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ICGE > SEC Filings for ICGE > Form 10-Q on 8-May-2014All Recent SEC Filings

Show all filings for ICG GROUP, INC.

Form 10-Q for ICG GROUP, INC.


8-May-2014

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth elsewhere in this Report and discussed in our other SEC filings. The following discussion should be read in conjunction with our audited Consolidated Financial Statements and the related Notes thereto included in this Report.

The Consolidated Financial Statements include the consolidated accounts of ICG Group, Inc., a company incorporated in Delaware, and its subsidiaries, both wholly-owned and consolidated (ICG Group, Inc. and all such subsidiaries are collectively hereafter referred to as "ICG," "the Company," "we," "our," or "us"), and have been prepared in accordance with GAAP.

Executive Summary

ICG is a multi-vertical cloud technology company with offerings that create unique and compelling value for our customers and provide transformative efficiency to vertical markets worldwide. We manage our consolidated vertical cloud-based businesses, which operate in the government, compliance and insurance markets, respectively, with a uniform set of industry-standard recurring revenue metrics and specifically look to drive growth at those businesses by:

- continuously creating compelling, differentiated cloud-based products and services through investment in research and development;

- driving efficient long-term growth in recurring revenue through aggressive reinvestment in lead generation, marketing and sales;

- identifying, structuring and executing accretive acquisitions that accelerate strategic plans, increase revenue growth and, over time, improve margins;

- investing in and cultivating deep, vertical-expert management teams; and

- implementing strategies to obtain operational leverage and increased profitability while maintaining high revenue growth, particularly as a company scales.

We believe that, through those and other measures, we are developing a set of leading businesses that possess unique assets which are hard to replicate and which provide competitive differentiation in the sizable vertical markets in which they operate. We believe further that our vertical cloud business model focus, which drives the compelling value proposition of our businesses, well-positions us to generate sustained, meaningful long-term returns for our stockholders, through, among other things:

- high revenue visibility and predictability (and lower revenue volatility than traditional software companies);

- strong gross margins;

- low customer acquisition costs and attractive lifetime customer values, which allow for efficient growth through investment in sales and marketing;

- economies of scale inherent in multi-tenancy software architecture, which allow a focus on innovation; and

- ultimately, long-term profitability and free cash flow.

The results of operations of our businesses are reported in two segments: the "vertical cloud" reporting segment and the "vertical cloud (venture)" reporting segment. Our vertical cloud reporting segment reflects the aggregate financial results of our businesses (1) that share the economic and other characteristics described above, (2) in which our management takes a very active role in providing strategic direction and operational support and (3) towards which we devote relatively large proportions of our personnel, financial capital and other resources. As of the date of this Report, we own majority controlling equity positions in (and therefore consolidate the financial results of) each of the three businesses in our vertical cloud segment. Our vertical cloud (venture) reporting segment includes businesses with many characteristics similar to those of the businesses in our vertical cloud segment, but in which we take a less active role in terms of strategic direction and operational support, and, accordingly, towards which we devote relatively small amounts of personnel, financial capital and other resources.

We have achieved significant growth over the last three years. A substantial majority of our growth has come from acquisitions. We believe that an active acquisition program will continue to be an important element of our growth strategy as it expands our customer base, grows our revenues and increases our stockholder value. Additionally, we have experienced significant organic growth at our businesses through new customers and expansion at existing customers.


We intend to continue investing for long-term growth. We have invested, and expect to continue to invest, heavily in sales and marketing. In addition, we expect to continue to invest in technology development efforts to deliver additional compelling applications to address customers' evolving needs. These investments will increase our costs on an absolute basis in the near term. Many of these investments will occur in advance of our businesses experiencing any direct benefit from them.

Our Businesses

As of March 31, 2014, Bolt, GovDelivery and MSDSonline are included in our vertical cloud segment. As of March 31, 2014, CIML, InstaMed and Parchment are included in our vertical cloud (venture) segment.

Channel Intelligence, InvestorForce and Procurian were sold during the year ended December 31, 2013, and are included in "Dispositions" in our segment disclosures. Those companies were presented as discontinued operations in our Consolidated Financial Statements. Freeborders and WhiteFence were also sold during the year ended December 31, 2013; our results of those operations are also included in "Dispositions" in our segment disclosures.

We own 70%, 94% and 96% of Bolt, GovDelivery and MSDSonline, respectively, as of March 31, 2014, and, accordingly, consolidate the results of those businesses. We own 38% of, and exert significant influence over, CIML; we account for that business under the equity method of accounting. We own less than 20% of InstaMed and Parchment, and account for those businesses under the cost method of accounting.

Results of Operations

The following tables contain selected financial information related to our reportable segments. The segments, as applicable, include the results of our consolidated businesses and record our share of the earnings and losses of businesses accounted for under the equity method of accounting. The businesses included in each segment are consistent between periods, with the exception of certain businesses that ICG acquired or disposed of in a given period, as noted below. The method of accounting for any particular company may change based upon, among other things, a change in our ownership interest.

"Dispositions" includes the results of those businesses that have been sold or ceased operations and are no longer included in our segments for the periods presented. A disposition could be the sale of a division, subsidiary or asset group of one of our consolidated businesses, typically classified as discontinued operations for accounting purposes, or the disposition of our ownership interest in a business accounted for under the equity method of accounting. "Other" expenses represent (1) the corporate general and administrative expenses of ICG's business operations, which primarily include employee costs and costs associated with operating as a public company and acquiring and disposing of businesses, (2) gains or losses on the dispositions of businesses and marketable securities holdings, (3) income taxes, (4) impairment charges associated with our businesses, and (5) the results of operations attributable to the respective noncontrolling interests of our businesses.

                                                             Segment Information
                                                                (in thousands)
                                                                                Reconciling Items
                                       Vertical Cloud        Total
                   Vertical Cloud         (Venture)         Segment        Dispositions         Other         Consolidated
Three Months Ended
  March 31, 2014
Revenue            $        18,422     $             -     $   18,422     $             -     $        -     $       18,422

Net income (loss)
  attributable to
  ICG Group, Inc.  $        (4,614 )   $          (312 )   $   (4,926 )   $            48     $   (5,272 )   $      (10,150 )

Three Months Ended
  March 31, 2013
Revenue            $        11,545     $           429     $   11,974     $             -     $        -     $       11,974

Net income (loss)
  attributable to
  ICG Group, Inc.  $        (5,539 )   $        (1,082 )   $   (6,621 )   $        27,684     $   (1,995 )   $       19,068


Results of Operations - Vertical Cloud Businesses

Three Months Ended March 31, 2014 compared to Three Months Ended March 31, 2013

The following presentation includes the consolidated results of Bolt,
GovDelivery and MSDSonline.



                               Three Months Ended March 31,                  Quarterly Change
                                 2014                 2013           (in thousands)      (percentage)
                                      (in thousands)
Selected data:
Revenue                     $       18,422       $       11,545     $          6,877                60 %

Cost of revenue                     (4,899 )             (4,128 )               (771 )             -19 %
Sales and marketing                 (8,531 )             (5,624 )             (2,907 )             -52 %
General and administrative          (3,458 )             (2,227 )             (1,231 )             -55 %
Research and development            (3,253 )             (2,246 )             (1,007 )             -45 %
Amortization of intangible
assets                              (2,301 )             (2,419 )                118                 5 %
Impairment related and
other                                    -                  (43 )                 43               100 %
Operating expenses                 (22,442 )            (16,687 )             (5,755 )             -34 %
Operating Income                    (4,020 )             (5,142 )              1,122                22 %
Interest and other                    (500 )               (324 )               (176 )             -54 %
Income tax benefit
(expense)                              (94 )                (73 )                (21 )             -29 %
Net loss                    $       (4,614 )     $       (5,539 )   $            925                17 %

Revenue

Revenue increased $6.9 million from the three months ended March 31, 2013 to the three months ended March 31, 2014, primarily due to revenue growth from new customer contracts and services at MSDSonline and GovDelivery. Additionally, revenue increased due to Bolt's acquisition of Superior Access that occurred in the second half of 2013, which results in Superior Access' results only being included in the 2014 period.

Operating expenses

Operating expenses increased $5.8 million from the three months ended March 31, 2013 to the corresponding 2014 period. Cost of revenue increased for the three months ended March 31, 2014 as compared to the corresponding 2013 period, primarily driven by costs associated with new customer signings. Sales and marketing expenses increased and those expenses as a percentage of revenue also increased in the three months ended March 31, 2014 compared to the corresponding 2013 period, as we continue to execute on sales and marketing initiatives and hire sales employees in all of our businesses. Additionally, operating expenses, primarily sales and marketing expenses and general and administrative, increased in the three months ended March 31, 2014 compared to the corresponding 2013 period, primarily as a result of Bolt's acquisition of Superior Access that occurred in the second half of 2013 (since Superior Access is only included in the 2014 period). We expect sales and marketing expenses to increase in 2014 compared to 2013, as we continue to aggressively build out teams at our businesses to drive revenue growth.

Interest and other

The increase in interest and other from the three months ended March 31, 2013 to the three months ended March 31, 2014 is primarily due to interest expense at Bolt associated with debt obligations at that business. Given our strong balance sheet, we intend to reduce third-party debt and, accordingly, reduce interest expense in future periods. However, we may also incur prepayment penalties by acting on this strategy.

Income tax benefit (expense)

Income tax benefit (expense) in the three months ended March 31, 2014 and 2013 primarily relates to state income taxes at MSDSonline.


Results of Operations - Vertical Cloud (Venture) Businesses

Three Months Ended March 31, 2014 compared to Three Months Ended March 31, 2013

The following presentation includes the consolidated results of CIML for the period from January 1, 2013 to February 20, 2013 (the date on which options and warrants were exercised in connection with the sale of Channel Intelligence to Google and therefore on which we no longer controlled CIML), when CIML was consolidated in our results, as well as the equity loss associated with CIML for the period after February 20, 2013, when CIML was accounted for as an equity method company.

                               Three Months Ended March 31,                 Quarterly Change
                                2014                2013            (in thousands)       (percentage)
                                      (in thousands)
Selected data:
Revenue                     $          -       $           429     $           (429 )             -100 %
Cost of revenue                        -                   (70 )                 70                100 %
Sales and marketing                    -                   (58 )                 58                100 %
General and administrative             -                (1,024 )              1,024                100 %
Amortization of intangible
assets                                 -                   (72 )                 72                100 %
Impairment related and
other                                  -                  (127 )                127                100 %
Operating expenses                     -                (1,351 )              1,351                100 %

Operating Income                       -                  (922 )                922                100 %
Interest and other                     -                    (1 )                  1                100 %
Equity loss                         (312 )                (159 )               (153 )              -96 %
Net loss                    $       (312 )     $        (1,082 )   $            770                 71 %

Equity loss

                                Three Months Ended March 31,                    Quarterly Change
                                 2014                   2013           (in thousands)        (percentage)
                                       (in thousands)
Selected data:
Our share of total net loss $         (264 )       $         (138 )   $           (126 )               -91 %
Amortization of intangible
assets                                 (48 )                  (21 )                (27 )              -129 %
Equity loss                 $         (312 )       $         (159 )   $           (153 )               -96 %

Equity loss for our vertical cloud venture segment for the three months ended March 31, 2014, and the corresponding 2013 period relates to our share of the results of CIML. The increase in CIML's net loss in the three months ended March 31, 2014 as compared to the corresponding 2013 period is primarily due to increases in operating expenses due to increases in headcount. Accordingly, our share of CIML's net loss resulted in larger equity loss in the 2014 period.

Results of Operations - Reconciling Items

Three Months Ended March 31, 2014 compared to Three Months Ended March 31, 2013

Dispositions

Discontinued operations as of March 31, 2014 include the following:
(1) Procurian, which was sold to Accenture on December 4, 2013, (2) Channel Intelligence, which was sold to Google on February 20, 2013, and
(3) InvestorForce, which was sold to MSCI on January 29, 2013. The following businesses that had been accounted for under the equity method of accounting were disposed during the year ended December 31, 2013: (1) WhiteFence, substantially all of the assets of which were acquired by Allconnect on October 28, 2013, and (2) Freeborders, which was acquired by Symbio on October 18, 2013. The results of these businesses (or our share of the results in the case of the equity-method businesses, including any related intangible amortization) were removed from our segments and are included in "Dispositions" in the "Results of Operations" segment information table above for all periods presented. The net impact of those discontinued operations and our share of the results of the disposed equity-method businesses are detailed below.


Equity loss and Discontinued operations

                                   Three Months Ended March 31,                    Quarterly Change
                                 2014                     2013             (in thousands)      (percentage)
                                          (in thousands)
Selected data:
Equity loss                  $           -         $             (542 )   $            542               100 %
Discontinued operations,
including gain on sale                  48                     28,226              (28,178 )              NM
Equity loss                  $          48         $           27,684     $        (27,636 )              NM

On December 4, 2013, Procurian was acquired by an affiliate of Accenture. Procurian's revenue for the three months ended March 31, 2013 was $34.4 million, and our share of Procurian's net income was $0.7 million in the three months ended March 31, 2013. Procurian's results are reflected in the line item "Discontinued operations, including gain on sale" in the table above.

On February 20, 2013, Channel Intelligence was sold to Google. Channel Intelligence's revenue for the period from January 1, 2013 through February 20, 2013 was $3.1 million, and our share of Channel Intelligence's net loss for that period was $2.5 million. Additionally, we recorded $0.4 million in the three months ended March 31, 2013 of amortization expense related to intangible assets and charges related to acquisition adjustments that were recorded in connection with the consolidation of Channel Intelligence in July 2012. The results of Channel Intelligence that had been included in our consolidated results (and the gain on the sale of Channel Intelligence) are included in the line item "Discontinued operations, including gain on sale" in the table above. In connection with the Channel Intelligence sale to Google, we recorded a gain of $17.8 million during three months ended March 31, 2013.

On January 29, 2013, InvestorForce was sold to MSCI. InvestorForce's revenue for the three months ended March 31, 2013 was $0.8 million and our share of InvestorForce's net loss was $0.5 million for the three months ended March 31, 2013. The results of InvestorForce (and the gain on the sale of InvestorForce) are included in the line item "Discontinued operations, including gain on sale" in the table above. In connection with the sale transaction, we recorded a gain of $15.7 million during the three months ended March 31, 2013.

On October 28, 2013, substantially all of the assets of WhiteFence were sold to Allconnect. For the three months ended March 31, 2013 our share of WhiteFence's net loss was $0.1 million which is included in the line item "Equity loss" in the table above.

On October 18, 2013, Freeborders was sold to Symbio. For the three months ended March 31, 2013 our share of Freeborders' net loss was $0.1 million, which is included in the line item "Equity loss" in the table above.

Other

Three Months Ended March 31, 2014 compared to Three Months Ended March 31, 2013





                            Three Months Ended March 31,                  Quarterly Change
                              2014                 2013           (in thousands)       (percentage)
                                   (in thousands)

General and
administrative           $       (6,551 )     $       (5,552 )   $           (999 )              -18 %
Other income (loss)                 294                  (58 )                352                 NM
Interest income                      81                   29                   52                179 %
Noncontrolling interest
(income) loss                       904                3,586               (2,682 )              -75 %
Net income (loss)        $       (5,272 )     $       (1,995 )   $         (3,277 )             -164 %


Corporate general and administrative

Corporate general and administrative expenses increased from the three months ended March 31, 2013 to the three months ended March 31, 2014 primarily due to an increase in equity-based compensation charges related to the equity awards issued in January and February 2014 that contained market, performance and service conditions. That increase was partially offset by lower aggregate salary and bonus expenses in 2014 following the termination of certain ICG employees in 2013 and the issuance of performance-based equity awards in 2013 in lieu of a portion of the annual cash bonus historically paid to ICG management in connection with achievement under ICG's annual performance plan.

Impairment related and other

Impairment related and other for the three months ended March 31, 2013 primarily relates to severance expense in that period.

Corporate other income (loss)

Corporate other income (loss) for the three months ended March 31, 2014 primarily related to cash proceeds received from the sale of a prior company.

Interest income

Income tax benefit (expense) in the three months ended March 31, 2014 and 2013 primarily relates to state income taxes at MSDSonline.

Income tax benefit (expense)

The income tax benefit recognized in 2013 is offset by a tax provision in discontinued operations since there was a loss in continuing operations and income in discontinued operations in that same year.

Noncontrolling interest (income) loss

The decrease in the loss attributable to the non-controlling interests in the three months ended March 31, 2014 compared to the three months ended March 31, 2013 relates to changes in the non-controlling interests with respect to all of ICG's consolidated businesses, which also included the noncontrolling interest's portion of transaction costs associated with our sales of Channel Intelligence and Procurian in the 2013 period.

Liquidity and Capital Resources

As of March 31, 2014, our principal source of liquidity was cash and cash equivalents totaling $319.8 million. Our cash and cash equivalents are comprised primarily of money market funds and commercial paper investments. We fund our operations with cash on hand, cash flow from operations, borrowings at certain of our businesses and proceeds from sales of our businesses.

As part of our business strategy, we constantly look to acquire new, cloud-based businesses that bring transformative efficiency to specific vertical markets. We could purchase businesses using cash, debt or ICG Common Stock. Our existing vertical cloud businesses also intend to pursue acquisition opportunities, using either cash on hand, cash from debt borrowings or stock as consideration. In connection with any such acquisitions, and as part of our capital allocation program, we may purchase additional debt or equity securities from our existing businesses. We may also use cash to repurchase shares of our Common Stock. We also expect to continue our aggressive sales and marketing campaigns and research and development initiatives. We expect that our current sources of liquidity, as described above, will be sufficient to fund our cash requirements, including execution of those initiatives, for the foreseeable future. We do not currently expect to pay a cash dividend to our stockholders in the near future, nor do we expect any of our existing vertical cloud businesses to pay a dividend in the near future. However, because we do not own 100% of any of those businesses, if one of our existing vertical cloud businesses were to pay a dividend or to make any other distribution to its equity holders, the noncontrolling interest holders may receive a portion of that dividend or distribution.

Our consolidated businesses may issue additional securities or repurchase outstanding shares. Equity issuances or repurchases by one of those businesses, including dilution associated with management equity grants, may change the ownership split that ICG and the noncontrolling interest holders have in that subsidiary. Any change in the ownership of a consolidated subsidiary would result in an adjustment to ICG's additional paid-in capital.


From time to time, we may be required to increase our ownership in one or more of our consolidated businesses as a result of certain members of those businesses' management teams exercising put rights (See Note 4, "Consolidated Businesses"). From time to time, we may also seek to voluntarily increase our ownership in one or more of our consolidated businesses.

Our cash flows from operating, investing and financing activities of continuing operations, as reflected in the Consolidated Statements of Cash Flows, are summarized in the following table:

                                                    Three months ended March 31,
                                                     2014                 2013
                                                           (in thousands)

 Cash (used in) provided by operating activities $      (9,651 )     $       (10,620 )
 Cash (used in) provided by investing activities $        (479 )     $        71,384
 Cash (used in) provided by financing activities $      (4,759 )     $         1,055

Operating activities

Income/(loss) from continuing operations is adjusted for non-cash items that include depreciation and amortization, equity-based compensation charges, other income/loss associated with the disposal of ownership interests in businesses and equity loss. In the three months ended March 31, 2014, the slight decrease in cash used in operating activities was primarily driven by operating expenses of our overall businesses and includes the spending initiatives related to sales and marketing, partially offset by the net impact of working capital components.

Investing activities

In the three months ended March 31, 2014, cash provided by investing activities primarily relates to cash proceeds received from a prior sale whereas for the . . .

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