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Business Combinations | 12 Months Ended
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Dec. 31, 2019
Business Combinations [Abstract] |
Business Combinations |
3. | Business Combinations
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 were 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 1.7 million 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. This amendment: (i) reduced 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) increased the aggregate commitment amount of the swing loan sub-facility under the revolving credit facility from $3.0 million to $5.0 million; and (iii) amended the financial covenant in the Credit Agreement related to the Company’s 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. 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 $17,125,000.
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 Mastech Digital’s previous credit facility |  |  | (10,091 | )
Cash paid at Closing |  | $ | 35,750 |
The 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 valuation 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 approach—relief 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 expenses related to the acquisition in 2017. In 2018 and 2019, the Company reversed transaction expenses of $140,000 and $110,000, respectively that did not materialize. This credit expense related to investment banker fees that were tied to the contingent consideration liability. These expenses are included in selling, general and administrative expenses in the accompanying Consolidated Statement of Operations. Included in the Consolidated Statement of Operations for year ended December 31, 2017 are revenues of $9.2 million and net income of approximately $1.1 million applicable to the InfoTrellis operations from our July 13, 2017 acquisition date through December 31, 2017. The following reflects the Company’s unaudited pro forma results had the results of InfoTrellis been included from January 1, 2017 for all periods presented:
|  | Years Ended December 31, |
|  | 2019 |  |  | 2018 |  |  | 2017 |
|  | (Amounts in thousands, except per share data) |
Revenue |  | $ | 193,574 |  |  | $ | 177,164 |  |  | $ | 158,785 |
Net income |  | $ | 11,145 |  |  | $ | 6,691 |  |  | $ | 2,388 |
Earnings per share—diluted |  | $ | .99 |  |  | $ | .60 |  |  | $ | .22 |
The information above does not reflect all of the operating efficiencies or inefficiencies that may have resulted from the InfoTrellis acquisitions in those periods prior to the 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.

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- Definition The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable). + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -URI http://asc.fasb.org/topic&trid=2303972 + Details
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