What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-10 compared with 2021-11-05 · 39 added, 110 removed, 171 unchanged (47% of the section changed)

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market intelligence and technology research and analysis.

Founded in 2006, and based in Stamford, Conn., ISG employs approximately 1,300 digital-ready professionals operating in more than 20 countries—a global team known for its innovative thinking, market influence, deep industry and technology expertise, and world-class research and analytical capabilities based on the industry’s most comprehensive marketplace data.

Founded in 2006, and based in Stamford, Conn., ISG employs more than 1,300 digital-ready professionals operating in more than 20 countries—a global team known for its innovative thinking, market influence, deep industry and technology expertise, and world-class research and analytical capabilities based on the industry’s most comprehensive marketplace data.

For more information, visit www.isg-one.com.

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These offerings are characterized by subscriptions (i.e., renewal centric as opposed to project centric revenue streams) or, in some instances, multi-year contracts.

Our digital services now span a volume of offerings and have become embedded as part of even our traditional transaction services.

Our digital services now span a volume of offerings and have become

embedded as part of even our traditional transaction services.

Digital enablement provides capabilities, digital insights and better engagement with clients and partners.

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The volume of work performed for any particular client can vary widely from period to period.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2021 AND SEPTEMBER 30, 2020

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND MARCH 31, 2021

Geographical revenue information for the segment is as follows:

Three Months Ended September 30,

Years Ended March 31,

Geographic Area

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Total revenues

Revenues increased $9.5 million, or approximately 15%, for the third quarter of 2021.

The increase in revenue in the Americas was primarily attributable to an increase in our Advisory and Research service lines.

The increase in revenue in the Asia Pacific was primarily attributable to an increase in our Advisory service line.

The decrease in revenue in Europe was primarily attributable to a decrease in our Advisory service line, partially offset by an increase in Research service line revenues.

Revenues increased $6.0 million, or approximately 9%, for the first quarter of 2022.

The increase in revenue in the Americas was primarily attributable to an increase in our Advisory, Network & Software Advisory Services (NaSa), Research, and GovernX service lines, partially offset by a decrease in our Automation service line.

The increase in revenue in Europe was primarily attributable to an increase in our Advisory and Automation service lines, partially offset by a decrease in our NaSa service line.

The increase in revenue in Asia Pacific was primarily attributable to an increase in our Advisory service line.

The translation of foreign currency revenues into U.S.

dollars positively impacted performance in Europe and Asia Pacific compared to the prior year.

dollars negatively impacted performance in Europe and Asia Pacific compared to the prior year.

Operating Expenses

The following table presents a breakdown of our operating expenses by category:

Three Months Ended September 30,

Years Ended March 31,

Operating Expenses

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Total operating expenses

Total operating expenses increased $5.2 million, or approximately 9%, for the third quarter of 2021.

Total operating expenses increased $3.3 million, or approximately 5%, for the first quarter of 2022.

The increase in operating expenses were primarily due to higher:

contract labor costs of $4.5 million, compensation costs of $2.5 million, and travel and entertainment expenses of $0.2 million.

These costs were partially offset by lower:

restructuring costs of $1.3 million and non-cash stock compensation of $0.7 million.

compensation costs of $3.4 million, travel and entertainment expense of $0.8 million, event related expenses of $0.5 million, RPA license fees of $0.4 million, and bad debt expense of $0.4 million.

These costs were partially offset by the Neuralify earnout adjustment of $1.4 million and lower non-cash stock compensation of $0.6 million.

Compensation costs consist of a mix of fixed and variable salaries, annual bonuses, benefits and profit sharing plan contributions.

A portion of compensation expenses for certain billable employees are allocated between direct costs and selling, general and administrative costs based on relative time spent between billable and non-billable activities.

compensation is determined based on achievement against Company financial and individual targets and is accrued monthly throughout the year based on management’s estimates of target achievement.

Bonus compensation is determined based on achievement against Company financial and individual targets and is accrued monthly throughout the year based on management’s estimates of target achievement.

Statutory and elective profit sharing plans are offered to employees as appropriate.

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Because our billable personnel operate primarily on client premises or work remotely, all occupancy expenses are recorded as general and administrative.

