8 million or 26.0% of revenues in 2024. When excluding the amortization of acquired intangible assets, severance expenses and finance and accounting transition expense in 2025, and the amortization of acquired intangible assets and severance expenses in 2024, the adjusted SG&A expenses related to operations as a percentage of revenues was 23.9% in 2025 versus 23.6% in 2024. The increase in SG&A as a percentage of revenues, excluding these items mentioned above, was largely due to higher general and administrative expenses in both business segments, partially offset by lower sales and operations expenses.
Fluctuations within SG&A expense components during 2025 compared to 2024 included the following:
Other Income / (Expense) Components
In 2025, other income consisted of net interest income of $844,000 and foreign exchange gains of $217,000. In 2024, other income consisted of interest income of $606,000 and foreign exchange gains of $27,000. The increase in interest income was due to a higher balance of cash on hand in 2025 compared to 2024. Net foreign exchange gains in 2025 compared to 2024 reflected exchange rate variations between the Indian rupee and the Canadian dollar compared to the U.S. dollar.
Income Tax Expense
Income tax expense for 2025 was $0.5 million and represented an effective tax rate on pre-tax income of 42.7%, compared to $1.0 million in 2024, which represented an effective tax rate on pre-tax income of 23.1%. The 2025 effective tax rate was largely impacted by disallowed executive compensation and return to provision items, compared to 2024 which was largely impacted by a worthless stock deduction recognized on the dissolution of our Singapore entity in 2024. Both periods were impacted by shortfalls in expected tax benefits from stock options/restricted stock and state income taxes. See additional information in Note 11.
2024 Compared to 2023
Revenues
Revenues for the year ended December 31, 2024 totaled $198.9 million, compared to $201.1 million for the year ended December 31, 2023. This 1.1% decline in total revenues reflected an increase in revenues of 6.6% in our Data and Analytics Services segment and a 2.6% revenue decrease in our IT Staffing Services segment. Both segments showed revenue run-rate improvements when comparing the fourth quarter of 2024 to the fourth quarter of 2023.
Our Data and Analytics Services segment's 2024 revenues increased to $36.6 million from $34.4 million in 2023. This increase was largely due to an increase in client spending on existing projects and a strong bookings performance in the fourth quarter of 2023. Bookings in 2024 totaled $41 million, in-line with full year 2023's bookings performance.
Our IT Staffing Services segment's 2024 revenues declined modestly, compared to 2023 revenues due to a lower average level of billable consultants during the first half of 2024 compared to the first half of 2023. However, we ended 2024 with 1,008 billable consultants, compared to 946 billable consultants at the end of 2023, an increase of 6.6%. Our average IT staffing bill rate for 2024 totaled $82.77 per hour compared to $78.84 per hour in 2023. This bill rate increase was due to higher rates on new assignments and was reflective of the type of skill sets that we deployed. Permanent placement / fee revenues totaled $0.9 million in 2024, compared to $0.8 million in 2023.
In 2024, we had two clients that exceeded 10% of total revenues (CGI = 14.5% and Populus = 10.7%). In 2023, we had one client that exceeded 10% of total revenues (CGI = 22.5%). Our top ten clients represented 54% of total revenues in 2024 and 53% of total revenues in 2023. Additionally, our largest industry vertical, financial services, represented approximately 49% of total revenues in 2024, compared to approximately 50% in 2023.
Gross Margin
Gross profit increased to $55.6 million in 2024, compared to $51.0 million in 2023, an increase of 8.9% on a year-over-basis. Gross profit as a percentage of revenue totaled 27.9% in 2024, compared to 25.4% in 2023.
Gross margins from our Data and Analytics Services segment in 2024 were 49.1%, which was 560-basis points higher than the 43.5% gross margins that we achieved in 2023. The increase reflected higher utilization and improved delivery efficiencies during 2024 when compared to 2023.
Gross margins in our IT Staffing Services segment were 23.2% in 2024, compared to 21.6% in 2023. This 160-basis point increase was due to higher gross margins on new assignments and favorable medical claim experience related to our self-insured program during 2024 when compared to 2023.
