10-Q 1 iii-20190930x10q.htm 10-Q iii_Current_Folio_10Q_Taxonomy2019

 

 

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 September 30, 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 symbol             III

 

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 October 31, 2019

Common Stock, $0.001 par value

 

47,535,463 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)

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

    

2019

    

2018

 

ASSETS

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

14,208

 

$

18,636

 

Accounts receivable and contract assets, net of allowance of $1,024 and $401, respectively

 

 

82,632

 

 

75,934

 

Prepaid expenses and other current assets

 

 

4,152

 

 

3,620

 

Total current assets

 

 

100,992

 

 

98,190

 

Restricted cash

 

 

85

 

 

89

 

Furniture, fixtures and equipment, net

 

 

5,947

 

 

6,636

 

Right-of-use assets

 

 

7,059

 

 

 —

 

Goodwill

 

 

85,255

 

 

85,389

 

Intangible assets, net

 

 

17,595

 

 

20,622

 

Deferred tax assets

 

 

3,017

 

 

2,944

 

Other assets

 

 

777

 

 

861

 

Total assets

 

$

220,727

 

$

214,731

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

 

$

8,889

 

$

8,453

 

Current maturities of long-term debt

 

 

10,313

 

 

8,250

 

Contract liabilities

 

 

4,004

 

 

6,187

 

Accrued expenses and other current liabilities

 

 

16,671

 

 

17,759

 

Total current liabilities

 

 

39,877

 

 

40,649

 

Long-term debt, net of current maturities

 

 

84,922

 

 

89,212

 

Deferred tax liabilities

 

 

1,677

 

 

1,790

 

Lease liabilities

 

 

5,568

 

 

 —

 

Other liabilities

 

 

4,217

 

 

4,493

 

Total liabilities

 

 

136,261

 

 

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; 48,114 shares issued and 47,475 outstanding at September 30, 2019 and 45,477 shares issued and 45,430 outstanding at December 31, 2018

 

 

48

 

 

45

 

Additional paid-in capital

 

 

243,738

 

 

235,998

 

Treasury stock (639 and 47 common shares, respectively, at cost)

 

 

(2,332)

 

 

(203)

 

Accumulated other comprehensive loss

 

 

(8,137)

 

 

(7,155)

 

Accumulated deficit

 

 

(148,851)

 

 

(150,098)

 

Total stockholders’ equity

 

 

84,466

 

 

78,587

 

Total liabilities and stockholders’ equity

 

$

220,727

 

$

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

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

    

2019

    

2018

 

2019

    

2018

 

Revenues

 

$

68,143

 

$

67,965

 

$

200,262

 

$

207,868

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct costs and expenses for advisors

 

 

37,725

 

 

38,624

 

 

116,636

 

 

121,761

 

Selling, general and administrative

 

 

23,092

 

 

23,990

 

 

70,327

 

 

70,898

 

Depreciation and amortization

 

 

1,672

 

 

1,977

 

 

5,031

 

 

5,872

 

Operating income

 

 

5,654

 

 

3,374

 

 

8,268

 

 

9,337

 

Interest income

 

 

41

 

 

 3

 

 

133

 

 

113

 

Interest expense

 

 

(1,598)

 

 

(1,675)

 

 

(4,763)

 

 

(5,140)

 

Foreign currency transaction gain (loss)

 

 

 7

 

 

(6)

 

 

(28)

 

 

19

 

Income before taxes

 

 

4,104

 

 

1,696

 

 

3,610

 

 

4,329

 

Income tax provision (benefit)

 

 

2,373

 

 

(2,307)

 

 

2,363

 

 

(2,200)

 

Net income

 

$

1,731

 

$

4,003

 

$

1,247

 

$

6,529

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

47,426

 

 

45,115

 

 

46,704

 

 

44,491

 

Diluted

 

 

48,404

 

 

47,100

 

 

47,204

 

 

46,349

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.04

 

$

0.09

 

$

0.03

 

$

0.15

 

Diluted

 

$

0.04

 

$

0.08

 

$

0.03

 

$

0.14

 

Comprehensive income:

 

 

   

 

 

 

 

 

 

 

 

 

 

Net income

 

$

1,731

 

$

4,003

 

$

1,247

 

$

6,529

 

Foreign currency translation, net of tax benefit of $294,  $110,  $309 and $421, respectively.

 

 

(927)

 

 

(786)

 

 

(982)

 

 

(1,790)

 

Comprehensive income:

 

$

804

 

$

3,217

 

$

265

 

$

4,739

 

 

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

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,247

 

 

1,247

 

Other comprehensive loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(982)

 

 

 —

 

 

(982)

 

Treasury shares repurchased

 

 —

 

 

 —

 

 

 —

 

 

(2,976)

 

 

 —

 

 

 —

 

 

(2,976)

 

Proceeds from issuance of ESPP

 

173

 

 

 —

 

 

575

 

 

 —

 

 

 —

 

 

 —

 

 

575

 

Issuance of treasury shares

 

 —

 

 

 —

 

 

(847)

 

 

847

 

 

 —

 

 

 —

 

 

 —

 

Issuance of common stock for contingent earn-out

 

243

 

 

 1

 

 

864

 

 

 —

 

 

 —

 

 

 —

 

 

865

 

Issuance of common stock for RSU vested

 

2,221

 

 

 2

 

 

(2)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Stock based compensation

 

 —

 

 

 —

 

 

7,150

 

 

 —

 

 

 —

 

 

 —

 

 

7,150

 

Balance September 30, 2019

 

48,114

 

$

48

 

$

243,738

 

$

(2,332)

 

$

(8,137)

 

$

(148,851)

 

$

84,466

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

 

 

    

 

 

    

 

 

    

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

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

6,529

 

 

6,529

 

Other comprehensive loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(1,790)

 

 

 —

 

 

(1,790)

 

Impact of change in accounting policy

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

2,040

 

 

2,040

 

Treasury shares repurchased

 

 —

 

 

 —

 

 

 —

 

 

(2,879)

 

 

 —

 

 

 —

 

 

(2,879)

 

Proceeds from issuance of ESPP

 

 —

 

 

 —

 

 

(18)

 

 

660

 

 

 —

 

 

 —

 

 

642

 

Issuance of treasury shares for RSU vested

 

 —

 

 

 —

 

 

(5,152)

 

 

5,152

 

 

 —

 

 

 —

 

 

 —

 

Issuance of common stock for contingent earn-out

 

290

 

 

 —

 

 

1,200

 

 

 —

 

 

 —

 

 

 —

 

 

1,200

 

Issuance of common stock for RSU vested

 

413

 

 

 1

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 1

 

Stock based compensation

 

 —

 

 

 —

 

 

7,230

 

 

 —

 

 

 —

 

 

 —

 

 

7,230

 

Balance September 30, 2018

 

45,193

 

$

45

 

$

233,394

 

$

(228)

 

$

(7,456)

 

$

(149,245)

 

$

76,510

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

    

2019

    

2018

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net income

 

$

1,247

 

$

6,529

 

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

 

 

 

 

 

 

 

Depreciation expense

 

 

2,022

 

 

2,075

 

Amortization of intangible assets

 

 

3,009

 

 

3,797

 

Deferred tax expense (benefit) from stock issuances

 

 

172

 

 

(152)

 

Amortization of deferred financing costs

 

 

460

 

 

600

 

Stock-based compensation

 

 

7,150

 

 

7,230

 

Change in fair value of contingent consideration

 

 

 —

 

 

362

 

Provisions for accounts receivable

 

 

738

 

 

501

 

Deferred tax provision

 

 

68

 

 

(245)

 

Loss on disposal of fixed assets

 

 

 4

 

 

32

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable and contract assets

 

 

(8,090)

 

 

(5,778)

 

Prepaid expense and other assets

 

 

1,008

 

 

(26)

 

Accounts payable

 

 

189

 

 

509

 

Contract liabilities

 

 

(2,184)

 

 

(1,865)

 

Accrued expenses

 

 

 9

 

 

(2,415)

 

Net cash provided by operating activities

 

 

5,802

 

 

11,154

 

Cash flows from investing activities

 

 

 

 

 

 

 

Purchase of furniture, fixtures and equipment

 

 

(1,115)

 

 

(3,603)

 

Net cash used in investing activities

 

 

(1,115)

 

 

(3,603)

 

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from debt

 

 

5,000

 

 

 —

 

Principal payments on borrowings

 

 

(7,688)

 

 

(8,574)

 

Payment of Alsbridge Notes

 

 

 —

 

 

(7,000)

 

Proceeds from issuance of employee stock purchase plan shares

 

 

575

 

 

642

 

Payment of contingent consideration

 

 

(865)

 

 

(1,200)

 

Payments related to tax withholding for stock-based compensation

 

 

(2,732)

 

 

(2,743)

 

Equity securities repurchased

 

 

(2,976)

 

 

(2,879)

 

Net cash used in financing activities

 

 

(8,686)

 

 

(21,754)

 

Effect of exchange rate changes on cash

 

 

(433)

 

 

(710)

 

Net decrease in cash, cash equivalents, and restricted cash

 

 

(4,432)

 

 

(14,913)

 

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

 

 

18,725

 

 

28,514

 

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

 

$

14,293

 

$

13,601

 

 

 

 

 

 

 

 

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

Issuance of treasury stock for vested restricted stock awards

 

$

847

 

$

5,151

 

 

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 September 30, 2019 and for the three and nine months ended September 30, 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 September 30, 2019, the results of operations for the three and nine months ended September 30, 2019 and 2018 and the cash flows for the nine months ended September 30, 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 and nine months ended September 30, 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.

 

6

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

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 September 30, 2019 and December 31, 2018 due to the short-term nature of these accounts.