Depreciation and amortization expense in the third quarter of 2021 and 2020 was $1.3 million and $1.6 million, respectively.

Depreciation and amortization expense in the first quarter of 2022 and 2021 was $1.3 million and $1.4 million, respectively.

The decrease of $0.1 million in depreciation and amortization expense was primarily due to prior year intangible assets that are now fully amortized.

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The following table presents a breakdown of other income (expense), net:

Three Months Ended September 30,

Years Ended March 31,

Other income (expense), net

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Income Tax Expense

Our quarterly effective tax rate varies from period to period based on the mix of earnings among the various state and foreign tax jurisdictions in which business is conducted and the level of non-deductible expenses projected to be incurred

during the current fiscal year.

Our effective tax rate for the three months ended September 30, 2021 was 34.9% compared to 9.9% for the quarter ended September 30, 2020.

The difference for the quarter ended September 30, 2021 was primarily due to the impact of earnings and losses in certain foreign jurisdictions, and the impact of vesting of restricted stock units.

The Company’s effective tax rate for the quarter ended September 30, 2021 was higher than the statutory rate primarily due to the impact of foreign operations.

There were no significant changes in uncertain tax position reserves or valuation allowances during the quarter ended September 30, 2021.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 AND SEPTEMBER 30, 2020

Revenues are generally derived from fixed fee contracts as well as engagements priced on a time and materials basis, which are recorded based on actual time worked as the services are performed.

In addition, we also earn revenues which are contingent on the attainment of certain contractual milestones.

Revenues related to materials (mainly out‑of‑pocket expenses such as airfare, lodging and meals) required during an engagement generally do not include a profit mark up and can be charged and reimbursed separately or as part of the overall fee arrangement.

Invoices are issued to clients monthly, semimonthly or in accordance with the specific contractual terms of each project.

We operate in one segment, fact‑based sourcing advisory services.

We operate principally in the Americas, Europe, and Asia Pacific.

Our foreign operations are subject to local government regulations and to the uncertainties of the economic and political conditions of those areas, and the revenue for our foreign operations is predominantly invoiced and collected in local currency.

Geographical revenue information for the segment is as follows:

Nine Months Ended September 30,

Geographic Area

(in thousands)

Total revenues

Revenues increased $25.5 million, or approximately 14%, for the nine months of 2021.

The increase in revenues in the Americas and Asia Pacific was primarily attributable to an increase in our Advisory service line.

The increase in revenues in Europe was primarily attributable to the increase in our Research service line.

The translation of foreign currency revenues into U.S.

dollars positively impacted performance in Europe and Asia Pacific compared to the prior year.

Operating Expenses

The following table presents a breakdown of our operating expenses by category:

Nine Months Ended September 30,

Operating Expenses

(in thousands)

Direct costs and expenses for advisors

Selling, general and administrative

Depreciation and amortization

Total operating expenses

Total operating expenses increased $13.2 million, or approximately 7%, for the nine months of 2021.

The increase in operating expenses were primarily due to higher:

compensation costs of $11.9 million and contract labor of $9.9 million.

These costs were partially offset by lower:

travel and entertainment expenses of $4.7 million, non-cash stock based compensation of $1.5 million, bad debt expense of $0.8 million, restructuring costs of $0.5 million, and communication costs of $0.3 million.

Depreciation and amortization expense in the nine months of 2021 and 2020 was $4.0 million and $4.6 million, respectively.

The decrease of $0.7 million in depreciation and amortization expense was primarily due to prior year intangible assets that are now fully amortized.

Our fixed assets consist of furniture, fixtures, equipment (mainly personal computers) and leasehold improvements.

Depreciation expense is generally computed by applying the straight-line method over the estimated useful lives of assets.

We also capitalize certain costs associated with the purchase and development of internal-use software, system conversions and website development costs.

These costs are amortized over the estimated useful life of the software or system.

We amortize our intangible assets (e.g.

client relationships and databases) over their estimated useful lives.

Goodwill related to acquisitions is not amortized, but is subject to annual impairment testing and interim impairment tests, if triggering events are identified.