Selling, General and Administrative ("SG&A") Expenses
SG&A expenses in 2024 totaled $51.8 million and represented 26.0% of total revenues, compared to $60.3 million or 30.0% of revenues in 2023. When excluding the amortization of acquired intangible assets and severance expenses in 2024, and the amortization of acquired intangible assets, severance expenses, an employment-related claim, net of recoveries, and goodwill impairment in 2023, the adjusted SG&A expenses related to operations as a percentage of revenues was 23.6% in 2024 versus 23.2% in 2023. The increase in SG&A as a percentage of revenues, excluding these items mentioned above, was largely due to higher sales expense in both business segments, partially offset by lower general and administrative expenses.
Fluctuations within SG&A expense components during 2024 compared to 2023 included the following:
Other Income / (Expense) Components
In 2024, other income / (expense) consisted of net interest income of $606,000 and foreign exchange gains of $27,000. In 2023, other income / (expense) consisted of interest income of $319,000 and foreign exchange losses of ($75,000). The increase in interest income was due to a higher balance of cash on hand in 2024 compared to 2023, partially offset by interest rate reductions in 2024. Net foreign exchange gains (losses) in 2024 compared to 2023 reflected exchange rate variations between the Indian rupee and the Canadian dollar compared to the U.S. dollar.
Income Tax Expense
Income tax expense (benefit) for 2024 was $1.0 million and represented an effective tax rate on pre-tax income of 23.1%, compared to ($1.9 million) in 2023, which represented an effective tax rate on pre-tax (loss) of (21.0%). The 2024 effective tax rate compared to 2023 reflected a worthless stock deduction recognized on the dissolution of our Singapore entity in 2024.
Liquidity and Capital Resources
Financial Conditions and Liquidity
On December 31, 2025, we had cash balances on hand of $36.5 million, no bank debt outstanding and approximately $19.9 million of borrowing capacity under our existing credit facility.
Historically, we have funded our business needs with cash generation from operating activities. In the data and analytics services and IT staffing services industries, investment in operating working capital levels (defined as current assets excluding cash and cash equivalents minus current liabilities, excluding short-term borrowings) is a significant use of cash. Controlling our operating working capital levels by closely managing our accounts receivable balance is an important element of cash preservation. Our accounts receivable "days sales outstanding" measurement ("DSO") at year-end 2025 increased slightly to 54-days compared to 52-days at year-end 2024.
Cash provided by operating activities, our cash and cash equivalent balances on hand at December 31, 2025 and current availability under our existing credit facility are expected to be adequate to fund our business needs over the next 12 months, including potential repurchases under the $5.0 million share repurchase authorization approved by our Board of Directors on February 16, 2026, but excluding any significant acquisition-related activities.
Below is a tabular presentation of cash flow activities for the periods discussed:
Years Ended December 31, | ||||||||||||
Cash Flows Activities | 2025 | 2024 | 2023 | |||||||||
(Amounts in millions) | ||||||||||||
Operating activities | $ | 11.1 | $ | 7.2 | $ | 16.0 | ||||||
Investing activities | (0.5 | ) | (0.9 | ) | (0.2 | ) | ||||||
Financing activities | (1.1 | ) | 0.7 | (1.6 | ) | |||||||
Operating Activities
Cash provided by (used in) operating activities for the years ended December 31, 2025, 2024 and 2023 totaled $11.1 million, $7.2 million, and $16.0 million, respectively. In 2025, cash flows from operating activities included net income of $0.6 million, non-cash charges of $3.2 million and a decrease in operating working capital of $7.4 million. In 2024, cash flows from operating activities included net income of $3.4 million, non-cash charges of $6.1 million and an increase in operating working capital of ($2.3 million). In 2023, cash flows from operating activities included a net (loss) of ($7.1 million), non-cash charges of $10.6 million and decreases in operating working capital of $12.5 million. The 2025 reduction in operating working capital was primarily due to lower accounts receivable, reflecting decreased revenue levels and the timing of billings and collections, as well as decreases in prepaid and other current assets. These favorable working capital changes were partially offset by a $2.0 million payment of deferred compensation during 2025. The 2024 increase in operating working capital reflected higher activities levels as accounts receivable and prepaid expenses increased. The 2023 reduction in operating working capital was due to lower accounts receivable, reflecting significant revenue declines during the year.
