What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-11-08 compared with 2024-08-06 · 61 added, 58 removed, 222 unchanged (35% of the section changed)

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market intelligence and technology research and analysis.

Founded in 2006, and based in Stamford, Connecticut, ISG employs approximately 1,500 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, Connecticut, ISG employs approximately 1,500 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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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.

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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, 2024 AND JUNE 30, 2023

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2024 AND SEPTEMBER 30, 2023

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 decreased $10.3 million, or approximately 14%, in the second quarter of 2024.

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

Revenues decreased $10.5 million, or approximately 15%, in the third quarter of 2024.

The decrease in revenue for the Americas was primarily attributable to a decrease in our Automation and Network & Software Advisory Service (“NaSa”) 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 and Automation service lines.

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The translation of foreign currency revenues into U.S.

dollars negatively impacted performance in Europe and Asia Pacific compared to the prior year by $0.2 million.

dollars positively impacted performance in Europe and Asia Pacific compared to the prior year by $0.3 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 decreased $9.1 million, or approximately 13%, for the second quarter of 2024.

The decrease in operating expenses was primarily due to lower contract labor expense of $4.4 million, compensation expense of $3.5 million, stock-based compensation expense of $1.5 million, professional fees of $0.4 million and severance and

integration expenses of $0.4 million.

These costs were partially offset by higher license fees of $0.9 million and conference expense of $0.4 million.

Total operating expenses decreased $8.6 million, or approximately 13%, for the third quarter of 2024.

The decrease in operating expenses was primarily due to lower contract labor expense of $3.3 million, contingent consideration adjustment of $2.4 million, license fees of $2.3 million and compensation expense of $1.6 million.

These costs were partially offset by higher bad debt expense of $0.6 million, acquisition costs of $0.6 million and stock-based compensation 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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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.

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.

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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 was $1.6 million for the second quarters 2024 and 2023 respectively.

Depreciation and amortization expense was $1.6 million and $1.5 million for the third quarters of 2024 and 2023, 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 June 30,

Three Months Ended September 30,

Other income (expense), net

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Total other expense, net

The total increase in other expenses of $0.2 million, or approximately 16%, was primarily the result of higher interest expense attributable to higher interest rates, lower foreign currency transaction gains and higher interest income.

The total decrease in other expenses of approximately 1% was primarily the result of higher interest income, offset by higher interest expense attributable to higher interest rates.

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 June 30, 2024 was 12.0% compared to 37.1% for the quarter ended June 30, 2023.

The difference for the quarter ended June 30, 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 June 30, 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 June 30, 2024.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2024 AND JUNE 30, 2023

Our effective tax rate for the quarter ended September 30, 2024 was 60.2% compared to 33.2% for the quarter ended September 30, 2023.

The difference for the quarter ended September 30, 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 September 30, 2024 was larger 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, 2024.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2024 AND SEPTEMBER 30, 2023

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 decreased $24.6million, or approximately 16%, for the six months ended June 30, 2024.

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

Revenues decreased $35.1 million, or approximately 16%, for the nine months ended September 30, 2024.

The decrease in revenue in the Americas was primarily attributable to a decrease in our Advisory and NaSa 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 and Automation service lines partially offset by an increase in our NaSa 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 decreased $13.9 million, or approximately 10%, for the six months ended June 30, 2024.

The decrease in operating expenses was primarily due to lower contract labor expense of $9.5 million, compensation expense of $5.3 million, stock-based compensation expense of $1.3 million and license fees of $0.5 million.

These costs were partially offset by higher severance and integration expenses of $2.3 million and conference expenses of $0.4 million.

Total operating expenses decreased $22.5 million, or approximately 11%, for the nine months ended September 30, 2024.

The decrease in operating expenses was primarily due to lower contract labor expense of $12.9 million, compensation expense of $6.9 million, license fees of $2.8 million, contingent consideration adjustment of $2.4 million, stock-based compensation expense of $1.1 million and professional fees of $0.5 million.

These costs were partially offset by higher severance and integration expenses of $2.2 million, bad debt expense of $0.7 million and acquisition costs of $0.6 million.