Other Income (Expense), Net

The following table presents a breakdown of other income (expense), net:

Nine Months Ended September 30,

Other income (expense), net

(in thousands)

Interest income

Interest expense

Foreign currency (loss) gain

Total other income (expense), net

The total decrease of $1.1 million, or approximately 40%, was primarily the result of lower interest expense attributable to our lower debt balance and lower interest rates.

Income Tax Expense

Our effective tax rate for the nine months ended September 30, 2021 was 27.7% compared to 57.6% for the nine months ended September 30, 2020.

The difference for the nine months ended September 30, 2021 was primarily due to the impact of earnings and losses in certain foreign jurisdictions and the impact of vesting of restricted stock units.

The Company’s effective tax rate for the nine months ended September 30, 2021 was higher than the statutory rate primarily due to the impact of vesting of restricted stock units.

There were no significant changes in uncertain tax position reserves or valuation allowances during the nine months ended September 30, 2021.

Our effective tax rate for the three months ended March 31, 2022 was 31.9% compared to 22.7% for the quarter ended March 31, 2021.

The difference for the quarter ended March 31, 2022 was primarily due to the impact of earnings and losses in certain foreign jurisdictions and the impact of vesting of restricted stock units.

The Company’s effective tax rate for the quarter ended March 31, 2022 was higher than the statutory rate primarily due to the impact of foreign operations.

There were no significant changes in uncertain tax position reserves or valuation allowances during the quarter ended March 31, 2022.

NON-GAAP FINANCIAL PRESENTATION

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We use non-GAAP financial measures to supplement the financial information presented on a GAAP basis.

We provide adjusted EBITDA (defined as net income, plus interest, taxes, depreciation and amortization, foreign currency transaction gains/losses, non-cash stock compensation, change in contingent consideration, acquisition-related costs, severance, integration and other expense, and financing-related costs), adjusted net income (defined as net income, plus amortization of intangible assets, non-cash stock compensation, foreign currency transaction gains/losses, change in contingent consideration, acquisition-related costs, severance, integration and other expense, financing-related costs, and write-off of deferred financing costs on a tax-adjusted basis) and adjusted net income per diluted share, excluding the net of tax effect of the items set forth in the table below.

We provide adjusted EBITDA (defined as net income, plus interest, taxes, depreciation and amortization, foreign currency transaction gains/losses, non-cash stock compensation, interest accretion associated with contingent consideration, acquisition-related costs, and severance, integration and other expense), adjusted net income (defined as net income, plus amortization of intangible assets, non-cash stock compensation, foreign currency transaction gains/losses, interest accretion associated with contingent consideration, acquisition-related costs, and severance, integration and other expense on a tax-adjusted basis) and adjusted net income per diluted share, excluding the net of tax effect of the items set forth in the table below.

These are non-GAAP measures that the Company believes provide useful information to both management and investors by excluding certain expenses and financial implications of foreign currency translations that management believes are not indicative of ISG’s core operations.

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We believe that these non-GAAP measures provide useful information to investors because they improve the comparability of the financial results between periods and provide for greater transparency of key measures used to evaluate the Company’s performance.

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands)

Three Months Ended March 31,

Interest expense (net of interest income)

Depreciation and amortization

Change in contingent consideration

Interest accretion associated with contingent consideration

Acquisition-related costs (1)

Severance, integration and other expense

Financing-related costs

Foreign currency transaction (gain) loss

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Adjusted EBITDA

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands)

Three Months Ended March 31,

Non-cash stock compensation

Intangible amortization

Change in contingent consideration

Interest accretion associated with contingent consideration

Acquisition-related costs (1)

Severance, integration and other expense

Financing-related costs

Write-off of deferred financing costs

Foreign currency transaction (gain) loss

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Adjusted net income

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

Net income per diluted share

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Intangible amortization

Change in contingent consideration

Interest accretion associated with contingent consideration

Acquisition-related costs (1)

Severance, integration and other expense

Financing-related costs

Write-off of deferred financing costs

Foreign currency transaction (gain) loss

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The volume of billings and timing of collections and payments affect these account balances.