Operating working capital levels are generally correlated with revenue trends. If revenue levels increase in future periods, we would expect operating working capital requirements to increase accordingly, which could reduce cash generated from operating activities. Conversely, sustained lower revenue levels may result in reduced working capital requirements.
Days sales outstanding may fluctuate based on revenue mix, as data and analytics services engagements typically experience higher DSO levels than IT staffing engagements. Changes in revenue composition could therefore impact overall working capital requirements in future periods.
Investing Activities
Cash (used in) investing activities for the years ended December 31, 2025, 2024 and 2023 totaled $(0.5) million, $(0.9) million and $(0.2) million, respectively. In 2025, cash (used in) investing activities was primarily comprised of capital expenditures totaling ($0.4) million and payments of ($0.1) million for non-current deposits. In 2024, cash (used in) investing activities consisted entirely of capital expenditures totaling ($0.9) million, largely related to computer equipment and cyber-security investments. In 2023, cash (used in) investing activities consisted of ($0.3) million of capital expenditures and a $0.1 million recovery of non-current office lease deposits.
Financing Activities
In 2025, cash (used in) financing activities totaled ($1.1 million) and included ($2.2 million) for the repurchase of common stock under the Company's share repurchase program, partially offset by $1 million of proceeds from the exercise of stock options and $0.1 million of proceeds from the issuance of common shares under our employee stock purchase plan. In 2024, cash provided by financing activities totaled $0.7 million and included $0.2 million of proceeds from the issuance of common shares under our employee stock purchase plan and $0.5 million of proceeds from the exercise of stock options, partially offset by the repurchase of common stock under the Company's share repurchase program. In 2023, cash (used in) financing activities totaled ($1.6 million) and included ($1.1 million) of debt repayments, ($0.6 million) of common stock repurchases, partially offset by proceeds from our issuance of common shares under our employee stock purchase plan.
2024 Primentor, Inc. Consulting Agreement
On January 12, 2024, the Company entered into a consulting agreement with Primentor, Inc. to provide strategic advisory and management consulting services, as well as any other business and organizational strategy services as the Board of Directors of the Company may reasonably request from time to time. During 2025 and 2024, the Company incurred consulting expenses of approximately $0.5 million and $0.4 million related to these services. For 2026, the Company expects to pay Primentor approximately $0.2 million.
2023 Employment-Related Claims Against the Company
As disclosed in Note 8 "Commitment and Contingencies" to the Notes to the Consolidated Financial Statements, included in Item 8 herein, a former employee who resigned from his employment with the Company in November 2022 asserted various employment-related claims against the Company. During the third quarter of 2023, the Company settled this claim for $3.1 million, net of recoveries, under the terms of a confidential settlement agreement. In addition to the settlement amount, we incurred
approximately $0.9 million in professional services fees related to this matter during 2023. The settlement amount and the professional fees are included in selling, general and administrative expenses in the Consolidated Statements of Operations.
2025 Finance and Accounting Functions to be Transitioned to India from the U.S.
During the first quarter of 2025, the Board of Directors approved a long-term cost optimization initiative to transition the Company's finance and accounting functions from the United States to India. The transition was completed as of December 31, 2025. During 2025, the Company incurred approximately $1.9 million of transition-related expenses, consisting primarily of severance, retention bonuses, and travel costs associated with training and knowledge transfer activities. These expenses were included within general and administrative expenses.
The Company does not expect to incur additional transition-related expenses in future periods as the initiative has been fully implemented. The Company expects this initiative to generate annualized cost savings of approximately $1.2 million beginning in 2026.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Inflation
We do not believe that inflation had a significant impact on our results of operations for the periods presented, although economic uncertainty, including the concerns of our clients and other companies with respect to inflationary conditions in North America and elsewhere, has had and may continue to have an adverse impact on the demand for our services. On an ongoing basis, we attempt to minimize any effects of inflation on our operating results by controlling operating costs and, whenever possible, seek to ensure that billing rates reflect increases in costs due to inflation.
