What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-07 compared with 2023-05-09 · 102 added, 53 removed, 151 unchanged (51% of the section changed)

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Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements.

These factors include those contained in this Form 10-Q, as well as the disclosures made in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 filed on March 8, 2023 (“Form 10-K”), and other filings we make with the Securities and Exchange Commission.

We do not undertake any obligation to update forward-looking statements, except as required by law.

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FOREWARN is an app-based solution currently tailored for the real estate industry, providing instant knowledge prior to face-to-face engagement with a consumer, helping professionals identify and mitigate risk.

As of March 31, 2023 and 2022, IDI had 7,256 and 6,592 billable customers and FOREWARN had 131,348 and 91,490 users, respectively.

As of June 30, 2023 and 2022, IDI had 7,497 and 6,817 billable customers and FOREWARN had 146,537 and 101,261 users, respectively.

We define a billable customer of IDI as a single entity that generated revenue during the last three months of the period.

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Pricing contracts are generally annual contracts or longer, with auto renewal.

For the three months ended March 31, 2023 and 2022, 75% and 77% of total revenue was attributable to customers with pricing contracts, respectively, versus 25% and 23% attributable to transactional customers, respectively.

For the three months ended June 30, 2023 and 2022, 79% and 80% of total revenue was attributable to customers with pricing contracts, respectively, versus 21% and 20% attributable to transactional customers, respectively.

For the six months ended June 30, 2023 and 2022, 77% and 78% of total revenue was attributable to customers with pricing contracts, respectively, versus 23% and 22% attributable to transactional customers, respectively.

We endeavor to understand our customers’

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in “Notes to Condensed Consolidated Financial Statements.”

First Quarter Financial Results

For the three months ended March 31, 2023, as compared to the three months ended March 31, 2022:

Second Quarter Financial Results

For the three months ended June 30, 2023, as compared to the three months ended June 30, 2022:

Total revenue increased 17% to $14.7 million.

Gross profit increased 18% to $9.4 million.

Gross margin increased to 66% from 64%.

Gross margin remained consistent at 64%.

Adjusted gross profit increased 19% to $11.4 million.

Adjusted gross margin increased to 78% from 77%.

Net income increased 569% to $0.7 million, which resulted in $0.05 per basic and diluted share.

Net income was $1.4 million compared to a net loss of $0.2 million, which resulted in earnings of $0.10 per basic and diluted share.

Net income margin increased to 9% from a net loss margin of (2%).

Adjusted EBITDA increased 58% to $4.6 million.

Net cash from operating activities decreased 37% to $1.5 million.

Cash and cash equivalents were $30.8 million as of March 31, 2023.

First Quarter and Recent Business Highlights

Added 235 customers to IDI during the first quarter, ending the quarter with 7,256 customers.

Added 14,388 users to FOREWARN during the first quarter, ending the quarter with 131,348 users.

Adjusted EBITDA margin increased to 32% from 23%.

Net cash from operating activities increased 40% to $3.5 million.

Cash and cash equivalents were $31.4 million as of June 30, 2023.

Second Quarter and Recent Business Highlights

Added 241 customers to IDI during the second quarter, ending the quarter with 7,497 customers.

Added 15,189 users to FOREWARN during the second quarter, ending the quarter with 146,537 users.

Over 285 REALTOR ® Associations throughout the U.S.

are now contracted to use FOREWARN.

Launched redesigned corporate websites, www.redviolet.com , www.ididata.com , and www.forewarn.com , providing a more valuable user experience with modern design, improved functionality, easier navigation, and greater detail on the breadth and applicability of our identity solutions.

Purchased 44,766 shares of the Company’s common stock year to date through May 5, 2023, at an average price of $16.88 per share pursuant to the Company’s $5.0 million Stock Repurchase Program that was authorized on May 2, 2022.

