What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-03 compared with 2023-08-08 · 68 added, 66 removed, 214 unchanged (39% of the section changed)

3 unchanged sentences

We have based these forward-looking statements on our current expectations and assumptions about future events.

In some cases, you can identify forward-looking statements by terminology, such as “may,” “should,” “could,” “predict,” “potential,” “continue,” “expect,” “anticipate,” “future,” “intend,” “plan,” “believe,” “estimate,” “forecast” and similar expressions (or the negative of such expressions) Forward-looking statements include statements concerning 2023 revenue growth rates and capital expenditures.

Forward-looking statements include statements concerning 2023 revenue growth rates and capital expenditures.

Forward-looking statements are based on our beliefs as well as assumptions based on information currently available to us, including financial and operational information, the volatility of our stock price, current competitive conditions and the impact of COVID-19.

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Although we do not expect any adverse conditions that will impact our ability to execute against our strategy over the next twelve months, the more significant factors that could limit our ability to grow in these areas include global macro-economic conditions and the impact on the overall sourcing market, competition, our ability to retain advisors and reductions in discretionary spending with our top client accounts or other significant client events.

Other areas that could impact the business would also include natural disasters, pandemics, such as COVID-19, legislative and regulatory changes and capital market disruptions.

Other areas that may impact the business include natural disasters, pandemics, such as COVID-19, wars, legislative and regulatory changes and capital market disruptions.

We principally derive revenues from fees for services generated on a project-by-project basis.

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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 JUNE 30, 2023 AND JUNE 30, 2022

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

Geographical revenue information for the segment is as follows:

Three Months Ended June 30,

Three Months Ended September 30,

Geographic Area

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Total revenues

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.

Revenues increased $2.9 million, or approximately 4%, for the third quarter of 2023.

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

The revenue decrease in Asia Pacific was primarily attributable to a decrease in our GovernX and NaSa service lines, partially offset by an increase in our Advisory 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 $0.1 million.

dollars positively impacted performance in Europe and Asia Pacific compared to the prior year by $1.4 million.

Operating Expenses

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

Three Months Ended June 30,

Three Months Ended September 30,

Operating Expenses

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Total operating expenses

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.

Total operating expenses increased $4.1 million, or approximately 7%, for the third quarter of 2023.

The increase in operating expenses was primarily due to higher license fees of $2.5 million, contract labor expense of $1.2 million,

severance and integration and other expense of $0.7 million, and computer expense of $0.2 million.

These costs were partially offset by lower compensation expense of $0.8 million.

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

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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.

Sales and marketing costs consist principally of compensation expenses 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.

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

Depreciation and amortization expense in the third quarter of 2023 and 2022 was $1.5 million and $1.3 million, respectively.

The increase of $0.2 million in depreciation and amortization expense was primarily due to the acquisition of Change 4 Growth.

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

Three Months Ended June 30,

Three Months Ended September 30,

Other income (expense), net

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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.

The total increase in other expenses of $0.8 million was primarily the result of higher interest expenses 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

Our quarterly effective tax rate varies from period to period based on the mix of our 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 September 30, 2023 was 33.2% compared to 18.0% for the quarter ended September 30, 2022.

The difference for the quarter ended September 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 September 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 September 30, 2023.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2023 AND SEPTEMBER 30, 2022

Geographical revenue information for the segment is as follows:

Six Months Ended June 30,

Nine Months Ended September 30,

Geographic Area

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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.

Revenues increased $12.8 million, or approximately 6%, for the nine months ended September 30, 2023.

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

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 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.

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

Six Months Ended June 30,

Nine Months Ended September 30,

Operating Expenses

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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.

Total operating expenses increased $16.9 million, or approximately 9%, for the nine months ended September 30, 2023.

The increase in operating expenses was primarily due to higher contract labor expense of $5.9 million, license fees of $5.3 million, severance and integration and other expenses of $1.6 million, travel and entertainment expenses of $1.5 million, non-cash compensation of $1.3 million, and computer expenses of $0.8 million.

These costs were partially offset by lower compensation expenses of $1.0 million.

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

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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.

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

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

Depreciation and amortization expense in the nine months ended September 30, 2023 and 2022 was $4.7 million and $3.9 million, respectively.

The increase of $0.8 million was primarily due to the acquisition of Change 4 Growth.

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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.

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.

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

Six Months Ended June 30,

Nine Months Ended September 30,

Other income (expense), net

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Total other income (expense), net

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.

