What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-08 compared with 2023-05-09 · 104 added, 36 removed, 176 unchanged (44% of the section changed)

31 unchanged sentences

We also derive our revenues from certain recurring revenue streams.

These include such annuity-based ISG offerings as ISG GovernX, Research, Software as a Subscription (Automation licenses), ISG Inform and the multi-year Public Sector contracts.

These include such annuity-based ISG offerings as ISG GovernX, Research, Software as a Subscription (Automation licenses), ISG Inform and multi-year Public Sector contracts.

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 MARCH 31, 2023 AND MARCH 31, 2022

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2023 AND JUNE 30, 2022

Geographical revenue information for the segment is as follows:

Three Months Ended March 31,

Three Months Ended June 30,

Geographic Area

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Total revenues

Revenues increased $5.9 million, or approximately 8%, for the first quarter of 2023.

The increase in revenue for the Americas was primarily attributable to an increase in our Advisory, Network & Software Advisory Services (NaSa) and GovernX service lines.

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

The decrease in revenue in Asia Pacific was primarily attributable to a decrease in our Advisory service line, partially offset by an increase in our NaSa service line.

Revenues increased $3.9 million, or approximately 6%, for the second quarter of 2023.

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

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

Flat revenue in Asia Pacific was primarily attributable to an increase in our GovernX and Research service lines, being offset by a decrease in our NaSa and Advisory service lines.

The translation of foreign currency revenues into U.S.

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

Three Months Ended March 31,

Three Months Ended June 30,

Operating Expenses

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Total operating expenses

Total operating expenses increased $6.6 million, or approximately 10%, for the first quarter of 2023.

The increase in operating expenses was primarily due to higher contract labor expense of $2.7 million, license fees of $1.6 million, travel and entertainment of $1.2 million, non-cash stock compensation of $0.5 million and professional fees of $0.5 million.

These costs were partially offset by lower compensation expense of $1.1 million and the prior year Neuralify earnout adjustment of $1.4 million.

Total operating expenses increased $6.2 million, or approximately 10%, for the second quarter of 2023.

The increase in operating expenses was primarily due to higher contract labor expense of $2.0 million, license fees of $1.1

million, compensation expense of $0.9 million, non-cash stock compensation $0.7 million, severance costs of $0.7 million, bad debt expense of $0.2 million, travel and entertainment costs of $0.2 million and computer expense of $0.2 million.

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

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Also included in training and professional development are expenses associated with the development, enhancement and maintenance of our proprietary methodologies and tools and the systems that support them.

General and administrative expenses consist principally of executive management compensation, allocations of billable employee compensation related to general management activities, IT infrastructure, and costs for the finance, accounting, information technology and human resource functions.

General and administrative expenses consist principally of executive management compensation, allocations of billable employee compensation related to general management activities, IT infrastructure and costs for finance, accounting, information technology and human resource functions.

General and administrative costs also reflect continued investment associated with implementing and operating client and employee management systems.

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 first quarter of 2023 and 2022 was $1.6 million and $1.3 million, respectively.

The increase of $0.3 million was primarily due to the acquisition of Change 4 Growth.

Depreciation and amortization expense in the second quarter of 2023 and 2022 was $1.6 million and $1.3 million, respectively.

The increase of $0.3 million in depreciation and amortization expense was primarily due to the acquisition of Change 4 Growth.

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

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

Three Months Ended March 31,

Three Months Ended June 30,

Other income (expense), net

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Interest expense

Foreign currency transaction gain

Total other income (expense), net

The total increase in other expenses of $0.7 million was primarily the result of higher interest expense attributable to higher interest rates and our higher debt balance.

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 our 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 quarter ended June 30, 2023 was 37.1% compared to 25.7% for the quarter ended June 30, 2022.

The difference for the quarter ended June 30, 2023 was primarily due to the impact of earnings and losses in certain foreign jurisdictions and the impact of the vesting of restricted stock units.

The Company’s effective tax rate for the quarter ended June 30, 2023 was higher than the statutory rate primarily due to non-deductible expenses and the impact of earnings in foreign jurisdictions.

There were no significant changes in uncertain tax position reserves or valuation allowances during the quarter ended June 30, 2023.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2023 AND JUNE 30, 2022

Geographical revenue information for the segment is as follows:

Six Months Ended June 30,

Geographic Area

(in thousands)

Total revenues

Revenues increased $9.8 million, or approximately 7%, for the six months ended June 30, 2023.

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

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

The decrease in revenue in Asia Pacific was primarily attributable to a decrease in our Advisory service line, being partially offset by an increase in our GovernX service line.

The translation of foreign currency revenues into U.S.

dollars negatively impacted performance in Europe and Asia Pacific compared to the prior year by $2.2 million.

Operating Expenses

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

Six Months Ended June 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 $12.8 million, or approximately 10%, for the six months ended June 30, 2023.

The increase in operating expenses was primarily due to higher contract labor expense of $4.7 million, license fees of $2.7

million, travel and entertainment costs of $1.4 million, non-cash stock compensation of $1.2 million, restructuring costs of $0.9 million, professional fees of $0.6 million, computer expense of $ 0.5 million and bad debt expense of $0.1 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.

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.

Direct costs also include employee taxes, health insurance, workers compensation and disability insurance.

Sales and marketing costs consist principally of compensation expense related to business development, proposal preparation and delivery and negotiation of new client contracts.

Costs also include travel expenses relating to the pursuit of sales opportunities, expenses for hosting periodic client conferences, public relations activities, participation in industry conferences, industry relations, website maintenance and business intelligence activities.

The Company maintains a dedicated global marketing function responsible for developing and managing sales campaigns, brand promotion, the ISG Index and assembling proposals.

We maintain a comprehensive program for training and professional development.

Related expenses include product training, updates on new service offerings or methodologies and development of project management skills.

General and administrative expenses consist principally of executive management compensation, allocations of billable employee compensation related to general management activities, IT infrastructure and costs for finance, accounting, information technology and human resource functions.

General and administrative costs also reflect continued investment associated with implementing and operating client and employee management systems.

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 six months ended June 30, 2023 and 2022 was $3.2 million and $2.6 million, respectively.

The increase of $0.6 million was primarily due to the acquisition of Change 4 Growth.

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:

Six Months Ended June 30,

Other income (expense), net

(in thousands)

Interest income

Interest expense

Foreign currency transaction (loss) gain

Total other income (expense), net

The total increase of $1.4 million was primarily the result of higher interest expense attributable to higher interest rates, our higher debt balance and $0.4 million associated with the write-off of deferred financing costs.

The total increase in other expenses of $2.0 million was primarily the result of higher interest expense attributable to higher interest rate, our higher debt balance and $0.4 million associated with the write-off of deferred financing costs.

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 quarter ended March 31, 2023 was 32.9% compared to 31.9% for the quarter ended March 31, 2022.

The difference for the quarter ended March 31, 2023 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, 2023 was higher than the statutory rate primarily due to non-deductible expenses and the impact of earnings in foreign jurisdictions.

There were no significant changes in uncertain tax position reserves or valuation allowances during the quarter ended March 31, 2023.

Our effective tax rate for the six months ended June 30, 2023 was 34.7% compared to 28.9% for the six months ended June 30, 2022.

The difference for the six months ended June 30, 2023 was primarily due to the impact of earnings and losses in certain foreign jurisdictions and the impact of the vesting of restricted stock units.

The Company’s effective tax rate for the six months ended June 30, 2023 was higher than the statutory rate primarily due to non-deductible expenses and the impact of foreign operations.

There were no significant changes in uncertain tax position reserves or valuation allowances during the six months ended June 30, 2023.

NON-GAAP FINANCIAL PRESENTATION

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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 March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands)

7 unchanged sentences

Adjusted EBITDA

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands)

8 unchanged sentences

Adjusted net income

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Net income per diluted share

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

As of March 31, 2023, our cash, cash equivalents and restricted cash were $23.8 million compared to $30.7 million as of December 31, 2022, a net decrease of $6.9 million which was primarily attributable to the following:

As of June 30, 2023, our cash, cash equivalents and restricted cash were $19.7 million compared to $30.7 million as of December 31, 2022, a net decrease of $11.0 million which was primarily attributable to the following:

● repayment of outstanding debt of $79.2 million;

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● payments related to tax withholding for stock-based compensation of $1.5 million;

● payment of contingent consideration for Change 4 Growth of $1.5 million;

● proceeds from revolving facility of $79.2 million;

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Prior to the end of the first quarter-end following the closing of the credit facility, the applicable margin shall be a percentage per annum equal to 0.50 % for the revolving loans maintained as Base Rate loans or 1.50% for the revolving loans maintained as Term SOFR loans.

● The senior secured credit facility contains a number of covenants that, among other things, place restrictions on matters customarily restricted in senior secured credit facilities, including restrictions on indebtedness (including guarantee obligations), liens, fundamental changes, sales or disposition of property or assets, investments (including loans, advances, guarantees and acquisitions), transaction with affiliates, dividends and other payments in respect of capital stock, optional payments and modifications of other material debt instruments, negative pledges and agreements restricting subsidiary distributions and changes in line of business.

investments (including loans, advances, guarantees and acquisitions), transactions with affiliates, dividends and other payments in respect of capital stock, optional payments and modifications of other material debt instruments, negative pledges and agreements restricting subsidiary distributions and changes in line of business.

In addition, the Company is required to comply with a consolidated leverage ratio and consolidated interest coverage ratio.

● 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 $79.2 million at both March 31, 2023 and December 31, 2022, which are carried at amortized cost.

The Company’s financial statements include outstanding borrowings of $79.2 million both as of June 30, 2023 and December 31, 2022, 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 was approximately $79.8 million and $76.5 million as of March 31, 2023 and December 31, 2022, respectively.

The fair value of the Company's outstanding borrowings was approximately $79.9 million and $76.5 million as of June 30, 2023 and December 31, 2022, 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 was 6.5% and 6.3% as of March 31, 2023 and December 31, 2022, 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.

The incremental borrowing rate used to discount future cash flows was 6.9% and 6.3% as of June 30, 2023 and December 31, 2022, 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.

The Company is currently in compliance with its financial covenants.

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In May 2023, the Company announced it will pay a quarterly dividend of $0.045 per share of common stock.

The Company expects to pay a total cash dividend of $0.18 per share for the four quarters ending March 31, 2024.

On May 8, 2023, the Board of Directors (the “Board”) approved the second-quarter dividend of $0.045 per share, payable June 30, 2023, to shareholders of record as of June 7, 2023.

The Company expects to pay a total cash dividend of $0.18 per share for the four quarters ending June 30, 2024.

On August 1, 2023, the Board of Directors of the Company (the “Board”) approved a third-quarter dividend of $0.045 per share, payable September 28, 2023, to shareholders of record as of September 6, 2023.

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

8 unchanged sentences

generally accepted accounting principles.

As such, we are required to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented.

the periods presented.

We base our estimates on historical experience, available information and various other assumptions we believe to be reasonable under the circumstances.

3 unchanged sentences

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