As of September 30, 2021, our cash, cash equivalents and restricted cash were $54.6 million, a net increase of $10.8 million from December 31, 2020, which was primarily attributable to the following:

As of March 31, 2022, our cash, cash equivalents and restricted cash were $43.8 million, a net decrease of $3.9 million from December 31, 2021, which was primarily attributable to the following:

● net cash provided by operating activities of $4.1 million;

● treasury shares repurchased of $5.2 million;

● payments related to tax withholding for stock-based compensation of $6.7 million;

● principal payments on borrowings of $1.1 million;

● cash dividends paid to shareholders of $2.9 million.

● purchase of furniture, fixtures and equipment of $1.0 million;

● payments related to tax withholding for stock-based compensation of $0.3 million.

Capital Resources

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● The senior secured credit facility contains customary events of default, including cross-default to other material agreements, judgment default and change of control.

The Company’s financial statements include outstanding borrowings of $75.6 million at September 30, 2021 and $78.8 million at December 31, 2020, which are carried at amortized cost.

The Company’s financial statements include outstanding borrowings of $73.4 million at March 31, 2022 and $74.5 million at December 31, 2021, which are carried at amortized cost.

The fair value of debt is classified within Level 3 of the fair value hierarchy.

The fair value of the Company's outstanding borrowings is approximately $74.7 million and $77.7 million at September 30, 2021 and December 31, 2020, respectively.

The fair value of the Company's outstanding borrowings is approximately $72.3 million and $73.6 million at March 31, 2022 and December 31, 2021, respectively.

The fair values of debt have been estimated using a discounted cash flow analysis based on the Company's incremental borrowing rate for similar borrowing arrangements.

The incremental borrowing rate used to discount future cash flows 1.9%.

The incremental borrowing rate used to discount future cash flows is 2.5% and 2.0% at March 31, 2022 and December 31, 2021, respectively.

The Company also considered recent transactions of peer group companies for similar instruments with comparable terms and maturities as well as an analysis of current market conditions and interest rates.

As of September 30, 2021 and December 31, 2020, there were no borrowings under the revolver.

As of March 31, 2022 and December 31, 2021, there were no borrowings under the revolver.

We anticipate that our current cash and the ongoing cash flows from our operations will be adequate to meet our working capital, capital expenditure, and debt financing needs for at least the next twelve months.

The anticipated cash needs of our business could change significantly if we pursue and complete additional business acquisitions, if our business plans change, if economic conditions change from those currently prevailing or from those now anticipated, or if other unexpected circumstances arise that may have a material effect on the cash flow or profitability of our business, including the potential impacts of the COVID-19 pandemic and the severity of the related economic downturn and length of time of an economic recovery.

The anticipated cash needs of our business could change significantly if we pursue and complete additional business acquisitions, if our business

plans change, if economic conditions change from those currently prevailing or from those now anticipated, or if other unexpected circumstances arise that may have a material effect on the cash flow or profitability of our business, including the potential impacts of the COVID-19 pandemic and the severity of the related economic downturn and length of time of an economic recovery.

If we require additional capital resources to grow our business, either internally or through acquisition, or maintain liquidity, we may seek to sell additional equity securities or to secure additional debt financing.

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We may not be able to obtain financing arrangements in amounts or on terms acceptable to us in the future.

The Company has financial covenants underlying its debt which require a Debt to adjusted EBITDA ratio of 3.25.

In light of the pandemic, there is uncertainty regarding the marketplace demand for the Company’s services and thus the Company’s future revenue generation.

Accordingly, in light of this uncertainty, the Company has developed plans to further reduce operating expenses to the extent more prolonged revenue shortfalls are experienced which would prevent

the Company from complying with its financial covenants.

The Company is currently in compliance with its financial covenants.

Dividend Program

In August 2021, the Company announced it will pay a third-quarter dividend of $0.03 per share of common stock.

In May 2022, the Company announced it increased the quarterly dividend by 33% to $0.04 per share of common stock.

The Company expects to pay a total cash dividend of $0.16 per share over the four quarters ending March 2023.

On November 4, 2021, the Board of Directors approved the fourth-quarter dividend of $0.03 per share, payable December 17, 2021, to shareholders of record as of December 3, 2021.

On May 3, 2022, the Board of Directors approved the second-quarter dividend of $0.04 per share, payable June 17, 2022, to shareholders of record as of June 3, 2022.

The dividends are accounted for as a decrease to Stockholders’ Equity.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis