What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-10 compared with 2023-11-03 · 52 added, 120 removed, 162 unchanged (51% of the section changed)

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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 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.

Forward-looking statements include, but are not limited to, statements concerning 2024 revenue growth rates and capital expenditures.

As a result, these statements are subject to various risks and uncertainties.

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As a result, we are focused on growing our existing service model, expanding geographically, developing new industry sectors, productizing market data assets, expanding our managed services offerings and growing via acquisitions.

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

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 their 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, 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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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 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 the 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 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, 2023 AND SEPTEMBER 30, 2022

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND MARCH 31, 2023

Geographical revenue information for the segment is as follows:

Three Months Ended September 30,

Three Months Ended March 31,

Geographic Area

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Total revenues

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.

Revenues decreased $14.2 million, or approximately 18%, in the first quarter of 2024.

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

The revenue decrease in Asia Pacific was primarily attributable to a decrease in our Advisory and NaSa 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 September 30,

Three Months Ended March 31,

Operating Expenses

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Total operating expenses

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.

Total operating expenses decreased $4.8 million, or approximately 7%, for the first quarter of 2024.

The decrease in operating expenses was primarily due to lower contract labor expense of $5.1 million, compensation expense of $1.9

million and license fees of $1.4 million.

These costs were partially offset by higher severance and integration and other expense of $2.7 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 finance, accounting, information technology and human resource functions.

Selling, 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 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.

Depreciation and amortization expense in the first quarter of 2024 and 2023 was $1.5 million and $1.6 million, respectively.

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 September 30,

Years Ended March 31,

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 $0.8 million was primarily the result of higher interest expenses attributable to higher interest rates and our higher debt balance.

Foreign currency transaction loss

Total other expense, net

The total decrease of $0.6 million, or approximately 32%, was primarily the result of lower interest expense associated with the write-off of deferred financing costs of $0.4 million in the prior year, higher interest income and lower foreign currency transaction losses.

Income Tax Expense

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:

Nine Months Ended September 30,

Geographic Area

(in thousands)

Total revenues

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.

The translation of foreign currency revenues into U.S.

dollars negatively impacted performance in Europe and Asia Pacific compared to the prior year by $0.8 million.

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 $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.

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 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.

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 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 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.

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 transaction (loss) gain

Total other income (expense), net

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 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.

Our effective tax rate for the quarter ended March 31, 2024 was 6.4% compared to 32.9% for the quarter ended March 31, 2023.

The difference for the quarter ended March 31, 2024 was primarily due to the impact of earnings and losses in certain foreign jurisdictions.

The Company’s effective tax rate for the quarter ended March 31, 2024 was lower 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, 2024.

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, 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, severance, integration and other expense 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, severance, integration and other expense and write-off of deferred financing costs, on a tax-adjusted basis) and adjusted net income per diluted share, excluding the net 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.

These non-GAAP measures are used by the Company to evaluate the Company’s business strategies and management’s performance.

However, they are not measurements of financial performance under GAAP and should not be considered as alternatives to measures of performance derived in accordance with GAAP.

These non-GAAP financial measures exclude non-cash and certain other special charges that many investors believe may obscure the user’s overall understanding of the Company’s current financial performance and the Company’s prospects for the future.

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,

Non-GAAP financial measures should be considered as a supplement to, and not as a substitute for, or superior to, the respective financial results presented in accordance with GAAP.

Three Months Ended March 31,

($ in thousands)

Net (loss) income

Interest expense (net of interest income)

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Severance, integration and other expense

Foreign currency transaction loss (gain)

Foreign currency transaction loss

Non-cash stock compensation

Adjusted EBITDA

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

($ in thousands)

Net (loss) income

Non-cash stock compensation

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Write-off of deferred financing costs

Foreign currency transaction loss (gain)

Foreign currency transaction loss

Tax effect (2)

Adjusted net income

Three Months Ended September 30,

Nine Months Ended September 30,

Net income per diluted share

Three Months Ended March 31,

Net (loss) income per diluted share

Non-cash stock compensation

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Acquisition-related costs (1)

Account Receivables Reserves

Severance, integration and other expense

Write-off of deferred financing costs

Foreign currency transaction loss (gain)

Foreign currency transaction loss

Tax effect (2)

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

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;

As of March 31, 2024, our cash, cash equivalents and restricted cash were $14.1 million compared to $22.8 million as of December 31, 2023, a net decrease of $8.7 million, which was primarily attributable to the following:

● net cash provided by operating activities of $2.3 million;

● repayment of outstanding debt of $5.0 million;

● cash dividends paid to shareholders of $2.4 million;

● payments related to debt financing costs of $0.8 million;

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

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● payments related to tax withholding for stock-based compensation of $0.4 million;

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

● proceeds from revolving facility of $84.2 million;

● proceeds from issuance of employees stock purchase plan shares of $0.2 million.

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● 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.

● 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.

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.

● 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.

During the first quarter of 2024, the applicable margin was increased to a percentage equal to 0.75% for the revolving loans maintained as Base Rate loans or 1.75% 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 dispositions 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 September 30, 2023 and December 31, 2022, which are carried at amortized cost.

The Company’s financial statements include outstanding borrowings of approximately $74.2 million and $79.2 million as of March 31, 2024 and December 31, 2023, respectively, 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 September 30, 2023 and December 31, 2022, respectively.

The fair value of the Company's outstanding borrowings was approximately $74.8 million and $79.8 million as of March 31, 2024 and December 31, 2023, 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 7.0% and 6.3% as of September 30, 2023 and December 31, 2022, respectively.

The incremental borrowing rate used to discount future cash flows was 7.2% and 6.9% as of March 31, 2024 and December 31, 2023, 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.

During the three months ended March 31, 2024, the Company repaid $5.0 million of the revolver loan.

The Company is currently in compliance with its financial covenants.

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Dividend Program

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 June 30, 2024.

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.

On May 7, 2024, the Board approved a second-quarter dividend of $0.045 per share, payable on July 5, 2024, to shareholders of record as of June 14, 2024.

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 condensed consolidated financial statements.

This management’s 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.

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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