Purchased 55,018 shares of the Company’s common stock during the six months ended June 30, 2023, at an average price of $17.04 per share pursuant to the Company’s $5.0 million Stock Repurchase Program that was authorized on May 2, 2022.

The Company has $3.2 million remaining under the Stock Repurchase Program.

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Management evaluates the financial performance of our business on a variety of key indicators, including non-GAAP metrics of adjusted EBITDA, adjusted EBITDA margin, adjusted gross profit, adjusted gross margin and free cash flow ("FCF").

Adjusted EBITDA is a financial measure equal to net income, the most directly comparable financial measure based on US GAAP, excluding interest income, net, income tax (benefit) expense, depreciation and amortization, share-based compensation expense, litigation costs, and write-off of long-lived assets and others, as noted in the tables below.

Adjusted EBITDA is a financial measure equal to net income (loss), the most directly comparable financial measure based on US GAAP, excluding interest income, net, income tax expense, depreciation and amortization, share-based compensation expense, litigation costs, and write-off of long-lived assets and others, as noted in the tables below.

We define adjusted EBITDA margin as adjusted EBITDA as a percentage of revenue.

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We define FCF as net cash provided by operating activities reduced by purchase of property and equipment and capitalized costs included in intangible assets.

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(In thousands)

Net income (loss)

Interest income, net

Income tax (benefit) expense

Income tax expense

Depreciation and amortization

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Adjusted EBITDA

Net income margin

Net income (loss) margin

Adjusted EBITDA margin

The following is a reconciliation of gross profit, the most directly comparable US GAAP financial measure, to adjusted gross profit:

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(In thousands)

Cost of revenue (exclusive of depreciation and amortization)

Cost of revenue (exclusive of depreciation and

amortization)

Depreciation and amortization of intangible assets

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The following is a reconciliation of net cash provided by operating activities, the most directly comparable US GAAP measure, to FCF:

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(In thousands)

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Results of Operations

Three months ended March 31, 2023 compared to three months ended March 31, 2022

Revenue increased $1.9 million or 15% to $14.6 million for the three months ended March 31, 2023 from $12.7 million for the three months ended March 31, 2022.

Revenue from new customers increased $0.9 million or 84%, and base revenue from existing customers increased $1.4 million or 14%, while growth revenue from existing customers decreased $0.4 million or 18%.

Our IDI billable customer base grew from 6,592 customers as of March 31, 2022 to 7,256 customers as of March 31, 2023, and our FOREWARN user base grew from 91,490 users to 131,348 users during that same period.

Three months ended June 30, 2023 compared to three months ended June 30, 2022

Revenue increased $2.2 million or 17% to $14.7 million for the three months ended June 30, 2023 from $12.5 million for the three months ended June 30, 2022.

Revenue from new customers increased $0.3 million or 42%, base revenue from existing customers increased $1.6 million or 15%, and growth revenue from existing customers increased $0.3 million or 20%.

Our IDI billable customer base grew from 6,817 customers as of June 30, 2022 to 7,497 customers as of June 30, 2023, and our FOREWARN user base grew from 101,261 users to 146,537 users during that same period.

Revenue from new customers represents the total monthly revenue generated from new customers in a given period.

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Cost of revenue (exclusive of depreciation and amortization) .

Cost of revenue remained consistent at $3.2 million for the three months ended March 31, 2023 and 2022.

Cost of revenue increased $0.3 million or 11% to $3.2 million for the three months ended June 30, 2023 from $2.9 million for the three months ended June 30, 2022.

Our cost of revenue primarily includes data acquisition costs.

Data acquisition costs consist primarily of the costs to acquire data either on a transactional basis or through flat-fee data licensing agreements, including unlimited usage agreements.

We continue to enhance the breadth and depth of our data through the addition and expansion of relationships with key data suppliers, including our largest data supplier, which accounted for 48% and 47% of our total data acquisition costs for the three months ended March 31, 2023 and 2022, respectively.

Other cost of revenue items include expenses related to third-party infrastructure fees.