In addition, refer to "Item 1A. Risk factors" in this annual report on Form 10-K for a discussion about risks that inflation directly or indirectly may pose to our business.
Seasonality
Our consultants' billable hours are affected by national holidays and vacation patterns. Accordingly, we typically have lower utilization rates and higher benefit costs during the fourth quarter. Additionally, assignment completions tend to be higher near the end of the calendar year, which largely impacts our revenue and gross profit performance during the subsequent quarter.
Critical Accounting Policies and Estimates
Certain accounting policies are particularly important to the portrayal of our financial position, results of operations and cash flows and require the application of significant judgment by management, and as a result, are subject to an inherent degree of uncertainty. In applying these policies, our management uses judgment to determine the appropriate assumptions to be used in the determination of certain estimates. These estimates are based on our historical experience, terms of existing contracts, observances of industry trends and other available information from outside sources, as appropriate. The following explains our most critical accounting policies. See the Notes to the Consolidated Financial Statements, contained in Item 8, of this Annual Report on Form 10-K for a complete description of our significant accounting policies.
Revenue Recognition
The Company recognizes revenue on time-and-material contracts over time 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 historically on average represent less than 2% of the total contract revenues. Revenue is earned on a per transaction or labor hour basis, as that amount directly corresponds to the value of the Company's performance. Revenue recognition is negatively impacted by holidays and consultant vacation and sick days.
The Company recognizes revenue on fixed price contracts over time 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. Incurred cost represents work performed, which corresponds with, and thereby best
depicts, the transfer of control to the client. 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.
The Company's time-and-material and fixed price revenue streams are recognized over time as the customer receives and consumes the benefits of the Company's performance as the work is performed.
In certain situations, related to client direct hire assignments where the Company's fee is contingent upon the hired resources' continued employment with the client, revenue is not fully recognized until such employment conditions are satisfied.
Accounts Receivable and Allowance for Credit Losses
The Company extends credit to clients based upon management's assessment of their creditworthiness. A substantial portion of the Company's revenue, and the resulting accounts receivable, are from Fortune 1000 companies, major systems integrators and other staffing organizations. The Company does not generally charge interest on delinquent accounts receivable.
Unbilled receivables represent amounts recognized as revenues based on services performed and, in accordance with the terms of the client contract, will be invoiced in a subsequent period.
Accounts receivables are reviewed periodically to determine the probability of loss. The Company records an allowance for credit losses when it is probable that the related receivable balance will not be collected based on historical collection experience, client-specific collection issues, and other matters the Company identifies in its collection monitoring.
Goodwill and Intangible Assets
Identifiable intangible assets are recorded at fair value as of the closing date when acquired in a business combination. Identifiable intangible assets related to acquisitions consisted of client relationships, covenants not-to-compete, trade names and technology, which are being amortized using the straight-line method over their estimated useful lives ranging from three years to twelve years, as more fully described in Note 3 "Goodwill and Other Intangible Assets, net" to the Notes to the Consolidated Financial Statements.
Excess purchase price over the fair value of net tangible assets and identifiable intangible assets acquired are recorded as goodwill. Goodwill is not amortized but is tested for impairment at least on an annual basis. If impairment is indicated, a write-down to fair value is recorded based on the excess of the carrying value of the reporting unit over its fair market value.
We review goodwill and intangible assets for impairment annually as of October 1stor more frequently if events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. The impairment test is performed at the reporting unit (business segment) level. Determination of recoverability is based on the lowest level of identifiable estimated future discounted cash flows resulting from use of the assets and their eventual disposition. Measurement of any impairment loss is based on the excess carrying value of the reporting unit over their fair market value.
In conducting our annual impairment testing, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (more than 50%) that the estimated fair value of a reporting unit is less than its carrying amount. If not, no further goodwill impairment testing is required. If it is more likely than not that a reporting unit's fair value is less than its carrying amount, we are then required to perform a quantitative impairment test. We also may elect not to perform the qualitative assessment, and instead, proceed directly to the quantitative impairment test.
In 2025, 2024 and 2023, we performed quantitative impairment tests related to our IT Staffing Services segment, which includes our June 2015 acquisition of Hudson Global Resources Management, Inc.'s U.S. IT staffing business ("Hudson IT"). The results of each of these testing's indicated no impairment associated with the carrying amount of goodwill.
Additionally in 2025, 2024 and 2023, we performed quantitative impairment tests related to our Data and Analytics Services segment which includes the July 2017 acquisition of InfoTrellis and the October 2020 acquisition of AmberLeaf. The results of the 2025 and 2024 testing's indicated no impairment associated with the carrying amount of goodwill. On October 1, 2023, our annual impairment testing date, we did not identify an impairment. However, due to a triggering event in the fourth quarter related to declining revenue trends and lower future revenue projections, our December 31, 2023 testing results indicated impairment associated with the carrying amount of goodwill of $5.3 million. Accordingly, this goodwill impairment charge is reflected in selling, general and administrative expenses in the Company's Consolidated Statements of Operations in Item 8, herein.
Leases
Operating leases right-of-use ("ROU") assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Since most of the Company's leases do not have an implicit borrowing rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Our leases may include options allowing us in our sole discretion to extend or terminate the lease, and when it is reasonably certain that we will exercise those options, we will include those periods in our lease term. Variable costs, such as payments for insurance and tax payments, are expensed when the obligation for those payments is incurred.
Business Combinations
The Company accounts for acquisitions in accordance with guidance found in ASC 805, Business Combinations("ASC 805"). This guidance requires consideration given (including contingent consideration), assets acquired and liabilities assumed to be valued at their fair market values at the acquisition date. The guidance further provides that: (1) in-process research and development will be recorded at fair value as an indefinite-lived intangible asset; (2) acquisition-related transaction costs will generally be expensed as incurred; (3) restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and (4) changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense.
ASC 805 requires that any excess purchase price over fair value of assets acquired (including identifiable intangibles) and liabilities assumed be recognized as goodwill. Additionally, any excess fair value of acquired net assets over acquisition consideration results in a bargain purchase gain. Prior to recording a gain, the acquiring entity must reassess whether all acquired assets and assumed liabilities have been identified and must perform re-measurements to verify that the consideration paid, assets acquired and liabilities assumed have all been properly valued.
Stock-Based Compensation
In 2008, the Company adopted a Stock Incentive Plan. This stock incentive plan was amended and restated effective as of May 14, 2024 and further amended on May 14, 2025 (as amended from time to time, the "Plan"). The Plan provides that up to 6,200,000 shares of the Company's common stock, par value $0.01 per share ("Common Stock") shall be allocated for issuance to directors, officers, employees and consultants of the Company. Grants under the Plan may be made in the form of stock options, stock appreciation rights, performance share awards, restricted stock awards or stock awards. The Plan is administered by the Compensation Committee of the Board of Directors. Stock options are granted at an exercise price equal to the closing share price of the Company's common stock at the grant date and generally vest over a three to five-year period.
On December 10, 2024, the Board approved and adopted the 2024 Inducement Stock Incentive Plan and reserved 1,500,000 shares of Common Stock for issuance of awards under the 2024 Inducement Stock Incentive Plan. The 2024 Inducement Stock Incentive Plan was approved and adopted without shareholder approval pursuant to NYSE American Guide Rule 711 and provided for grants of non-qualified stock options, restricted stock awards, stock awards, performance share awards and other stock-based awards (each, an "Inducement Award"). Effective May 14, 2025, the 2024 Inducement Stock Incentive Plan was terminated, which means that no further grants can be made under the 2024 Inducement Stock Incentive Plan but existing outstanding awards granted pursuant to this plan continue to be governed by the plan's terms. The 2024 Inducement Stock Incentive Plan was established exclusively to grant equity awards to individuals who were not previously employees or directors of the Company, as an inducement to join the Company.
In October 2018, the Board of Directors of the Company approved the Mastech Digital, Inc. 2019 Employee Stock Purchase Plan (the "Stock Purchase Plan"). The Stock Purchase Plan is intended to meet the requirements of Section 423 of the Code and required the approval of the Company's shareholders to be qualified under Section 423 of the Code. On May 15, 2019, the Company's shareholders approved the Stock Purchase Plan. Under the Stock Purchase Plan, 600,000 shares of common stock (subject to adjustment upon certain changes in the Company's capitalization) are available for purchase by eligible employees who become participants in the Stock Purchase Plan. The purchase price per share is 85% of the lesser of (i) the fair market value per share of common stock on the first day of the offering period, or (ii) the fair market value per share of common stock on the last day of the offering period. On February 16, 2026, the Company's Board of Directors approved the termination of the Stock Purchase Plan. The termination will become effective on July 1, 2026, following completion of the current offering period ending June 30, 2026. Shares issuable under the current offering period will be issued in accordance with the terms of the plan, and no additional offering periods will commence thereafter.
The Company accounts for stock-based compensation expense in accordance with ASC Topic 718 "Share-based Payments" which requires us to measure all share-based payments based on their estimated fair value and recognize compensation expense over the requisite service period. The fair value of our stock options and shares issued under the Company's Stock Purchase Plan is determined at the date of grant using the Black-Scholes option pricing model.
Income Taxes
The Company records an estimated liability for income and other taxes based on what management determines will likely be paid in the various tax jurisdictions in which we operate. Management uses its best judgment in the determination of these amounts. However, the liabilities ultimately realized and paid are dependent on various matters, including the resolution of the tax audits in the various affected tax jurisdictions, and may differ from the amounts recorded. An adjustment to the estimated liability would be recorded through income in the period in which it becomes probable that the amount of the actual liability differs from the amount recorded.
Management determines the Company's income tax provision using the asset and liability method. Under this method, deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities. The Company measures deferred tax assets and liabilities using enacted tax rates in effect for the year in which we expect to recover or settle the temporary differences. The effect of a change in tax rates on deferred taxes is recognized in the period that the change is enacted. The Company evaluates its deferred tax assets and records a valuation allowance when, in management's opinion, it is more likely than not that some portion or all of the deferred tax assets will not be realized. As of December 31, 2025 and 2024, the Company provided a valuation allowance of $435,000 and $452,000, respectively, related to the uncertainty of the realization of foreign net operating losses ("NOL").
The Tax Cuts and Jobs Act of 2017 created a new requirement that certain income earned by foreign subsidiaries, known as global intangible low-tax income ("GILTI"), must be included in the gross income of their U.S. shareholder. The Financial Accounting Standards Board (the "FASB" allows an accounting policy election of either recognizing deferred taxes for temporary differences expected to reverse as GILTI in future years or recognizing such taxes as a current-period expense when incurred. We have elected to treat the tax effect of GILTI as a current-period expense as incurred.
The Company accounts for uncertain tax positions in accordance with ASC Topic 740-10, "Accounting for Uncertainty in Income Taxes". The Company recognizes the effect of income tax positions only if those positions are more likely than not to be sustained under audit. As of December 31, 2025 and 2024, there were no uncertain tax positions for which a reserve or liability is necessary.
Foreign Currency Translation
The reporting currency of the Company and its subsidiaries is the U.S. dollar. The functional currency of the Company's subsidiary in Canada is the U.S. dollar because the majority of its revenue is denominated in U.S. dollars. The functional currency of the Company's Indian and European subsidiaries is their local currency. The results of operations of the Company's Indian and European subsidiaries are translated at the monthly average exchange rates prevailing during the period. The financial position of the Company's Indian and European subsidiaries is translated at the current exchange rates at the end of the period, and the related translation adjustments are recorded as a component of accumulated other comprehensive income (loss) within Shareholders' Equity. Gains and losses resulting from foreign currency transactions are included as a component of other income (expense), net in the Consolidated Statements of Operations. Foreign exchange gains / (losses) in 2025 totaled $217,000; 2024 totaled $27,000; in 2023 we incurred losses of ($75,000).
Recently Issued Accounting Standards
Recent accounting pronouncements are described in Note 1 to the Consolidated Financial Statements contained in Item 8, herein.