 

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

 

 

 

September 30, 2019

 

 

     

Level 1

     

Level 2

     

Level 3

     

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

17

 

$

 —

 

$

 —

 

$

17

 

Total

 

$

17

 

$

 —

 

$

 —

 

$

17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration (1)

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

Total

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

7

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 


(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 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 nine months ended September 30, 2019 and 2018:  

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

     

2019

     

2018

  

Beginning Balance

 

$

1,703

 

$

3,698

 

Payment of contingent consideration

 

 

(1,730)

 

 

(2,401)

 

Change in value of contingent consideration

 

 

 —

 

 

362

 

Accretion of contingent consideration

 

 

30

 

 

44

 

Unrealized (loss) gain related to currency translation

 

 

(3)

 

 

 1

 

Ending Balance

 

$

 —

 

$

1,704

 

 

The Company’s financial instruments include outstanding borrowings of $96.4  million at September 30, 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 $96.3 million and $98.9 million at September 30, 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 5.27% to 5.34%. 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.

8

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

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.

 

In June 2016, the FASB issued new guidance on the measurement of credit losses for financial assets measured at amortized cost, which includes accounts receivable, and available-for-sale debt securities. The new guidance replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. This update is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods. Early adoption is permitted for annual periods beginning after December 15, 2018, including interim periods within those annual periods. At its July 17th meeting, the FASB voted to propose a deferral of the effective date of this guidance to smaller reporting companies to fiscal years beginning after December 15, 2022.  The FASB expects to issue the final amendments by December 31, 2019.  The Company is currently evaluating the potential impact of adopting this guidance on its financial statements.

 

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 September 30, 2019, the Company had $76.6 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, software and implementation contracts, and research and subscription contracts. 

 

Contract Balances

 

9

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

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 before revenue is recognized, resulting in contract liabilities.  Contract assets and liabilities are reported in the current assets and current liabilities sections of the consolidated balance sheet, at the end of each reporting period, based on the timing of the satisfaction of the related performance obligation(s).  See the table below for a breakdown of contract assets and contract liabilities.

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31,

 

    

2019

    

2018

Contract assets

 

$

37,455

 

$

22,878

Contract liabilities

 

$

4,004

 

$

6,187

 

Revenue recognized for the three months ended September 30, 2019 that was included in the contract liability balance at July 1, 2019 was $2.9 million and represented primarily revenue from our research and subscription contracts.

 

Revenue recognized for the nine months ended September 30, 2019 that was included in the contract liability balance at January 1, 2019 was $5.9 million and represented primarily revenue from our research and subscription contracts.

 

Disaggregation of Revenue

 

The following table presents our revenue disaggregated by geographic area for the three and nine months ended September 30, 2019 and 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

Geographic area

    

2019

    

2018

    

2019

    

2018

Americas

 

$

40,253

 

$

38,502

 

$

118,738

 

$

121,009

Europe

 

 

22,558

 

 

24,033

 

 

67,562

 

 

69,834

Asia Pacific

 

 

5,332

 

 

5,430

 

 

13,962

 

 

17,025

 

 

$

68,143

 

$

67,965

 

$

200,262

 

$

207,868

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

10

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

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 borrowing 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.

 

The components of lease expense were as follows:

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

    

2019

    

2019

Lease cost

 

 

 

 

 

 

Operating lease cost

 

$

725

 

$

2,235

Finance lease cost:

 

 

 

 

 

 

Amortization of right-of-use assets

 

 

 6

 

 

 9

Interest on lease liabilities

 

 

 1

 

 

 2

Short-term lease cost

 

 

 9

 

 

19

Variable lease cost

 

 

76

 

 

247

Sublease income

 

 

(61)

 

 

(183)

Total lease cost

 

$

756

 

$

2,329

 

 

 

 

 

 

 

Supplemental cash flow information related to leases was as follows

 

 

 

 

 

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

 

 

Operating cash flows from finance leases

 

$

 5

 

$

 8

Operating cash flows from operating leases

 

$

849

 

$

2,658

Financing cash flows from finance leases

 

$

 1

 

$

 2

11

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

Supplemental balance sheet information related to leases was as follows:

 

 

 

 

 

 

 

 

(In thousands, except lease term and discount rate)

 

 

 

 

September 30,

 

    

 

 

2019

Operating leases

 

 

 

 

 

 

Operating lease right-of-use assets

 

 

 

 

$

7,059

 

 

 

 

 

 

 

Current operating lease liabilities (1)

 

 

 

 

$

3,062

Non-current operating lease liabilities

 

 

 

 

 

5,534

Total operating lease liabilities

 

 

 

 

$

8,596

 

 

 

 

 

 

 

Finance leases

 

 

 

 

 

 

Finance lease right-of-use assets

 

 

 

 

$

57

 

 

 

 

 

 

 

Current finance lease liabilities (1)

 

 

 

 

$

24

Non-current finance lease liabilities

 

 

 

 

 

34

Total finance lease liabilities

 

 

 

 

$

58

 

 

 

 

 

 

 

Weighted average remaining lease term (in years)

 

 

 

 

 

 

Operating leases

 

 

 

 

 

4.3

Finance leases

 

 

 

 

 

2.6

Weighted average discount rate

 

 

 

 

 

 

Operating leases

 

 

 

 

 

7.7%

Finance leases

 

 

 

 

 

7.9%

 

(1)

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

 

Maturities of lease liabilities were as follows: