10-Q 1 iii-20190331x10q.htm 10-Q iii_Current_Folio_10Q

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2019

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from               to              

 

Commission File Number 001-33287

 

INFORMATION SERVICES GROUP, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware

 

20-5261587

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

2187 Atlantic Street
Stamford, CT 06902
(Address of principal executive offices and zip code)

 

Registrant’s telephone number, including area code: (203) 517-3100

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

Title of each class

Name of each exchange on which registered

Shares of Common Stock, $0.001 par value

The Nasdaq Stock Market LLC

 

Trading symbolIII

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ☐

 

Accelerated filer ☒

 

Non-accelerated filer ☐

 

Smaller reporting company ☒

 

 

 

 

 

 

Emerging growth company ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒ No

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at April 30, 2019

Common Stock, $0.001 par value

 

46,799,144 shares

 

 

 

 

 

 

 


 

CAUTIONARY NOTE REGARDING

FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10–Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “continue,” or the negative of such terms or other similar expressions. The actual results of ISG may vary materially from those expected or anticipated in these forward-looking statements. The realization of such forward-looking statements may be impacted by certain important unanticipated factors.  Because of these and other factors that may affect ISG’s operating results, past performance should not be considered as an indicator of future performance, and investors should not use historical results to anticipate results or trends in future periods. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers should carefully review the risk factors described in this and other documents that ISG files from time to time with the Securities and Exchange Commission, including subsequent Current Reports on Form 8-K, Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K.

1


 

PART I — FINANCIAL INFORMATION

 

ITEM 1.FINANCIAL STATEMENTS (UNAUDITED)

 

INFORMATION SERVICES GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited) 

(In thousands, except par value)

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

    

2019

    

2018

 

ASSETS

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

13,606

 

$

18,636

 

Accounts receivable and contract assets, net of allowance of $539 and $401, respectively

 

 

75,829

 

 

75,934

 

Prepaid expenses and other current assets

 

 

3,358

 

 

3,620

 

Total current assets

 

 

92,793

 

 

98,190

 

Restricted cash

 

 

87

 

 

89

 

Furniture, fixtures and equipment, net

 

 

6,486

 

 

6,636

 

Operating lease right-of-use assets

 

 

8,029

 

 

 

Goodwill

 

 

85,368

 

 

85,389

 

Intangible assets, net

 

 

19,616

 

 

20,622

 

Deferred tax assets

 

 

2,816

 

 

2,944

 

Other assets

 

 

845

 

 

861

 

Total assets

 

$

216,040

 

$

214,731

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

 

$

10,252

 

$

8,453

 

Current maturities of long-term debt

 

 

8,938

 

 

8,250

 

Contract liabilities

 

 

3,441

 

 

6,187

 

Accrued expenses and other current liabilities

 

 

18,547

 

 

17,759

 

Total current liabilities

 

 

41,178

 

 

40,649

 

Long-term debt, net of current maturities

 

 

85,136

 

 

89,212

 

Deferred tax liabilities

 

 

1,505

 

 

1,790

 

Operating lease liabilities

 

 

6,566

 

 

 

Other liabilities

 

 

2,951

 

 

4,493

 

Total liabilities

 

 

137,336

 

 

136,144

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 10,000 shares authorized; none issued

 

 

 —

 

 

 

Common stock, $0.001 par value, 100,000 shares authorized; 46,324 shares issued and 45,938 outstanding at March 31, 2019 and 45,477 shares issued and 45,430 outstanding at December 31, 2018

 

 

46

 

 

45

 

Additional paid-in capital

 

 

238,482

 

 

235,998

 

Treasury stock (386 and 47 common shares, respectively, at cost)

 

 

(1,514)

 

 

(203)

 

Accumulated other comprehensive loss

 

 

(7,314)

 

 

(7,155)

 

Accumulated deficit

 

 

(150,996)

 

 

(150,098)

 

Total stockholders’ equity

 

 

78,704

 

 

78,587

 

Total liabilities and stockholders’ equity

 

$

216,040

 

$

214,731

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

2


 

INFORMATION SERVICES GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

    

2019

    

2018

Revenues

 

$

64,791

 

$

68,877

Operating expenses

 

 

 

 

 

 

Direct costs and expenses for advisors

 

 

40,765

 

 

42,984

Selling, general and administrative

 

 

23,012

 

 

22,228

Depreciation and amortization

 

 

1,684

 

 

1,902

Operating (loss) income

 

 

(670)

 

 

1,763

Interest income

 

 

 3

 

 

107

Interest expense

 

 

(1,563)

 

 

(1,737)

Foreign currency transaction loss

 

 

(17)

 

 

(24)

(Loss) income before taxes

 

 

(2,247)

 

 

109

Income tax benefit

 

 

(1,349)

 

 

(55)

Net (loss) income

 

$

(898)

 

$

164

Weighted average shares outstanding:

 

 

 

 

 

 

Basic

 

 

45,808

 

 

43,705

Diluted

 

 

45,808

 

 

45,861

(Loss) earnings per share:

 

 

 

 

 

 

Basic

 

$

(0.02)

 

$

0.00

Diluted

 

$

(0.02)

 

$

0.00

Comprehensive (loss) income:

 

 

   

 

 

 

Net (loss) income

 

$

(898)

 

$

164

Foreign currency translation, net of tax benefit (expense) of $50 and $(154), respectively.

 

 

(159)

 

 

492

Comprehensive (loss) income

 

$

(1,057)

 

$

656

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

3


 

INFORMATION SERVICES GROUP, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-in-

 

 

Treasury

 

Comprehensive

 

Accumulated

 

Stockholders’

 

 

 

Shares

 

Amount

 

 

Capital

 

 

Stock

 

Loss

 

Deficit

 

Equity

 

Balance December 31, 2018

 

45,477

 

$

45

 

$

235,998

 

$

(203)

 

$

(7,155)

 

$

(150,098)

 

$

78,587

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(898)

 

 

(898)

 

Other comprehensive income /(loss)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(159)

 

 

 —

 

 

(159)

 

Treasury shares repurchased

 

 —

 

 

 —

 

 

 —

 

 

(1,311)

 

 

 —

 

 

 —

 

 

(1,311)

 

Proceeds from issuance of ESPP

 

46

 

 

 —

 

 

175

 

 

 —

 

 

 —

 

 

 —

 

 

175

 

Issuance of common stock for RSU vested

 

801

 

 

 1

 

 

(1)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Stock based compensation

 

 —

 

 

 —

 

 

2,310

 

 

 —

 

 

 —

 

 

 —

 

 

2,310

 

Balance March 31, 2019

 

46,324

 

$

46

 

$

238,482

 

$

(1,514)

 

$

(7,314)

 

$

(150,996)

 

$

78,704

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

 

 

    

 

 

    

 

 

    

Accumulated

    

 

 

    

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

 

 

 

Total

 

 

 

Common Stock

 

Paid-in-

 

Treasury

 

Comprehensive

 

Accumulated

 

Stockholders’

 

 

 

Shares

 

Amount

 

Capital

 

Stock

 

Loss

 

Deficit

 

Equity

 

Balance December 31, 2017

 

44,490

 

$

44

 

$

230,134

 

$

(3,161)

 

$

(5,666)

 

$

(157,814)

 

$

63,537

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

164

 

 

164

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

492

 

 

 

 

 

492

 

Impact of change in accounting policy

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,039

 

 

2,039

 

Treasury shares repurchased

 

 

 

 

 

 

 

 

 

 

(924)

 

 

 

 

 

 

 

 

(924)

 

Proceeds from issuance of ESPP

 

 

 

 

 

 

 

23

 

 

156

 

 

 

 

 

 

 

 

179

 

Issuance of treasury shares

 

 

 

 

 

 

 

(1,485)

 

 

1,485

 

 

 

 

 

 

 

 

 —

 

Stock based compensation

 

 

 

 

 

 

 

2,055

 

 

 

 

 

 

 

 

 

 

 

2,055

 

Balance March 31, 2018

 

44,490

 

$

44

 

$

230,727

 

$

(2,444)

 

$

(5,174)

 

$

(155,611)

 

$

67,542

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

 

4


 

INFORMATION SERVICES GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

    

2019

    

2018

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net (loss) income

 

$

(898)

 

$

164

 

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation expense

 

 

680

 

 

628

 

Amortization of intangible assets

 

 

1,004

 

 

1,274

 

Deferred tax benefit from stock issuances

 

 

(3)

 

 

(39)

 

Amortization of deferred financing costs

 

 

174

 

 

198

 

Stock-based compensation

 

 

2,310

 

 

2,055

 

Changes in accounts receivable allowance

 

 

179

 

 

392

 

Deferred tax benefit

 

 

(4)

 

 

(298)

 

Loss on disposal of fixed assets

 

 

33

 

 

36

 

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

Accounts receivable and contract assets

 

 

(197)

 

 

6,087

 

Prepaid expense and other assets

 

 

783

 

 

(43)

 

Accounts payable

 

 

1,650

 

 

1,585

 

Contract liabilities

 

 

(2,746)

 

 

(854)

 

Accrued expenses

 

 

(1,687)

 

 

(1,640)

 

Net cash provided by operating activities

 

 

1,278

 

 

9,545

 

Cash flows from investing activities

 

 

 

 

 

 

 

Purchase of furniture, fixtures and equipment

 

 

(353)

 

 

(3,019)

 

Net cash used in investing activities

 

 

(353)

 

 

(3,019)

 

Cash flows from financing activities

 

 

 

 

 

 

 

Principal payments on borrowings

 

 

(3,563)

 

 

(2,312)

 

Proceeds from issuance of employee stock purchase plan shares

 

 

175

 

 

179

 

Payments related to tax withholding for stock-based compensation

 

 

(1,157)

 

 

(878)

 

Equity securities repurchased

 

 

(1,311)

 

 

(924)

 

Net cash used in financing activities

 

 

(5,856)

 

 

(3,935)

 

Effect of exchange rate changes on cash

 

 

(101)

 

 

90

 

Net (decrease) increase in cash, cash equivalents, and restricted cash

 

 

(5,032)

 

 

2,681

 

Cash, cash equivalents,  and restricted cash, beginning of period

 

 

18,725

 

 

28,514

 

Cash, cash equivalents,  and restricted cash, end of period

 

$

13,693

 

$

31,195

 

 

 

 

 

 

 

 

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

Issuance of treasury stock for vested restricted stock awards

 

$

 —

 

$

1,485

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(tabular amounts in thousands, except per share data)

(unaudited)

 

NOTE 1—DESCRIPTION OF ORGANIZATION AND BUSINESS OPERATIONS

 

Information Services Group, Inc. (the “Company” or “ISG”) was founded in 2006 with the strategic vision to become a high-growth, leading provider of information-based advisory services.  The Company specializes in digital transformation services, including automation, cloud and data analytics; sourcing advisory; managed governance and risk services; network carrier services; technology strategy and operations design; change management; market intelligence and technology research and analysis.

 

NOTE 2—BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements as of March 31, 2019 and for the three months ended March 31, 2019 and 2018, have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements and pursuant to Form 10-Q and Article 10 of Regulation S-X.  In the opinion of management, all adjustments (consisting of normal recurring accruals) have been made that are considered necessary for a fair statement of the financial position of the Company as of March 31, 2019, the results of operations for the three months ended March 31, 2019 and 2018 and the cash flows for the three months ended March 31, 2019 and 2018.  The condensed consolidated balance sheet as of December 31, 2018 has been derived from the Company’s audited consolidated financial statements.  Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.

 

Certain information and disclosures normally included in the notes to annual financial statements prepared in accordance with GAAP have been omitted from these interim financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).  Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the financial statements for the fiscal year ended December 31, 2018, which are included in the Company’s 2018 Annual Report on Form 10-K filed with the SEC.

 

NOTE 3—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the periods reported.  Actual results may differ from those estimates.  Additionally, ISG has to determine the nature and timing of the satisfaction of performance obligations, the standalone selling price (“SSP”) of certain performance obligations, among other judgments associated with revenue recognition.  Numerous internal and external factors can affect estimates.  Estimates are also used for (but not limited to): allowance for doubtful accounts; useful lives of furniture, fixtures and equipment and definite-lived intangible assets; depreciation expense; fair value assumptions in analyzing goodwill and other long-lived assets for impairment; income taxes and deferred tax asset valuation; and the valuation of stock-based compensation.

 

Restricted Cash

 

Restricted cash consists of cash and cash equivalents which the Company has committed for rent deposits.

 

Fair Value

 

The carrying value of the Company’s cash and cash equivalents, restricted cash, receivables, accounts payable, other current liabilities, and accrued interest approximated their fair values at March 31, 2019 and December 31, 2018 due to the short-term nature of these accounts.

6


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

 

Fair value measurements were applied with respect to our nonfinancial assets and liabilities measured on a nonrecurring basis, which would consist of measurements primarily to contingent consideration in a business combination.

 

Fair value is the price that would be received upon a sale of an asset or paid upon a transfer of a liability in an orderly transaction between market participants at the measurement date (exit price).  Market participants can use market data or assumptions in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique.  These inputs can be readily observable, market-corroborated, or generally unobservable. The use of unobservable inputs is intended to allow for fair value determinations in situations where there is little, if any, market activity for the asset or liability at the measurement date.  Under the fair-value hierarchy:

 

·

Level 1 measurements include unadjusted quoted market prices for identical assets or liabilities in an active market;

 

·

Level 2 measurements include quoted market prices for identical assets or liabilities in an active market that have been adjusted for items such as effects of restrictions for transferability and those that are not quoted but are observable through corroboration with observable market data, including quoted market prices for similar assets; and

 

·

Level 3 measurements include those that are unobservable and of a highly subjective measure.

 

The following tables summarize assets and liabilities measured at fair value on a recurring basis at the dates indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basis of Fair Value Measurements

 

 

 

March 31, 2019

 

 

     

Level 1

     

Level 2

     

Level 3

     

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

17

 

$

 —

 

$

 —

 

$

17

 

Total

 

$

17

 

$

 —

 

$

 —

 

$

17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration (1)

 

$

 —

 

$

 —

 

$

1,728

 

$

1,728

 

Total

 

$

 —

 

$

 —

 

$

1,728

 

$

1,728

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basis of Fair Value Measurements

 

 

 

December 31, 2018

 

 

     

Level 1

     

Level 2

     

Level 3

     

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

315

 

$

 —

 

$

 —

 

$

315

 

Total

 

$

315

 

$

 —

 

$

 —

 

$

315

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration (1)

 

$

 —

 

$

 —

 

$

1,703

 

$

1,703

 

Total

 

$

 —

 

$

 —

 

$

1,703

 

$

1,703

 


(1)  Contingent consideration is included in “Accrued expenses and other current liabilities.” 

 

The fair value measurement of this contingent consideration is classified within Level 3 of the fair value hierarchy and reflects the Company’s own assumptions in measuring fair values using the income approach. In developing these

7


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

estimates, the Company considered certain performance projections, historical results, and industry trends.  This amount was estimated through a valuation model that incorporated probability-weighted assumptions related to the achievement of these milestones and the likelihood of the Company making payments.  These cash outflow projections have then been discounted using a rate ranging from 14.5% to 28.5%.

 

The following table represents the change in the contingent consideration liability during the three months ended March 31, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

     

2019

     

2018

  

Beginning Balance

 

$

1,703

 

$

3,698

 

Accretion of contingent consideration

 

 

30

 

 

102

 

Unrealized (loss) gain related to currency translation

 

 

(5)

 

 

18

 

Ending Balance

 

$

1,728

 

$

3,818

 

 

The Company’s financial instruments include outstanding borrowings of $95.6 million at March 31, 2019 and $99.1 million at December 31, 2018, 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 is approximately $95.3 million and $98.9 million at March 31, 2019 and December 31, 2018, 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 ranged from 5.74% to 5.85%. 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.

 

Recently Issued Accounting Pronouncements

 

In August 2018, the Financial Accounting Standards Board (“FASB”) issued an update that modifies the disclosure requirements for fair value measurements by removing, modifying or adding disclosures. The guidance is effective for fiscal year beginning after December 15, 2019 and early adoption is permitted. Certain disclosures in the update are applied retrospectively, while others are applied prospectively. The Company is currently evaluating the potential impact of adopting this guidance on its financial statements.

 

In September 2018, the FASB issued new guidance which requires a customer in a cloud computing arrangement to determine which implementation costs to capitalize as assets or expense as incurred. Under the new guidance, capitalized implementation costs related to a hosting arrangement that is a service contract will be amortized over the term of the hosting arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use. This update is effective for annual periods beginning after December 15, 2019, and interim periods within those periods, and early adoption is permitted. The Company is currently evaluating the potential impact of adopting this guidance on its financial statements.

 

In November 2018, the FASB issued guidance to clarify that certain transactions between parties to collaborative arrangements should be accounted for in accordance with FASB revenue guidance when the counterparty is a customer. This guidance also prohibits the presentation of collaborative arrangements as revenues from contracts with customers if the counterparty is not a customer. This guidance, which is required to be applied retrospectively and is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted, is not expected to have an impact on the Company’s consolidated financial statement.

 

 

 

8


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

NOTE 4—REVENUE

 

The majority of our revenue is derived from contracts that can span from a few months to several years. We enter into contracts that can include various combinations of services and products, which, depending on contract type, are sometimes capable of being distinct.  If services are determined to be distinct, they are accounted for as separate performance obligations.  A performance obligation is a promise in a contract to transfer a distinct good or service to the client and is the unit of account.  A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied.  The majority of our contracts have a single performance obligation as the promise to transfer the individual services is not separately identifiable from other promises in the contracts and, therefore, not distinct.  For contracts with multiple performance obligations, including our managed service implementation and software and implementation contract types, the Company allocates the transaction price to each performance obligation using our best estimate of the standalone selling price, or SSP, of each distinct good or service in the contract.  As of March 31, 2019, the Company had $69.3 million of remaining performance obligations, the majority of which are expected to be satisfied within the next year. 

 

We used practical expedients permitted by the standard when applicable.  These practical expedients included:

 

·

applying the new guidance only to contracts that are not completed as of January 1, 2018;

 

·

expensing the incremental costs to obtain a contract as incurred when the expected amortization period is one year or less; and

 

·

presenting all revenue net of any related sales tax.

 

Our contracts may include promises to transfer multiple services and products to a client.  Determining whether services and products are considered distinct performance obligations that should be accounted for separately versus together may require judgment. 

 

Estimates were required to determine the SSP for each distinct performance obligation identified within our managed service implementation contracts and software and implementation contracts, and research and subscription contracts. 

 

Contract Balances

 

The timing of revenue recognition, billings, and cash collections results in billed accounts receivables, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities).  Our clients are billed based on the type of arrangement.  A portion of our services is billed monthly based on hourly or daily rates.  There are also client engagements in which we bill a fixed amount for our services.  This may be one single amount covering the whole engagement or several amounts for various phases, functions, or milestones.  Generally, billing occurs subsequent to revenue recognition, resulting in contract assets.  However, we sometimes receive advances or deposits, particularly on our software and implementation contracts, before revenue is recognized, resulting in contract liabilities.  These assets and liabilities are reported on the consolidated balance sheet at the end of each reporting period.  See the table below for a breakdown of contract assets and contract liabilities.

 

 

 

 

 

 

 

 

 

 

    

March 31,

    

December 31,

    

 

    

2019

    

2018

    

Contract assets

 

$

31,357

 

$

22,878

 

Contract liabilities

 

$

3,441

 

$

6,187

 

 

9


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

Revenue recognized for the three months ended March 31, 2019 that was included in the contract liability balance at the beginning of the year was $4.7 million and represented primarily revenue from our software and implementation contracts and managed services contracts.

 

Disaggregation of Revenue

 

The following table presents our revenue disaggregated by geographic area for the three months ended March 31, 2019 and 2018.

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

Geographic area

    

2019

    

2018

    

Americas

 

$

38,229

 

$

41,676

 

Europe

 

 

22,204

 

 

21,754

 

Asia Pacific

 

 

4,358

 

 

5,447

 

 

 

$

64,791

 

$

68,877

 

 

 

 

 

 

 

 

 

 

 

 

NOTE 5—LEASES

 

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, “Leases” (Topic 842) (“ASC 842”).  ASC 842 requires companies to recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets.  We adopted ASC 842 using the effective date of January 1, 2019 as the date of our initial application of the standard. Consequently, financial information for the comparative periods will not be updated. The Company determines if a contract is, or contains, a lease at contract inception.  The Company elected the package of practical expedients for leases that commenced prior to January 1, 2019 and will not reassess: (i) whether any expired or existing contracts are or contain leases; (ii) lease classification for any expired or existing leases; and (iii) initial direct costs capitalization for any existing leases. The Company elected upon adoption, including the use of hindsight in assessing factors that impact determination of the lease term, such as the likelihood that any renewal or purchase options are exercised.  The Company elected to make an accounting policy election to keep leases with an initial term of 12 months or less off the balance sheet. The Company also elected not to separate non-lease components from lease components and instead to account for each separate lease component and the non-lease components associated with that lease component as a single lease component. The Company will recognize those lease payments in the consolidated statements of income on a straight-line basis over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental bowing rate based on the information available at the commencement date in determining the present value of the lease payments.

 

The Company leases its office space and office equipment under long-term operating lease agreements which expire at various dates through August 2026, some of which include options to extend the leases for up to 3 years, and some of which included options to terminate the leases within 1 year. Under the operating leases, the Company pays certain operating expenses relating to the office equipment and leased property.

 

10


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

The components of lease expense were as follows:

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

    

2019

Lease cost

 

 

 

Operating lease cost

 

$

789

Short-term lease cost

 

 

 2

Variable lease cost

 

 

79

Sublease income

 

 

(61)

Total lease cost

 

$

809

 

 

 

 

Supplemental cash flow information related to leases was as follows:

 

 

 

Cash paid from operating leases included in the measurement of lease liabilities

 

$

1,013

Supplemental balance sheet information related to leases was as follows:

 

 

 

 

 

(In thousands, except lease term and discount rate)

 

March 31,

 

    

2019

Operating leases

 

 

 

Operating lease right-of-use assets

 

$

8,029

 

 

 

 

Current operating lease liabilities (1)

 

$

3,077

Operating lease liabilities

 

 

6,566

Total operating lease liabilities

 

$

9,643

 

 

 

 

Weighted average remaining lease term (in years)

 

 

 

Operating leases

 

 

4.7

Weighted average discount rate

 

 

 

Operating leases

 

 

7.7%

 

(1)

Current operating lease liabilities is included in “Accrued expenses and other current liabilities.”

 

Maturities of lease liabilities were as follows:

 

 

 

 

 

 

 

Operating

 

    

Leases

Year Ending December 31,

 

 

 

2019 (excluding the three months ended March 31, 2019)

 

$

2,501

2020

 

 

2,990

2021

 

 

2,047

2022

 

 

1,322

2023

 

 

930

Thereafter

 

 

1,778

Total lease payments

 

 

11,568

Less imputed interest

 

 

(1,925)

Total

 

$

9,643

 

 

11


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

The minimum rental commitments under non-cancelable operating leases under ASC 840 as disclosed in our 2018 Annual Report, with initial or remaining terms of one year or more consist of the following at December 31, 2018:

 

 

 

 

 

 

    

Operating

 

 

 

Leases

 

2019

 

$

3,034

 

2020

 

 

2,654

 

2021

 

 

1,808

 

2022

 

 

1,218

 

2023

 

 

925

 

Thereafter

 

 

1,795

 

Total minimum lease payments

 

$

11,434

 

 

 

 

 

 

 

NOTE 6—NET INCOME PER COMMON SHARE

 

Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that would share in the net income of the Company.  For the three months ended March 31, 2019, 4.7 million restricted shares have not been considered in the diluted earnings per share calculation, as the effect would be anti-dilutive.     

 

The following tables set forth the computation of basic and diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

    

2019

    

2018

Basic:

 

 

 

 

 

 

Net (loss) income

 

$

(898)

 

$

164

Weighted average common shares

 

 

45,808

 

 

43,705

(Loss) earnings per share

 

$

(0.02)

 

$

0.00

Diluted:

 

 

 

 

 

 

Net (loss) income

 

$

(898)

 

$

164

 

 

 

 

 

 

 

Basic weighted average common shares

 

 

45,808

 

 

43,705

Potential common shares

 

 

 —

 

 

2,156

Diluted weighted average common shares

 

 

45,808

 

 

45,861

Diluted (loss) earnings per share

 

$

(0.02)

 

$

0.00

 

 

 

 

 

NOTE 7—INCOME TAXES

 

The Company’s effective tax rate for the three months ended March 31, 2019 was 60.0% based on pretax loss of $2.2 million.   The Company’s effective tax rate for the quarter was impacted by foreign rate differentials and the Company's inability to fully utilize foreign tax credits in the U.S.  The effective tax rate was (50.5)% for the three months ended March 31, 2018.  The difference was primarily due to the impact of prior year quarter earnings in jurisdictions where the Company is currently precluded from recording a tax provision for the three months ended March 31, 2019.

 

As of March 31, 2019, the Company had total unrecognized tax benefits of approximately $1.5 million, all of which would impact the Company’s effective tax rate if recognized.  The Company recognizes interest and penalties related to unrecognized tax benefits within the income tax provision in its condensed consolidated statement of operations.  As of

12


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

March 31, 2019, the Company’s accrual of interest and penalties amounted to $0.8 million.  The Company recorded no material year-to-date change in the accrual of unrecognized tax benefits and associated interest and penalties.

 

NOTE 8—COMMITMENTS AND CONTINGENCIES

 

The Company is subject to contingencies which arise through the ordinary course of business. All material liabilities of which management were aware are properly reflected in the financial statements at March 31, 2019 and December 31, 2018.

  

Experton Contingent Consideration 

 

As of March 31, 2019, the Company has recorded a liability of $0.3 million representing the estimated fair value of contingent consideration related to the acquisition of Experton which is classified as current and included in accrued expenses on the consolidated balance sheet. The Company paid the remaining $0.3 million in the second quarter of 2019 related to 2018 performance, of which 50% was paid with shares of ISG common stock.

 

TracePoint Contingent Consideration

 

As of March 31, 2019, the Company has recorded a liability of $1.5 million representing the estimated fair value of contingent consideration related to the acquisition of TracePoint which is classified as current and included in accrued expenses on the consolidated balance sheet. The Company will pay the remaining $1.5 million in the second quarter of 2019 related to 2018 performance, of which 50% is to be paid with shares of ISG common stock.

 

NOTE 9—SEGMENT AND GEOGRAPHICAL INFORMATION

 

The Company operates as one reportable segment consisting primarily of fact-based sourcing advisory services. The Company operates principally in the Americas, Europe and Asia Pacific.

 

Geographical revenue information for the segment is as follows:

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

 

    

2019

    

2018

    

Revenues

 

 

 

 

 

 

 

Americas

 

$

38,229

 

$

41,676

 

Europe

 

 

22,204

 

 

21,754

 

Asia Pacific

 

 

4,358

 

 

5,447

 

 

 

$

64,791

 

$

68,877

 

 

The segregation of revenues by geographic region is based upon the location of the legal entity performing the services. The Company does not measure or monitor gross profit or operating income by geography or by service line for the purposes of making operating decisions or allocating resources.

NOTE 10—FINANCING ARRANGEMENTS AND LONG-TERM DEBT

On December 1, 2016, the Company amended and restated its senior secured credit facility to include a $110.0 million term facility and a $30.0 million revolving facility (the “2016 Credit Agreement”).  The material terms under the 2016 Credit Agreement are as follows:

Each of the term loan facility and revolving credit facility has a maturity date of December 1, 2021 (the “Maturity Date”).

13


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

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

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

At the Company’s option, the credit facility bears interest at a rate per annum equal to either (i) the “Base Rate” (which is the highest of (a) the rate publicly announced from time to time by the administrative agent as its “prime rate”, (b) the Federal Funds Rate plus 0.5% per annum and (c) the Eurodollar Rate, plus 1.0%), plus the applicable margin (as defined below) or (ii) Eurodollar Rate (adjusted for maximum reserves) as determined by the Administrative Agent, plus the applicable margin.  The applicable margin is adjusted quarterly based upon the Company’s quarterly leverage ratio. 

The Term Loan is repayable in four consecutive quarterly installments of $1,375,000 each, that commenced March 31, 2017, followed by eight consecutive quarterly installments in the amount of $2,062,500 each, that commenced March 31, 2018, followed by seven consecutive quarterly installments of $2,750,000 each, commencing March 31, 2020 and a final payment of the outstanding principal amount of the Term Loan on the Maturity Date.

Mandatory repayments of term loans shall be required from (subject to agreed exceptions) (i) 100% of the proceeds from asset sales by the Company and its subsidiaries, (ii) 100% of the net proceeds from issuances of debt and equity by the Company and its subsidiaries and (iii) 100% of the net proceeds from insurance recovery and condemnation events of the Company and its subsidiaries.

The senior secured credit facility contains a number of covenants that, among other things, place restrictions on matters customarily restricted in senior secured credit facilities, including restrictions on indebtedness (including guarantee obligations), liens, fundamental changes, sales or disposition of property or assets, investments (including loans, advances, guarantees and acquisitions), transactions with affiliates, dividends and other payments in respect of capital stock, optional payments and modifications of other material debt instruments, negative pledges and agreements restricting subsidiary distributions and changes in line of business. In addition, the Company is required to comply with a total leverage ratio and fixed charge 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.

On February 10, 2017, as required by the 2016 Credit Agreement, the Company entered into an agreement to cap the interest rate at 4% on the LIBOR component of its borrowings under the term loan facility until December 31, 2019. This interest rate cap was not designated for hedging or speculative purposes. The expense related to this interest rate cap was not material.

As of March 31, 2019, the total principal outstanding under the term loan facility and revolving credit facility was $93.1 million and $2.5 million, respectively. The effective interest rate for the term loan facility and revolving credit facility as of March 31, 2019 was 5.8% and 5.7%, respectively.

 

NOTE 11—SUBSEQUENT EVENT

 

On May 9, 2019, ISG amended its 2016 Credit Agreement to increase the maximum permitted leverage ratio through and including September 30, 2019 to 3.75X, which then declines to 3.25X until September 30, 2020 and further declines to 3.00X until the Maturity Date.

 

14


 

 

 

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion and analysis in conjunction with our financial statements and related notes included elsewhere in this report. Except for historical information, the discussion in this report contains certain forward-looking statements that involve risks and uncertainties. We have based these forward-looking statements on our current expectations and assumptions about future events. In some cases, you can identify forward-looking statements by terminology, such as “may,” “should,” “could,” “predict,” “potential,” “continue,” “expect,” “anticipate,” “future,” “intend,” “plan,” “believe,” “estimate,” “forecast” and similar expressions (or the negative of such expressions.) Forward-looking statements include statements concerning 2019 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, and current competitive conditions. As a result, these statements are subject to various risks and uncertainties. For a discussion of material risks and uncertainties that the Company faces, see the discussion in our 2018 Annual Report on Form 10-K titled “Risk Factors.”

 

BUSINESS OVERVIEW

 

ISG (Information Services Group) (Nasdaq: III) is a leading global technology research and advisory firm. A trusted business partner to more than 700 clients, including more than 70 of the top 100 enterprises in the world, ISG is committed to helping corporations, public sector organizations, and service and technology providers achieve operational excellence and faster growth. The firm specializes in digital transformation services, including automation, cloud and data analytics; sourcing advisory; managed governance and risk services; network carrier services; technology strategy and operations design; change management; market intelligence and technology research and analysis. Founded in 2006, and based in Stamford, Conn., ISG employs more than 1,300 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.

 

Our strategy is to strengthen our existing market position and develop new services and products to support future growth plans. 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 could impact the business would also include natural disasters, legislative and regulatory changes and capital market disruptions.

 

We principally derive revenues from fees for services generated on a project by project basis. Prior to the commencement of a project, we reach agreement with the client on rates for services based upon the scope of the project, staffing requirements and the level of client involvement. Revenues for services rendered are recognized on a time and materials basis or on a fixed fee or capped fee basis in accordance with accounting and disclosure requirements for revenue recognition.

 

Revenues for time and materials contracts are recognized based on the number of hours worked by our advisors at an agreed upon rate per hour and are recognized in the period in which services are performed. Revenues for time and materials contracts are billed monthly, semimonthly or in accordance with the specific contractual terms of each project.

 

We also derive our revenues from recurring revenue streams.  This includes Managed Services, Research, the U.S. Public Sector, subscription services around Robotic Process Automation and analytic benchmarking.  All are characterized by subscriptions (i.e., renewal centric as opposed to project centric revenue streams) or multi-year contracts.  Our digital services now span a volume of offerings and have become embedded as part of even our traditional transaction services.  Digital enablement provides capabilities, digital insights and better engagement with clients and partners.

15


 

 

 

 

Our results are impacted principally by our full-time consultants’ utilization rate, the number of business days in each quarter and the number of our revenue generating professionals who are available to work. Our utilization rate can be negatively affected by increased hiring because there is generally a transition period for new professionals that results in a temporary drop in our utilization rate. Our utilization rate can also be affected by seasonal variations in the demand for our services from our clients. The number of business work days is also affected by the number of vacation days taken by our consultants and holidays in each quarter. We typically have fewer business work days available in the fourth quarter of the year, which can impact revenues during that period. Time and expense engagements do not provide us with a high degree of predictability as to performance in future periods. Unexpected changes in the demand for our services can result in significant variations in utilization and revenues and present a challenge to optimal hiring and staffing. The volume of work performed for any particular client can vary widely from period to period.

 

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND MARCH 31, 2018

 

Revenues

 

Revenues are generally derived from fixed fee contracts as well as engagements priced on a time and materials basis, which are recorded based on actual time worked as the services are performed. In addition, from time to time, we also earn incremental revenues, in addition to hourly or fixed fee billings, which are contingent on the attainment of certain contractual milestones.  Revenues related to materials (mainly out-of-pocket expenses such as airfare, lodging and meals) required during an engagement generally do not include a profit mark up and can be charged and reimbursed separately or as part of the overall fee arrangement. Invoices are issued to clients monthly, semimonthly or in accordance with the specific contractual terms of each project.

 

We operate in one segment, fact-based sourcing advisory services. We operate principally in the Americas, Europe, and Asia Pacific. Our foreign operations are subject to local government regulations and to the uncertainties of the economic and political conditions of those areas, and the revenue for our foreign operations is predominantly invoiced and collected in local currency.

 

Geographical revenue information for the segment is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent

 

 

 

Geographic Area

    

2019

    

2018

    

Change

    

Change

  

 

    

 

 

(in thousands)

 

 

 

Americas

    

$

38,229

    

$

41,676

    

$

(3,447)

    

(8)

%

 

 

Europe

 

 

22,204

 

 

21,754

 

 

450

 

 2

%

 

 

Asia Pacific

 

 

4,358

 

 

5,447

 

 

(1,089)

 

(20)

%

 

 

Total revenues

 

$

64,791

 

$

68,877

 

$

(4,086)

 

(6)

%

 

 

 

Revenues decreased $4.1 million or approximately 6% in the first quarter of 2019.  The decrease in revenues in the Americas was primarily attributable to decline in our Advisory service lines.  The increase in revenues in Europe was primarily attributable to growth in our Advisory service line.  The decrease in revenues in Asia Pacific was primarily attributable to a decline in our Managed Services service line.  The translation of foreign currency revenues into U.S. dollars negatively impacted performance compared to the prior year in Europe and Asia Pacific.     

 

16


 

 

 

Operating Expenses

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent

 

 

 

Operating Expenses

    

2019

    

2018