The total increase in other expenses of $2.8 million was primarily the result of higher interest expenses attributable to higher interest rates, our higher debt balance and $0.4 million associated with the write-off of deferred financing costs.

Income Tax Expense

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.

Our quarterly effective tax rate varies from period to period based on our 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 nine months ended September 30, 2023 was 34.1% compared to 25.4% for the nine months ended September 30, 2022.

The difference for the nine months ended September 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 nine months ended September 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 nine months ended September 30, 2023.

NON-GAAP FINANCIAL PRESENTATION

This management’s discussion and analysis presents supplemental measures of our performance that are derived from our consolidated financial information but are not presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

We refer to these financial measures, which are considered “non-GAAP financial measures” under SEC rules, as adjusted EBITDA, adjusted net income and adjusted net income per diluted share, each as defined below.

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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 June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands)

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Adjusted EBITDA

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands)

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Adjusted net income

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Net income per diluted share

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Adjusted net income per diluted share

(1) Consists of expenses from acquisition-related costs and non-cash fair value adjustments on pre-acquisition contract liabilities.

(2) Marginal tax rate of 32%, reflecting U.S.

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

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:

As of September 30, 2023, our cash, cash equivalents and restricted cash were $18.8 million compared to $30.7 million as of December 31, 2022, a net decrease of $11.9 million, which was primarily attributable to the following:

● repayment of outstanding debt of $84.2 million;

● net cash used in operating activities of $0.6 million;

● net cash provided by operating activities of $2.6 million;

● cash dividends paid to shareholders of $6.5 million;

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Capital Resources

On February 22, 2023, the Company amended and restated its senior secured credit facility to increase the revolving commitments per the revolving facility (the “2023 Credit Agreement”) from $54.0 million to $140.0 million and eliminate its term loan.

On February 22, 2023, the Company amended and restated its senior secured credit facility to increase the revolving commitments per the revolving facility from $54.0 million to $140.0 million and eliminate its term loan.

The material terms under the 2023 Credit Agreement are as follows.

● The revolving credit facility has a maturity date of February 22, 2028 (the “Maturity Date”).

Capitalized terms used but not defined herein have the meanings ascribed to them in the 2023 Credit Agreement:

● The revolving credit facility has a maturity date of February 22, 2028.

● The credit facility is secured by all of the equity interests owned by the Company, and its direct and indirect domestic subsidiaries and, subject to agreed exceptions, the Company’s direct and indirect “first-tier” foreign subsidiaries, and a perfected first priority security interest in all of the Company’s and its direct and indirect domestic subsidiaries’ tangible and intangible assets.

● The Company’s direct and indirect existing and future wholly owned domestic subsidiaries serve as guarantors to the Company’s obligations under the senior secured facility.

● At the Company’s option, the credit facility bears interest at a rate per annum equal to either (i) the “Base Rate” (which is the highest of (a) the rate publicly announced from time to time by the administrative agent as its “prime rate”, (b) the Federal Funds Rate plus 0.5% per annum and (c) Term SOFR, plus 1.0%), plus the applicable margin (as defined below) or (ii) Term SOFR (which is the Term SOFR screen rate for the relevant interest period plus a credit spread adjustment of 0.10%) as determined by the administrative agent, plus the applicable margin.

relevant interest period plus a credit spread adjustment of 0.10%) as determined by the administrative agent, plus the applicable margin.

The applicable margin is adjusted quarterly based upon the Company’s consolidated leverage ratio.

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.

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.

● 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), 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 both as of June 30, 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 September 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 $79.9 million and $76.5 million as of June 30, 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 September 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 6.9% and 6.3% as of June 30, 2023 and December 31, 2022, respectively.

The incremental borrowing rate used to discount future cash flows was 7.0% and 6.3% as of September 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 .

In the third quarter of 2023, the Company borrowed $5.0 million against the revolver and subsequently repaid $5.0 million during the quarter.

The Company is currently in compliance with its financial covenants.

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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 is currently in compliance with its financial covenants.

Dividend Program

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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.

On August 1, 2023, the Board approved a third-quarter dividend of $0.045 per share, which was paid on September 28, 2023, to shareholders of record as of September 6, 2023.

On November 1, 2023, the Board of Directors of the Company (the “Board”) approved a fourth-quarter dividend of $0.045 per share, payable December 20, 2023, to shareholders of record as of December 5, 2023.

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

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Critical Accounting Policies and Accounting Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements.

We prepare these financial statements in conformity with U.S.

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.

Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements.

We prepare these financial statements in conformity with GAAP.

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

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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