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

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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, 2024 and 2023 were $3.1 million and $3.2 million, respectively.

Depreciation and amortization expense was $4.7 million for the nine months ended September 30, 2024 and 2023, 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:

Six Months Ended June 30,

Nine Months Ended September 30,

Other income (expense), net

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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 six months ended June 30, 2024 was (3.7%) compared to 34.7% for the six months ended June 30, 2023.

The difference for the six months ended June 30, 2024 was primarily due to the impact of earnings and losses in certain foreign jurisdictions.

The Company’s effective tax rate for the six months ended June 30, 2024 was lower 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, 2024.

Our effective tax rate for the nine months ended September 30, 2024 was 112.9% compared to 34.1% for the nine months ended September 30, 2023.

The difference for the nine months ended September 30, 2024 was primarily due to the impact of earnings and losses in certain foreign jurisdictions.

The Company’s effective tax rate for the nine months ended September 30, 2024 was larger 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, 2024.

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 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.

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

See “Non-GAAP Financial Measures” below for information about our use of these non-GAAP financial measures, including our reasons for including these measures and reconciliations of each non-GAAP financial measure to the most directly comparable GAAP financial measure.

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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 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, change in 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, change in 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.

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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 June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

($ in thousands)

Net (loss) income

Net income (loss)

Interest expense (net of interest income)

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Interest accretion associated with contingent consideration

Change in contingent consideration (Note 3)

Acquisition-related costs (1)

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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)

Net (loss) income

Net income (loss)

Non-cash stock compensation

1 unchanged sentence

Interest accretion associated with contingent consideration

Change in contingent consideration (Note 3)

Acquisition-related costs (1)

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Adjusted net income

Three Months Ended June 30,

Six Months Ended June 30,

Net (loss) income per diluted share

Three Months Ended September 30,

Nine Months Ended September 30,

Net income (loss) per diluted share

Non-cash stock compensation

1 unchanged sentence

Interest accretion associated with contingent consideration

Change in contingent consideration (Note 3)

Acquisition-related costs (1)

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

As of June 30, 2024, our cash, cash equivalents and restricted cash were $11.9 million compared to $22.8 million as of December 31, 2023, a net decrease of $10.9 million, which was primarily attributable to the following:

As of September 30, 2024, our cash, cash equivalents and restricted cash were $9.8 million compared to $22.8 million as of December 31, 2023, a net decrease of $13.0 million, which was primarily attributable to the following:

● net cash provided by operating activities of $13.3 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, 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.

For the first six months of 2024, the applicable margin was increased to a

percentage equal to 1% for the revolving loans maintained as Base Rate loans or 2% for the revolving loans maintained as Term SOFR loans.

For the first nine months of 2024, the applicable margin was increased to a percentage equal to 1% for the revolving loans maintained as Base Rate loans or 2% 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.

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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 approximately $74.2 million and $79.2 million as of June 30, 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 $74.8 million and $79.8 million as of June 30, 2024 and December 31, 2023, respectively.

The Company’s financial statements include outstanding borrowings of approximately $66.2 million and $79.2 million as of September 30, 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 $66.9 million and $79.8 million as of September 30, 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 7.4% and 6.9% as of June 30, 2024 and December 31, 2023, respectively.

The incremental borrowing rate used to discount future cash flows was 6.7% and 6.9% as of September 30, 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.

During the six months ended June 30, 2024, the Company borrowed $5.0 million and repaid $10.0 million of the revolver loan.

During the nine months ended September 30, 2024, the Company borrowed $10.0 million and repaid $23.0 million of the revolver loan.

The Company is currently in compliance with its financial covenants.

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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.

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

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

The sale of additional equity securities or certain forms of debt financing could result in additional dilution to our stockholders.

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Dividend Program

On August 2, 2024, the Company’s Board of Directors (the “Board”) approved a third-quarter dividend of $0.045 per share, payable on October 4, 2024, to shareholders of record as of September 6, 2024.

On November 1, 2024, the Company’s Board of Directors (the “Board”) approved a fourth-quarter dividend of $0.045 per share, payable on December 20, 2024, to shareholders of record as of December 3, 2024.

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