As the construct of our data costs is primarily a flat-fee, unlimited usage model, the cost of revenue as a percentage of revenue decreased to 22% for the three months ended March 31, 2023 from 25% for the three months ended March 31, 2022.

We continue to enhance the breadth and depth of our data through the addition and expansion of relationships with key data suppliers, including our largest data supplier, which accounted for 48% of our total data acquisition costs for the three months ended June 30, 2023 and 2022.

Other cost of revenue items include expenses related to third-party infrastructure fees and pertinent personnel costs.

As the construct of our data costs is primarily a flat-fee, unlimited usage model, the cost of revenue as a percentage of revenue decreased to 22% for the three months ended June 30, 2023 from 23% for the three months ended June 30, 2022.

We expect that cost of revenue as a percentage of revenue will continue to decrease over the coming years as our revenue increases.

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Sales and marketing expenses .

Sales and marketing expenses increased $1.5 million or 63% to $3.9 million for the three months ended March 31, 2023 from $2.4 million for the three months ended March 31, 2022.

Sales and marketing expenses increased $0.3 million or 9% to $3.1 million for the three months ended June 30, 2023 from $2.8 million for the three months ended June 30, 2022.

Sales and marketing expenses consist of salaries and benefits, advertising and marketing, travel expenses, and share-based compensation expense, incurred by our sales team, and provision for bad debts.

The increase during the three months ended March 31, 2023 was primarily attributable to the increase of $0.7 million in salaries and benefits, and sales commissions, resulting from increased revenue, and $0.6 million in provision for bad debts.

The increase during the three months ended June 30, 2023 was primarily attributable to the increase of $0.1 million in salaries and benefits, and $0.1 million in provision for bad debts.

General and administrative expenses .

General and administrative expenses decreased $0.2 million or 2% to $5.2 million for the three months ended March 31, 2023 from $5.4 million for the three months ended March 31, 2022.

For the three months ended March 31, 2023 and 2022, our general and administrative expenses consisted primarily of employee salaries and benefits of $2.8 million and $2.5 million, share-based compensation expense of $1.3 million and $1.3 million, and professional fees of $0.6 million and $1.0 million, respectively.

General and administrative expenses decreased $0.2 million or 4% to $5.1 million for the three months ended June 30, 2023 from $5.3 million for the three months ended June 30, 2022.

For the three months ended June 30, 2023 and 2022, our general and administrative expenses consisted primarily of employee salaries and benefits of $2.6 million and $2.5 million, respectively, share-based compensation expense of $1.2 million and $1.3 million, respectively, and professional fees of $0.8 million and $0.9 million, respectively.

Depreciation and amortization .

Depreciation and amortization expenses increased $0.4 million or 25% to $1.9 million for the three months ended March 31, 2023 from $1.5 million for the three months ended March 31, 2022.

The increase in depreciation and amortization for the three months ended March 31, 2023 resulted primarily from the amortization of software developed for internal use that became ready for its intended use after March 31, 2022.

Depreciation and amortization expenses increased $0.5 million or 27% to $2.1 million for the three months ended June 30, 2023 from $1.6 million for the three months ended June 30, 2022.

The increase in depreciation and amortization for the three months ended June 30, 2023 resulted primarily from the amortization of software developed for internal use that became ready for its intended use after June 30, 2022.

Interest income, net .

Interest income of $0.3 million for the three months ended March 31, 2023 was primarily due to interest income earned on investments in certain money market funds.

There was no significant interest income, net for the three months ended March 31, 2022.

Interest income of $0.3 million for the three months ended June 30, 2023 was primarily due to interest income earned on investments in certain money market funds.

There was no interest income for the three months ended June 30, 2022.

Income (loss) before income taxes .

Income before income taxes was $1.5 million for the three months ended June 30, 2023 compared to a loss of $0.2 million for the three months ended June 30, 2022.

The change was primarily attributable to the increase in revenue, decrease in our cost of revenue as a percentage of revenue, and increase in interest income, which was partially offset by the increase in depreciation and amortization of $0.5 million.

Income taxes .

Income tax expense of $0.2 million and $0.04 million was recognized for the three months ended June 30, 2023 and 2022, respectively.

A valuation allowance on the deferred tax assets was recognized as of June 30, 2023 and 2022, to reduce the deferred tax assets to the amount that is more likely than not to be realized.

See Note 6, “Income taxes,”

included in “Notes to Condensed Consolidated Financial Statements.”

Net income (loss) .

Net income was $1.4 million for the three months ended June 30, 2023 compared to a net loss of $0.2 million for the three months ended June 30, 2022, as a result of the foregoing.

Six months ended June 30, 2023 compared to six months ended June 30, 2022

Revenue increased $4.1 million or 16% to $29.3 million for the six months ended June 30, 2023 from $25.2 million for the six months ended June 30, 2022.

Revenue from new customers increased $1.2 million or 66%, and base revenue from existing customers increased $2.9 million or 15%, while growth revenue from existing customers remained consistent.

Revenue from new customers represents the total monthly revenue generated from new customers in a given period.

A customer is defined as a new customer during the first six months of revenue generation.

Base revenue from existing customers represents the total monthly revenue generated from existing customers in a given period that does not exceed the customers' trailing six-month average revenue.

A customer is defined as an existing customer six months after their initial month of revenue.

Growth revenue from existing customers represents the total monthly revenue generated from existing customers in a given period in excess of the customers' trailing six-month average revenue.

Cost of revenue (exclusive of depreciation and amortization) .

Cost of revenue increased $0.3 million or 5% to $6.4 million for the six months ended June 30, 2023 from $6.1 million for the six months ended June 30, 2022.

Our cost of revenue primarily includes data acquisition costs.

Data acquisition costs consist primarily of the costs to acquire data either on a transactional basis or through flat-fee data licensing agreements, including unlimited usage agreements.

We continue to enhance the breadth and depth of our data through the addition and expansion of relationships with key data suppliers, including our largest data supplier, which accounted for 48% of our total data acquisition costs for the six months ended June 30, 2023 and 2022.

Other cost of revenue items include expenses related to third-party infrastructure fees and pertinent personnel costs.

As the construct of our data costs is primarily a flat-fee, unlimited usage model, the cost of revenue as a percentage of revenue decreased to 22% for the six months ended June 30, 2023 from 24% for the six months ended June 30, 2022.

We expect that cost of revenue as a percentage of revenue will continue to decrease over the coming years as our revenue increases.

Historically, at scale, the industry business model’s cost of revenue will trend between 15% and 30% as a percentage of revenue.

Sales and marketing expenses .

Sales and marketing expenses increased $1.8 million or 34% to $7.0 million for the six months ended June 30, 2023 from $5.2 million for the six months ended June 30, 2022.

The increase during the six months ended June 30, 2023 was primarily attributable to the increase of $0.7 million in salaries and benefits, and sales commissions, resulting from increased revenue, and $0.7 million in provision for bad debts.

General and administrative expenses .

General and administrative expenses decreased $0.4 million or 3% to $10.3 million for the six months ended June 30, 2023 from $10.7 million for the six months ended June 30, 2022.

For the six months ended June 30, 2023 and 2022, our general and administrative expenses consisted primarily of employee salaries and benefits of $5.3 million and $5.0 million, respectively, share-based compensation expense of $2.5 million and $2.6 million, respectively, and professional fees of $1.4 million and $1.8 million, respectively.

Depreciation and amortization .

Depreciation and amortization expenses increased $0.9 million or 26% to $4.0 million for the six months ended June 30, 2023 from $3.1 million for the six months ended June 30, 2022.

The increase in depreciation and amortization for the six months ended June 30, 2023 resulted primarily from the amortization of software developed for internal use that became ready for its intended use after June 30, 2022.

Interest income, net .

Interest income of $0.6 million for the six months ended June 30, 2023 was primarily due to interest income earned on investments in certain money market funds.

There was no significant interest income, net for the six months ended June 30, 2022.

Income before income taxes .

Income before income taxes was $0.7 million and $0.3 million for the three months ended March 31, 2023 and 2022, respectively.

The increase in income before income taxes for the three months ended March 31, 2023 was primarily attributable to the increase in revenue, decrease in our cost of revenue as a percentage of revenue, and increase in interest income, which was partially offset by the increase in employee salaries and benefits and sales commissions of $1.0 million, provision for bad debts of $0.6 million, and depreciation and amortization of $0.4 million.

Income before income taxes was $2.2 million and $0.1 million for the six months ended June 30, 2023 and 2022, respectively.

The increase in income before income taxes for the six months ended June 30, 2023 was primarily attributable to the increase in revenue, decrease in our cost of revenue as a percentage of revenue, and increase in interest income, which was partially offset by the increase in employee salaries and benefits and sales commissions of $1.0 million, provision for bad debts of $0.7 million, and depreciation and amortization of $0.9 million.

Income taxes .

Income tax benefit of $0.03 million and income tax expense of $0.2 million was recognized for the three months ended March 31, 2023 and 2022, respectively.

A valuation allowance on the deferred tax assets was recognized as of March 31, 2023 and 2022, to reduce the deferred tax assets to the amount that is more likely than not to be realized.

Income tax expense of $0.1 million and $0.2 million was recognized for the six months ended June 30, 2023 and 2022, respectively.

A valuation allowance on the deferred tax assets was recognized as of June 30, 2023 and 2022, to reduce the deferred tax assets to the amount that is more likely than not to be realized.

See Note 6, “Income taxes,”

included in “Notes to Condensed Consolidated Financial Statements.”

Net income was $0.7 million for the three months ended March 31, 2023 compared to $0.1 million for the three months ended March 31, 2022, as a result of the foregoing.

Net income (loss) .

Net income was $2.1 million for the six months ended June 30, 2023 compared to a net loss of $0.1 million for the six months ended June 30, 2022, as a result of the foregoing.

Effect of Inflation

We believe that the persistent inflationary pressure throughout 2022 and up to March 31, 2023 has contributed to deteriorating macroeconomic conditions and increased recession fears, causing businesses to slow their spending over the last several months, which have resulted, and may continue to result, in fluctuations in volumes, pricing and operating margins for our services.

We believe that the persistent inflationary pressure throughout 2022 and up to June 30, 2023 has contributed to deteriorating macroeconomic conditions and increased recession fears, causing businesses to slow their spending over the last several months, which have resulted, and may continue to result, in fluctuations in volumes, pricing and operating margins for our services.

Also, higher interest rates imposed to combat inflation, may reduce the demand for credit, which may lead to a decline in the volume of services we provide to our customers in the banking or financial industry, or other industries that are affected by these types of disruptions.

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Cash flows provided by operating activities .

For the three months ended March 31, 2022, net cash provided by operating activities was $1.5 million, primarily the result of the net income of $0.7 million, adjusted for certain non-cash items (consisting of share-based compensation expense, depreciation and amortization, write-off of long-lived assets, provision for bad debts, noncash lease expenses, and deferred income tax (benefit) expense) totaling $4.1 million, and the cash used as a result of changes in assets and liabilities of $3.3 million, primarily the result of the increase in accounts receivable, prepaid expenses and other current assets and other noncurrent assets, and the decrease in accrued expenses and other current liabilities, and operating lease liabilities.

For the three months ended March 31, 2022, net cash provided by operating activities was $2.4 million, primarily the result of the net income of $0.1 million, adjusted for certain non-cash items, as mentioned above, totaling $3.3 million, and the cash used as a result of changes in assets and liabilities of $0.9 million, primarily the result of the increase in accounts receivable and prepaid expenses and other current assets, and the decrease in deferred revenue and operating lease liabilities, which was offset by the increase in accounts payable.

For the six months ended June 30, 2023, net cash provided by operating activities was $5.1 million, primarily the result of the net income of $2.1 million, adjusted for certain non-cash items (consisting of share-based compensation expense, depreciation and amortization, write-off of long-lived assets, provision for bad debts, noncash lease expenses, and deferred income tax expense) totaling $7.9 million, and the cash used as a result of changes in assets and liabilities of $4.9 million, primarily the result of the increase in accounts receivable, prepaid expenses and other current assets and other noncurrent assets, and the decrease in accounts payable, accrued expenses and other current liabilities, and operating lease liabilities.

For the six months ended June 30, 2022, net cash provided by operating activities was $5.0 million, primarily the result of the net loss of $0.1 million, adjusted for certain non-cash items (consisting primarily of share-based compensation expense, depreciation and amortization, write-off of long-lived assets, provision for bad debts, noncash lease expenses, and deferred income tax expense) totaling $6.5 million, and the cash used as a result of changes in assets and liabilities of $1.4 million, primarily the result of the increase in accounts receivable and prepaid expenses and other current assets, and the decrease in accounts payable, deferred revenue and operating lease liabilities.

Cash flows used in investing activities .

For the three months ended March 31, 2023 and 2022, net cash used in investing activities was $2.3 million and $1.9 million, respectively, primarily as a result of capitalized costs included in intangible assets.

For the six months ended June 30, 2023 and 2022, net cash used in investing activities was $4.6 million and $4.1 million, respectively, primarily as a result of capitalized costs included in intangible assets.

Cash flows used in financing activities .

For the three months ended March 31, 2023, net cash used in financing activities was $0.2 million, mainly the result of $0.2 million paid in aggregate for the repurchase of common stock pursuant to a stock repurchase program that the board of directors authorized on May 2, 2022 (the "Stock Repurchase Program"), authorizing the repurchase of up to $5.0 million of our common stock.

There were no significant financing activities for the three months ended March 31, 2022.

As of March 31, 2023, we had material commitments under certain data licensing agreements of $25.0 million.

For the six months ended June 30, 2023, net cash used in financing activities was $1.0 million, mainly the result of $0.9 million paid in aggregate for the repurchase of common stock pursuant to a stock repurchase program that the board of directors authorized on May 2, 2022 (the "Stock Repurchase Program"), authorizing the repurchase of up to $5.0 million of our common stock.

For the six months ended June 30, 2022, net cash used in financing activities was $2.8 million, resulting from the taxes paid related to the net share settlement of vesting of RSUs.

As of June 30, 2023, we had material commitments under certain data licensing agreements of $24.5 million.

We anticipate funding our operations using available cash and cash flow generated from operations within the next twelve months.

We reported net income of $0.7 million and $0.1 million for the three months ended March 31, 2023 and 2022, respectively.

As of March 31, 2023, we had a total shareholders’

We reported net income of $1.4 million and a net loss of $0.2 million for the three months ended June 30, 2023 and 2022, respectively, and net income of $2.1 million and a net loss of $0.1 million for the six months ended June 30, 2023 and 2022, respectively.

As of June 30, 2023, we had a total shareholders’

equity balance of $75.8 million.

As of March 31, 2023, we had cash and cash equivalents of approximately $30.8 million.

As of June 30, 2023, we had cash and cash equivalents of approximately $31.4 million.

Based on projections of growth in revenue and operating results in the next twelve months, and the available cash and cash equivalents held by us, we believe that we will have sufficient cash resources to finance our operations and expected capital expenditures for the next twelve months.

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Off-Balance Sheet Arrangements

As of March 31, 2023, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.

As of June 30, 2023, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.

Quantitative and Qualitati ve Disclosures About Market Risk.

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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