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Section 1: 10-Q (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 June 30, 2016

 

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.)

 

Two Stamford Plaza
281 Tresser Boulevard
Stamford, CT 06901
(Address of principal executive offices and zip code)

 

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

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes No

 

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

 

Large accelerated filer

 

Accelerated filer

 

Non-accelerated filer

 

Smaller reporting company

 

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

 

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 July 29, 2016

Common Stock, $0.001 par value

 

35,694,703 shares

 

 

 

 

 

 

 


 

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)

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

    

2016

    

2015

 

ASSETS

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

16,081

 

$

17,835

 

Accounts and unbilled receivables, net of allowance of $569 and $415, respectively

 

 

52,580

 

 

49,484

 

Deferred tax asset

 

 

2,078

 

 

2,109

 

Prepaid expense and other current assets

 

 

2,557

 

 

2,066

 

Total current assets

 

 

73,296

 

 

71,494

 

Restricted cash

 

 

334

 

 

394

 

Furniture, fixtures and equipment, net

 

 

3,222

 

 

3,021

 

Goodwill

 

 

42,096

 

 

37,286

 

Intangible assets, net

 

 

13,042

 

 

13,860

 

Other assets

 

 

5,399

 

 

4,704

 

Total assets

 

$

137,389

 

$

130,759

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

 

$

8,223

 

$

6,700

 

Current maturities of long-term debt

 

 

2,250

 

 

2,250

 

Deferred revenue

 

 

4,221

 

 

5,154

 

Accrued expenses

 

 

18,696

 

 

17,076

 

Total current liabilities

 

 

33,390

 

 

31,180

 

Long-term debt, net of current maturities

 

 

57,036

 

 

47,947

 

Other liabilities

 

 

6,302

 

 

4,521

 

Total liabilities

 

 

96,728

 

 

83,648

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

Redeemable noncontrolling interest

 

 

1,076

 

 

939

 

Stockholders’ equity

 

 

 

 

 

 

 

Preferred stock, $.001 par value; 10,000 shares authorized; none issued

 

 

 

 

 

Common stock, $.001 par value, 100,000 shares authorized; 38,003 shares issued and 35,510 outstanding at June 30, 2016 and 37,977 shares issued and 37,219 outstanding at December 31, 2015

 

 

38

 

 

38

 

Additional paid-in capital

 

 

204,414

 

 

204,904

 

Treasury stock (2,493 and 758 common shares, respectively, at cost)

 

 

(9,954)

 

 

(3,053)

 

Accumulated other comprehensive loss

 

 

(6,647)

 

 

(6,538)

 

Accumulated deficit

 

 

(148,266)

 

 

(149,179)

 

Total stockholders’ equity

 

 

39,585

 

 

46,172

 

Total liabilities, redeemable noncontrolling interest and stockholders’ equity

 

$

137,389

 

$

130,759

 

 

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

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

    

2016

    

2015

    

2016

    

2015

 

Revenues

 

$

60,354

 

$

53,411

 

$

110,283

 

$

103,950

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct costs and expenses for advisors

 

 

36,106

 

 

32,558

 

 

67,474

 

 

62,996

 

Selling, general and administrative

 

 

19,104

 

 

17,011

 

 

35,815

 

 

33,421

 

Depreciation and amortization

 

 

1,927

 

 

1,838

 

 

3,645

 

 

3,556

 

Operating income

 

 

3,217

 

 

2,004

 

 

3,349

 

 

3,977

 

Interest income

 

 

2

 

 

7

 

 

24

 

 

9

 

Interest expense

 

 

(566)

 

 

(440)

 

 

(994)

 

 

(938)

 

Foreign currency transaction gain (loss)

 

 

244

 

 

26

 

 

(262)

 

 

400

 

Income before taxes

 

 

2,897

 

 

1,597

 

 

2,117

 

 

3,448

 

Income tax provision

 

 

1,234

 

 

578

 

 

1,105

 

 

1,522

 

Net income

 

$

1,663

 

$

1,019

 

$

1,012

 

$

1,926

 

Net income attributable to noncontrolling interest

 

 

51

 

 

85

 

 

99

 

 

139

 

Net income attributable to ISG

 

$

1,612

 

$

934

 

$

913

 

$

1,787

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

35,609

 

 

37,199

 

 

36,475

 

 

37,116

 

Diluted

 

 

36,719

 

 

38,971

 

 

37,029

 

 

38,731

 

Earnings per share attributable to ISG:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.05

 

$

0.03

 

$

0.03

 

$

0.05

 

Diluted

 

$

0.04

 

$

0.02

 

$

0.03

 

$

0.05

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

1,663

 

$

1,019

 

$

1,012

 

$

1,926

 

Foreign currency translation, net of tax benefit (expense) of $456,  $(315),  $66 and $630, respectively.

 

 

(745)

 

 

197

 

 

(109)

 

 

(1,242)

 

Comprehensive income

 

 

918

 

$

1,216

 

 

903

 

$

684

 

Comprehensive income attributable to noncontrolling interest

 

 

51

 

 

85

 

 

99

 

 

139

 

Comprehensive income attributable to ISG

 

$

867

 

$

1,131

 

$

804

 

$

545

 

 

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

3


 

INFORMATION SERVICES GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

    

2016

    

2015

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net income

 

$

1,012

 

$

1,926

 

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

 

 

 

 

 

 

 

Depreciation expense

 

 

988

 

 

903

 

Amortization of intangible assets

 

 

2,657

 

 

2,653

 

Tax expense (benefit) from stock issuances

 

 

14

 

 

(178)

 

Amortization of deferred financing costs

 

 

84

 

 

76

 

Stock-based compensation

 

 

3,315

 

 

2,225

 

Change in fair value of contingent consideration

 

 

(19)

 

 

141

 

Changes in accounts receivable allowance

 

 

186

 

 

19

 

Deferred tax benefit

 

 

(965)

 

 

(378)

 

Loss on disposal of fixed assets

 

 

1

 

 

2

 

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

Accounts receivable

 

 

(874)

 

 

(5,092)

 

Prepaid expense and other current assets

 

 

(1,046)

 

 

(1,537)

 

Accounts payable

 

 

913

 

 

(174)

 

Deferred revenue

 

 

(1,483)

 

 

(653)

 

Debt issuance costs

 

 

198

 

 

 —

 

Accrued expenses

 

 

370

 

 

(2,645)

 

Net cash provided by (used in) operating activities

 

 

5,351

 

 

(2,712)

 

Cash flows from investing activities

 

 

 

 

 

 

 

Acquisitions, net of cash acquired

 

 

(1,862)

 

 

 

Restricted cash

 

 

61

 

 

28

 

Purchase of furniture, fixtures and equipment

 

 

(1,216)

 

 

(695)

 

Net cash used in investing activities

 

 

(3,017)

 

 

(667)

 

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from debt

 

 

13,500

 

 

 —

 

Principal payments on borrowings

 

 

(4,288)

 

 

(1,417)

 

Proceeds from issuance of ESPP shares

 

 

295

 

 

289

 

Payment of contingent consideration

 

 

(2,483)

 

 

(2,322)

 

Installment payment for acquisition of CCI

 

 

 —

 

 

(661)

 

Dividend paid

 

 

 —

 

 

(5,189)

 

Debt issuance costs

 

 

9

 

 

 —

 

Tax (expense) benefit from stock issuances

 

 

(14)

 

 

178

 

Equity securities repurchased

 

 

(11,047)

 

 

(1,169)

 

Net cash used in financing activities

 

 

(4,028)

 

 

(10,291)

 

Effect of exchange rate changes on cash

 

 

(60)

 

 

(870)

 

Net decrease in cash and cash equivalents

 

 

(1,754)

 

 

(14,540)

 

Cash and cash equivalents, beginning of period

 

 

17,835

 

 

27,662

 

Cash and cash equivalents, end of period

 

$

16,081

 

$

13,122

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

Noncash financing activities:

 

 

 

 

 

 

 

Issuance of treasury stock for vested restricted stock awards

 

$

3,839

 

$

3,175

 

 

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

 

4


 

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”) was founded in 2006 with the strategic vision to become a high-growth, leading provider of information-based advisory services.  In 2007, we consummated our initial public offering and completed the acquisition of TPI Advisory Services Americas, Inc. (“TPI”). The Company is a leading technology insights, market intelligence and advisory services company serving more than 500 clients around the world to help them achieve operational excellence.  Based in Stamford, Connecticut, the Company has more than 1,000 employees and operates in 21 countries.

 

NOTE 2—BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements as of June 30, 2016 and for the three and six months ended June 30, 2016 and 2015, 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 June 30, 2016, the results of operations for the three and six months ended June 30, 2016 and 2015 and the cash flows for the six months ended June 30, 2016 and 2015.  The condensed consolidated balance sheet as of December 31, 2015 has been derived from the Company’s audited consolidated financial statements.  Operating results for the three and six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.

 

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, 2015, which are included in the Company’s 2015 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 accounting principles generally accepted in the United States of America 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. The complexity of the estimation process and issues related to the assumptions, risks and uncertainties inherent in the application of the proportional performance method of accounting affect the amounts of revenues, expenses, unbilled receivables and deferred revenue. 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, depreciation expense, contingent consideration, fair value assumptions in analyzing goodwill and intangible asset impairments, income taxes and deferred tax asset valuation, and the valuation of stock based compensation.

 

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 June 30, 2016 and December 31, 2015 due to the short-term nature of these instruments.

 

5


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

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

 

 

 

June 30, 2016

 

 

     

Level 1

     

Level 2

     

Level 3

     

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

20

 

$

 —

 

$

 —

 

$

20

 

Total

 

$

20

 

$

 —

 

$

 —

 

$

20

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration (1)

 

$

 —

 

$

 —

 

$

6,263

 

$

6,263

 

Foreign currency exchange forward contract (2)

 

 

 —

 

 

102

 

 

 —

 

 

102

 

 

 

$

 —

 

$

102

 

$

6,263

 

$

6,365

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basis of Fair Value Measurements

 

 

 

December 31, 2015

 

 

     

Level 1

     

Level 2

     

Level 3

     

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

20

 

$

 —

 

$

 —

 

$

20

 

Total

 

$

20

 

$

 —

 

$

 —

 

$

20

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration (1)

 

$

 —

 

$

 —

 

$

4,019

 

$

4,019

 


(1)

The short-term portion is included in “Accrued expenses.”  The long-term portion is included in “Other liabilities.”

 

(2)

Included in “Accrued Expenses.”

 

The Company’s contingent consideration liability was $6.3 million and $4.0 million at June 30, 2016 and December 31, 2015, respectively.  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

6


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

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 13.5% to 23.5%.

 

In January 2016, the Company entered into four foreign exchange forward contracts to partially hedge exposure to changes in foreign exchange rates. There are two remaining foreign exchange forward contracts with a EUR notional of 5.0 million and USD notional of 5.5 million at June 30, 2016.  These contracts are scheduled to settle at various times throughout 2016. These contracts are marked-to-market with the resulting gains and losses recognized in earnings offsetting the gains and losses on the non-functional currency denominated monetary assets and liabilities being hedged. These derivative contracts are not designated as hedges and are carried at fair value, with changes in the fair value recorded to foreign currency transaction gain (loss) in the condensed consolidated statement of comprehensive income.  We recognized  a $0.3 million unrealized gain and  a $0.1 million of unrealized loss on forward exchange contracts which is reflected on the foreign currency transaction gain (loss) line for the three and six months ended June 30, 2016, respectively.  The foreign currency exchange contracts agreement is valued using broker quotations or market transactions in either the listed or over-the-counter markets.  These derivative instruments are classified within level 2.   

 

The Company’s financial instruments include outstanding borrowings of $60.0 million at June 30, 2016 and $50.8 million at December 31, 2015, 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 $60.0 million and $50.8 million at June 30, 2016 and December 31, 2015, 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 2.59% to 2.78%. 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.

 

The following table represents the change in the contingent consideration liability during the six months ended June 30, 2016 and 2015:

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

     

2016

     

2015

  

Beginning Balance

 

$

4,019

 

$

4,825

 

Payment of contingent consideration

 

 

(2,483)

 

 

(2,322)

 

Acquisition 

 

 

4,634

 

 

 

Change in fair value of contingent consideration

 

 

(19)

 

 

141

 

Accretion of contingent consideration

 

 

152

 

 

90

 

Unrealized loss related to currency translation

 

 

(40)

 

 

(143)

 

Ending Balance

 

$

6,263

 

$

2,591

 

 

Recently Issued Accounting Pronouncements

 

In May 2015, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance that outlines a single comprehensive model for entities to use in accounting for revenue. Under the guidance, revenue is recognized when a company transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The standard is effective for public entities with annual and interim reporting periods beginning after December 15, 2016.  On July 9, 2015, the FASB approved the deferral of the effective date of the new revenue guidance by one year to annual reporting periods beginning after December 15, 2017, with early adoption being permitted for annual periods beginning after December 15, 2016. Entities have the option of using either a full retrospective or a modified retrospective approach to adopt the guidance.     In March 2016, the FASB issued an accounting standard update to clarify the implementation guidance on principal versus agent considerations.  In

7


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

April 2016, the FASB issued an accounting standard update to clarify the identification of performance obligations and the licensing implementation guidance, while retaining the related principles for those areas.  In May 2016, the FASB issued an accounting standard update to clarify guidance in certain areas and add some practical expedients to the guidance.  The amendments in these 2016 updates do not change the core principle of the previously issued guidance in May 2014.    The Company is currently assessing the effects this guidance may have on its consolidated financial statements, as well as the method of transition that the Company will use in adopting the new standard.

 

In April 2015, the FASB issued guidance require the presentation of debt issuance costs in financial statements as a direct reduction of related debt liabilities with amortization of debt issuance costs reported as interest expense. Under current U.S. GAAP standards, debt issuance costs are reported as deferred charges (i.e., as an asset). In August 2015, the FASB clarified the guidance that debt issuance costs related to line-of-credit arrangements could continue to be presented as an asset and be subsequently amortized over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the arrangement. This guidance is effective for annual periods, and interim periods within those fiscal years, beginning after December 15, 2015 and is to be applied retrospectively upon adoption. The Company adopted the guidance effective January 1, 2016 and presented $0.7 million and $0.6 million, respectively, of debt issuance costs as a direct deduction to the debt liability as of June 30, 2016 and December 31, 2015. This change in accounting principle did not have an impact on the Company’s results of operations, cash flows or stockholders’ equity.  

 

In November 2015, the FASB issued an accounting standards update to simplify the presentation of deferred income taxes on the balance sheet. The update requires that all deferred tax assets and liabilities be classified as noncurrent. The current guidance that deferred tax assets and liabilities of a tax-paying component of an entity be offset and presented as a single amount is not impacted by this update. The provisions of the new standard are effective beginning January 1, 2017, for annual and interim periods and early adoption is permitted.  The Company does not expect the adoption of this guidance to have a material impact on its results of operations, but will result in a reclassification of current net deferred tax on its balance sheet in future years. Adoption of the guidance as of June 30, 2016 would result in a reclassification of current net deferred tax of $2.1 million and $2.1 million as of June 30, 2016 and December 31, 2015, respectively.

 

In February 2016, the FASB issued guidance on accounting for leases which requires lessees to recognize most leases on their balance sheets for the rights and obligations created by those leases. The guidance requires enhanced disclosures regarding the amount, timing, and uncertainty of cash flows arising from leases and will be effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The guidance requires the use of a modified retrospective approach. The Company is evaluating the impact of the guidance on its consolidated financial statements and related disclosures.

 

In March 2016, the FASB issued amended guidance related to employee share-based payment accounting. The guidance requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled and will be applied on a prospective basis. The guidance also requires presentation of excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity, and can be applied retrospectively or prospectively. The guidance increases the amount companies can withhold to cover income taxes on awards without triggering liability classification for shares used to satisfy statutory income tax withholding obligations and requires application of a modified retrospective transition method. The amended guidance will be effective for interim and annual periods beginning after December 15, 2016; early adoption is permitted if all provisions are adopted in the same period. The Company is evaluating the impact of the amended guidance on its consolidated financial statements and related disclosures.

 

8


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

NOTE 4—ACQUISITIONS

 

TracePoint Acquisition

 

On April 29, 2016 (the “TracePoint Acquisition Date”), a subsidiary of the Company executed an Asset Purchase Agreement with TracePoint Consulting LLC, a Georgia limited liability company (“TracePoint”) and consummated the acquisition of substantially all of the assets and assumed certain liabilities of TracePoint for a purchase price of up to $7.7 million. 

 

The purchase price was comprised of $1.4 million of cash consideration paid at closing. TracePoint will also have the right to receive up to $6.3 million in additional consideration, of which $5.0 million to be paid 50% in cash and stock, respectively, via earn-out payments for fiscal years 2016-2018, if certain financial targets are met.

 

The following table summarizes the consideration transferred to acquire TracePoint and the amounts of identified assets acquired and liabilities assumed as of the TracePoint Acquisition Date:

 

The preliminary allocable purchase price consists of the following:

 

 

 

 

 

Cash

    

$

1,418

Contingent consideration

 

 

3,729

Total allocable purchase price

 

$

5,147

 

Recognized amounts of identifiable assets acquired and liabilities assumed as of the TracePoint Acquisition Date:

 

 

 

 

 

 

Cash

     

$

 —

 

Accounts receivable

 

 

1,099

 

Other assets

 

 

322

 

Intangible assets

 

 

1,049

 

Accounts payable

 

 

(559)

 

Accrued expenses and other

 

 

(44)

 

Net assets acquired

 

$

1,867

 

 

 

 

 

 

Goodwill

 

$

3,280

 

 

Costs associated with this acquisition are included in the selling, general and administrative expenses in the condensed consolidated statement of comprehensive income and totaled $0.1 million during the six months ended June 30, 2016.  This business combination was accounted for under the acquisition method of accounting, and as such, the aggregate purchase price was allocated on a preliminary basis to the assets acquired and liabilities assumed based on estimated fair values as of the closing date.    The purchase price allocations will be finalized after the completion of the valuation of certain intangible assets and any adjustments to the preliminary purchase price allocations are not expected to have a

9


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

material impact on the Company’s results of operations.  Based on the valuation and other factors as described above, the purchase price assigned to intangible assets and the amortization period were as follows:

 

 

 

 

 

 

 

 

 

 

    

 

 

Purchase Price

    

 

 

 

 

     

Allocation

     

Asset Life

 

 

Amortizable intangible assets:

 

 

 

 

 

 

 

Customer relationships

 

$

1,030

 

15

 years

 

Non-compete

 

 

19

 

3

years

 

Total intangible assets

 

$

1,049

 

 

 

 

 

Experton Group Acquisition

 

During the second quarter of 2016, the Company recorded an adjustment to its preliminary purchase price allocation with respect to its acquisition of the Experton Group (as defined below) as well as related deferred tax effects, including reducing the amount allocated to intangible assets by $0.3 million.

 

On February 29, 2016 (the “Experton Acquisition Date”), the Company executed a Sale and Purchase Agreement for all the shares of Experton Group AG (“the Agreement”), and consummated the acquisition of all the shares of Experton Group AG (“Experton Group”), a German Corporation.  Experton Group is a subscription-based research, advisory and benchmarking firm based in Munich, Germany.   

 

Under the terms of the Agreement, the Company acquired the shares for aggregate cash consideration of $0.6 million at closing and another $0.6 million of cash consideration to be paid one year from the Experton Acquisition Date.  In addition, Experton Group is eligible to receive a minimum of $0 and a maximum of up to $1.2 million of earn-out payments for fiscal years 2016-2018, if certain revenue targets are met, payable in a combination of cash and stock consideration.

 

The following table summarizes the consideration transferred to acquire Experton Group and the amounts of identified assets acquired and liabilities assumed as of the Experton Acquisition Date:

 

The preliminary allocable purchase price consists of the following:

 

 

 

 

 

 

Cash

    

$

554

 

Post-completion installment payment

 

 

554

 

Contingent consideration

 

 

905

 

Total allocable purchase price

 

$

2,013

 

 

10


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

Recognized amounts of identifiable assets acquired and liabilities assumed as of the Experton Acquisition Date:

 

 

 

 

 

 

Cash

     

$

110

 

Accounts receivable

 

 

412

 

Other assets

 

 

57

 

Intangible assets

 

 

757

 

Deferred income tax liability

 

 

(224)

 

Accounts payable

 

 

(51)

 

Accrued expenses and other

 

 

(521)

 

Net assets acquired

 

$

540

 

 

 

 

 

 

Goodwill

 

$

1,473

 

 

Costs associated with this acquisition are included in the selling, general and administrative expenses in the condensed consolidated statement of comprehensive income and totaled $0.1 million during the six months ended June 30, 2016.  This business combination was accounted for under the acquisition method of accounting, and as such, the aggregate purchase price was allocated on a preliminary basis to the assets acquired and liabilities assumed based on estimated fair values as of the closing dates. The purchase price allocations will be finalized after the completion of the valuation of certain intangible assets and any adjustments to the preliminary purchase price allocations are not expected to have a material impact on the Company’s results of operations.  Based on the valuation and other factors as described above, the purchase price assigned to intangible assets and the amortization period were as follows:

 

 

 

 

 

 

 

 

 

    

Purchase Price

    

 

 

 

     

Allocation

     

Asset Life

 

Amortizable intangible assets:

 

 

 

 

 

 

Customer relationships

 

$

735

 

10

 years

Non-compete

 

 

22

 

3

 years

Total intangible assets

 

$

757

 

 

 

 

The Condensed Consolidated Statements of Comprehensive Income include the results of Experton and TracePoint acquisitions subsequent to the closing. Had the acquisition occurred as of January 1, 2015, the impact on the Company’s results of operations would not have been material. 

 

NOTE 5—NET (LOSS) 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. The 50,000 contingently issuable shares related to the acquisition of CCI were excluded from basic and diluted earnings per share since the contingency has not been met as of the reporting 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 and six months ended June 30, 2016, the effect of 34,374 stock appreciation rights (“SARs”) have not been considered in the diluted earnings per share, since the market price of the stock was less than the exercise price during the period in the computation, respectively.  In addition, 0.2 million restricted shares have not been considered in the diluted earnings per share calculation for the three and six months ended June 30, 2016, as the effect would be anti-dilutive.  For the three and six months ended June 30, 2015, the effect of 68,748 SARs have not been considered in the diluted earnings per share, since the market price of the stock was less than the exercise price during the period in the computation, respectively.  In addition, 0.3 million and 0.4 million restricted shares have not been considered in the diluted earnings per share calculation for the three and six months ended June 30, 2015, respectively, as the effect would be anti-dilutive.

11


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

    

2016

    

2015

    

2016

    

2015

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to ISG

 

$

1,612

 

$

934

 

$

913

 

$

1,787

 

Weighted average common shares

 

 

35,609

 

 

37,199

 

 

36,475

 

 

37,116

 

Earnings per share attributable to ISG

 

$

0.05

 

$

0.03

 

$

0.03

 

$

0.05

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to ISG

 

$

1,612

 

$

934

 

$

913

 

$

1,787

 

Interest expense of convertible debt, net of tax

 

 

9

 

 

22

 

 

23

 

 

37

 

Net income, attributable to ISG, as adjusted

 

$

1,621

 

$

956

 

$

936

 

$

1,824

 

Basic weighted average common shares

 

 

35,609

 

 

37,199

 

 

36,475

 

 

37,116

 

Potential common shares

 

 

1,110

 

 

1,772

 

 

554

 

 

1,615

 

Diluted weighted average common shares

 

 

36,719

 

 

38,971

 

 

37,029

 

 

38,731

 

Diluted earnings per share attributable to ISG

 

$

0.04

 

$

0.02

 

$

0.03

 

$

0.05

 

 

 

 

 

NOTE 6—INCOME TAXES

 

The Company’s effective tax rate for the three and six months ended June 30, 2016 was 42.6% and 52.2% based on pretax income of $2.9 million and $2.1 million, respectively.  The Company’s effective tax rate for the quarter was greater than the statutory rate primarily due to non-deductible travel and entertainment expenses, increase in FIN 48 accruals, and the impact of current quarter losses in jurisdictions where the Company is currently precluded from booking tax benefits. The effective tax rate was 36.2% and 44.1% for the three and six months ended June 30, 2015, respectively.  The difference is primarily due to FIN 48 accruals recorded for the three months ended June 30, 2016.

 

As of June 30, 2016, the Company had total unrecognized tax benefits of approximately $1.9 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 June 30, 2016, the Company’s accrual of interest and penalties amounted to $0.5 million.

 

NOTE 7—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 June 30, 2016 and December 31, 2015.

 

STA Consulting Contingent Consideration

 

The Company paid the remaining contingent liability of $1.7 million in April 2016 related to 2015 performance. 

 

CCI Contingent Consideration

 

As of June 30, 2016, the Company has recorded a liability of $0.6 million representing the estimated fair value of contingent consideration related to the acquisition of CCI Consulting, and is classified as current and included in accrued expenses on the consolidated balance sheet. The Company paid $0.7 million in April 2016 related to 2015 performance and the remaining contingent liability is expected to be paid in the second quarter of 2017. 

 

12


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

Saugatuck Contingent Consideration

 

As of June 30, 2016, the Company has recorded a liability of $0.9 million representing the estimated fair value of contingent consideration related to the acquisition of Saugatuck, of which $0.4 million is classified as current and included in accrued expenses on the consolidated balance sheet.  The Company paid $0.2 million in February 2016 related to 2015 performance.

 

Experton Contingent Consideration 

 

As of June 30, 2016, the Company has recorded a liability of $1.0 million representing the estimated fair value of contingent consideration related to the acquisition of Experton, of which $0.3 million is classified as current and included in accrued expenses on the consolidated balance sheet.

 

TracePoint Contingent Consideration

 

As of June 30, 2016, the Company has recorded a liability of $3.7 million representing the estimated fair value of contingent consideration related to the acquisition of TracePoint, of which $1.7 million is classified as current and included in accrued expenses on the consolidated balance sheet.

 

 

NOTE 8—GOODWILL

 

The changes in the carrying amount of goodwill for the period ended June 30, 2016 is as follows:

 

 

 

 

 

 

Balance as of December 31, 2015

     

$

37,286

 

Acquisition

 

 

4,753

 

Foreign currency impact

 

 

57

 

Balance as of June 30, 2016

 

$

42,096

 

 

 

NOTE 9—REDEEMABLE NONCONTROLLING INTEREST

 

The following provides a summary of activity in the noncontrolling interest account for the period ended June 30, 2016 relating to the acquisition of Convergent Technologies Partners:

 

 

 

 

 

 

Balance as of December 31, 2015

     

$

939

 

Net income attributable to noncontrolling interest

 

 

99

 

Accretion attributable to noncontrolling interest

 

 

38

 

Balance as of June 30, 2016

 

$

1,076

 

 

 

 

NOTE 10—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.

 

13


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

Geographical revenue information for the segment is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

    

2016

    

2015

    

2016

    

2015

    

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas

 

$

31,671

 

$

28,628

 

$

57,593

 

$

56,244

 

Europe

 

 

21,221

 

 

18,668

 

 

40,274

 

 

36,729

 

Asia Pacific

 

 

7,462

 

 

6,115

 

 

12,416

 

 

10,977

 

 

 

$

60,354

 

$

53,411

 

$

110,283

 

$

103,950

 

 

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 for the purposes of making operating decisions or allocating resources.

 

NOTE 11—FINANCING ARRANGEMENTS AND LONG-TERM DEBT

 

On May 3, 2013 (the "Closing"), the Company entered into a five year senior secured credit facility (the "2013 Credit Agreement") comprised of a $45.0 million term loan facility and a $25.0 million revolving credit facility. On May 3, 2013, the Company borrowed $55.0 million under the 2013 Credit Agreement to refinance our existing debt under the Company's prior credit facility and to pay transaction costs.

 

On May 11, 2015, the Company amended the 2013 Credit Agreement to reduce annual mandatory principal payments, lower borrowing costs and extend the term of the 2013 Credit Agreement by two years, resulting in a maturity date of May 3, 2020. As a result of the amendment, the Term Loan is repayable in twenty consecutive quarterly installments of $562,500 each, commencing June 30, 2015. In addition, the amendment also allows the Company to prepay up to $3.5 million of the subordinated convertible notes issued in connection with the Company's acquisition of Compass in 2011.

 

On March 9, 2016, the Company amended the 2013 Credit Agreement.  The amendment increases the revolving line of credit commitment by $15.0 million to a total of $40.0 million and allows the Company to maintain its maximum consolidated total leverage ratio at 3.00 to 1.00 through the first quarter of 2017.

 

On April 29, 2016, the Company’s lenders agreed to amend the 2013 Credit Agreement to allow the Company to complete the acquisition of TracePoint Consulting LLC, a Georgia limited liability company (“TracePoint”).  In addition, the Company’s lenders agreed to allow the Company to exclude the acquisition from the Company’s $10.0 million fiscal year permitted acquisition basket and from the calculation of the Company’s Consolidated Fixed Charge Coverage ratio.

 

The material terms of the senior secured credit facility under the 2013 Credit Agreement are as follows:

 

·

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.

 

·

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

14


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

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), transaction 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. As of June 30, 2016, our maximum total leverage ratio was 3.00 to 1.00 and we were in compliance with all covenants contained in the 2013 Credit Agreement.

 

·

The senior secured credit facility contains customary events of default, including cross-default to other material agreements, judgment default and change of control.

 

The Company is required under the 2013 Credit Agreement to establish a fixed or maximum interest rate covering a notional amount of not less than 50% of the aggregate outstanding indebtedness for borrowed money (other than the total revolving outstanding) for a period of three years from the closing date of our 2013 Credit Agreement. Subsequent to May 3, 2013, the Company entered into an agreement to cap the interest rate at 5% on the LIBOR component of its borrowings under the term loan facility until May 3, 2016. This interest rate cap was not designated for hedging or speculative purposes. The expense related to this interest rate cap was not material.

 

During the second quarter of 2016, the Company borrowed $13.5 million under the revolving credit facility to fund the Dutch auction tender offer and to retire a portion of the Compass convertible notesAs of June 30, 2016, the total principal outstanding under the term loan facility and revolving credit facility was $36.3 million and $23.5 million, respectively. Additional mandatory principal repayments totaling $1.1 million and $2.3 million will be due in 2016 and 2017, respectively.

 

In the first quarter of 2016, the Company adopted accounting guidance requiring debt issuance costs related to recognized debt liabilities to be presented in the balance sheet as a direct reduction from the debt liability rather than an asset.  Accordingly, as of June 30, 2016, approximately $0.7 million of deferred debt issuance costs were presented as a direct reduction within Long-Term Debt on the Company’s Consolidated Balance Sheets.  Furthermore, the Company reclassified approximately $0.6 million of deferred debt issuance costs from Other Assets to Long-Term Debt as of December 31, 2015.

 

Compass Convertible Notes

 

On January 4, 2011, as part of the consideration for the acquisition of Compass, the Company issued an aggregate of $6.3 million in convertible notes to Compass (the "Notes"). The Notes mature on January 4, 2018 and interest is payable on the outstanding principal amount, computed daily, at the rate of 3.875% per annum on January 31 of each calendar year and on the seventh anniversary of the date of the Notes. The Notes were subject to transfer restrictions until January 31, 2013. If the price of the Company's common stock on the Nasdaq Global Market exceeds $4 per share for 60 consecutive trading days (the "Trigger Event"), a holder of the Notes may convert all (but not less than all) of the outstanding principal amount of the Notes into shares of our common stock at the rate of 1 share for every $4 in principal amount outstanding. After the Trigger Event, the Company may prepay all or any portion of the outstanding principal amount of the Notes by giving a holder 30 days written notice.

 

15


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

On April 26, 2013, the Company settled a portion of the Notes. The payee agreed to accept from the Company an amount equal to $650,000 as satisfaction in full of all indebtedness of $1.1 million owing by the Company to such payee. As a result of this transaction, the Company recognized a gain of $0.5 million in the second quarter of 2013 representing the difference between the fair value of the consideration issued in the settlement transaction and the carrying value of the amounts due to the payee. This amount was recorded in Gain on Extinguishment of Debt in the accompanying consolidated statement of comprehensive income (loss).

 

On November 14, 2013, the Company's lenders agreed to amend the 2013 Credit Agreement to allow the Company to prepay the entire outstanding principal amount of the CPIV S.A. Convertible Note ("CPIV Note") plus accrued interest and exclude the CPIV Note prepayment from the calculation of our consolidated fixed charge coverage ratio. On November 25, 2013, the Company settled a portion of the Notes and prepaid the CPIV Note and the payee agreed to accept from the Company an amount equal to the principal of $1.7 million plus accrued interest as satisfaction in full of all indebtedness owing by the Company to such payee. Therefore, there was no gain or loss recorded as a result of this transaction.

 

On March 21, 2014, the Trigger Event occurred. As a result, a holder of the Notes may convert all (but not less than all) of the outstanding principal amount of the Notes into shares of our common stock at the rate of 1 share for every $4 in principal amount outstanding. In addition, ISG may elect to prepay all or any portion of the outstanding principal amount of the Notes by giving a holder 30 days written notice; however, such holder shall be given the opportunity to convert the outstanding principal amount into shares as described above. No holder of the Notes has the option to require cash payment as a result of the Trigger Event, hence the Notes are classified as non-current.

 

On May 6, 2016, the Company prepaid a convertible note in the amount of $3.2 million for principal and accrued interest as satisfaction in full of all indebtedness owed by the Company under such convertible note. No gain or loss was recorded as a result of this transaction. As a result of this transaction, the Company’s fully diluted shares outstanding reduced by 790,721 shares and the aggregate principal amount of convertible notes that remain outstanding is $0.2 million.

 

NOTE 12—SHARE REPURCHASE PROGRAM 

 

On March 9, 2016, the Company’s Board of Directors approved a new share repurchase authorization of up to $15 million.  The repurchase program is expected to be executed over time.  The shares may be repurchased from time to time in open market transactions at prevailing market prices, in privately negotiated transactions, pursuant to a Rule 10b5-1 repurchase plan or by other means in accordance with federal securities laws. The timing and the amount of any repurchases will be determined by the Company’s management based on its evaluation of market conditions, capital allocation alternatives, and other factors.  There is no guarantee as to the number of shares that will be repurchased, and the repurchase program may be extended, suspended or discontinued at any time without notice at the Company's discretion.

 

On March 10, 2016 the Company commenced a tender offer to purchase up to $12.0 million in value of shares of its common stock $0.001 par value per share (the “Shares”), at a price not greater than $4.00 nor less than $3.30 per Share, to the seller in cash, less any applicable withholding taxes and without interest (the “Offer”).   The Offer expired on April 7, 2016. The Company conducted the Offer through a procedure commonly called a modified “Dutch auction”.  A modified “Dutch auction” tender offer allows stockholders to indicate how much stock and at what price within the specified offer range they wish to tender their stock.

 

Based on the final count for the tender offer, the Company accepted for payment an aggregate of 2,323,879 shares of its common stock, $0.001 par value per share on April 7, 2016, at a purchase price of $4.00 per share for an aggregate purchase price of approximately $9.3 million. As of June 30, 2016, there is $18.6 million available for repurchase in the Company’s repurchase program.    

 

 

 

16


 

 

 

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 2016 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 2015 Form 10-K titled “Risk Factors.”

 

BUSINESS OVERVIEW

 

Information Services Group, Inc. (ISG) (NASDAQ: III) is a leading technology insights, market intelligence and advisory services company serving more than 500 clients around the world to help them achieve operational excellence.  We support private and public sector organizations to transform and optimize their operational environments through research, benchmarking, consulting and managed services with a focus on information technology, business process transformation, program management services and enterprise resource planning. Clients look to us for unique insights and innovative solutions for leveraging technology, our deep data source, and more than five decades of experience of global leadership in information and advisory services.  Based in Stamford, Connecticut, we have more than 1,000 employees and operate in 21 countries.

 

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 offering 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 strategic 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 derive our revenues from fees and reimbursable expenses for professional services. Certain revenues are generated under hourly or daily rates billed on a time and expense basis. Clients are typically invoiced on a monthly basis, with revenue recognized as the services are provided. There are also client engagements in which we are paid a fixed amount for our services, often referred to as fixed fee billings. This may be one single amount covering the whole engagement or several amounts for various phases or functions. From time to time, we earn incremental revenues, in addition to hourly or fixed fee billings, which are contingent on the attainment of certain contractual milestones or objectives. Such revenues may cause unusual variations in quarterly revenues and operating results.

 

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 result 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

17


 

 

 

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.

 

NON-GAAP FINANCIAL PRESENTATION

 

This management’s discussion and analysis presents supplemental measures of our performance that are derived from our consolidated financial information but are not presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”). We refer to these financial measures, which are considered “non-GAAP financial measures” under SEC rules, as adjusted EBITDA, adjusted net income, and adjusted earnings per diluted share, each as defined below. See “Non-GAAP Financial Measures” below for information about our use of these non-GAAP financial measures, including our reasons for including these measures and reconciliations of each non-GAAP financial measure to the most directly comparable GAAP financial measure.

 

RESULTS OF OPERATIONS

 

NON-GAAP FINANCIAL MEASURES

 

We use non-GAAP financial measures to supplement the financial information presented on a GAAP basis.  We provide adjusted EBITDA (defined as net income before net income attributable to noncontrolling interest, interest, taxes, depreciation and amortization, foreign currency transaction gains/losses, non-cash stock compensation, impairment charges for goodwill and intangible assets, interest on contingent consideration, tax indemnity receivable, gain on extinguishment of debt and bargain purchase gain), adjusted net income (defined as net income plus amortization of intangible assets, non-cash stock compensation, foreign currency transaction gains/losses and non-cash impairment charges for goodwill and intangible assets, gain on extinguishment of debt and bargain purchase gain, on a tax-adjusted basis) and adjusted net income as earnings per diluted share, excluding the net of tax effect of the items set forth in the table below, which are non-GAAP measures that the Company believes provide useful information to both management and investors by excluding certain expenses and financial implications of foreign currency translations, which management believes are not indicative of ISG’s core operations. These non-GAAP measures are used by the Company to evaluate the Company’s business strategies and management’s performance.  These non-GAAP financial measures exclude non-cash and certain other special charges that many investors believe may obscure the user’s overall understanding of the Company’s current financial performance and the Company’s prospects for the future. We believe that these non-GAAP measures provide useful information to investors because they improve the comparability of the financial results between periods and provide for greater transparency of key measures used to evaluate the Company’s performance.

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

 

 

    

2016

    

2015

 

    

 

 

(in thousands)

 

 

Net income attributable to ISG

    

$

1,612

    

$

934

 

 

Net income attributable to noncontrolling interest

 

 

51

 

 

85

 

 

Interest expense (net of interest income)

 

 

564

 

 

433

 

 

Income taxes

 

 

1,234

 

 

578

 

 

Depreciation and amortization

 

 

1,927

 

 

1,838

 

 

Interest on contingent consideration

 

 

30

 

 

 

 

Foreign currency transaction

 

 

(244)

 

 

(26)

 

 

Non-cash stock compensation

 

 

1,851

 

 

1,323

 

 

Adjusted EBITDA

 

$

7,025

 

$

5,165

 

 

 

 

 

18


 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

June 30,

 

    

 

 

2016

    

2015

 

 

 

 

(in thousands)

 

 

Net income attributable to ISG

    

$

1,612

    

$

934

 

 

Intangible amortization

 

 

1,382

 

 

1,374

 

 

Foreign currency transaction

 

 

(244)

 

 

(26)

 

 

Non-cash stock compensation

 

 

1,851

 

 

1,323

 

 

Tax effect (1)

 

 

(1,136)

 

 

(1,015)

 

 

Adjusted net income

 

$

3,465

 

$

2,590

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

June 30,

 

   

 

   

2016

   

2015

 

 

Earnings per diluted share attributable to ISG

    

$

0.04

    

$

0.02

 

 

Intangible amortization

 

 

0.04

 

 

0.04

 

 

Foreign currency transaction

 

 

(0.01)

 

 

 —

 

 

Non-cash stock compensation

 

 

0.05

 

 

0.04

 

 

Tax effect(1)

 

 

(0.03)

 

 

(0.03)

 

 

Non-GAAP earnings per diluted share

 

$

0.09

 

$

0.07

 

 


(1)Marginal tax rate of 38% applied.

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

 

    

2016

    

2015

 

 

 

 

(in thousands)

 

 

Net income attributable to ISG

    

$

913

    

$

1,787

 

 

Net income attributable to noncontrolling interest

 

 

99

 

 

139

 

 

Interest expense (net of interest income)

 

 

970

 

 

929

 

 

Income taxes

 

 

1,105

 

 

1,522

 

 

Depreciation and amortization

 

 

3,645

 

 

3,556

 

 

Interest on contingent consideration

 

 

60

 

 

 —

 

 

Foreign currency transaction

 

 

262

 

 

(400)

 

 

Non-cash stock compensation

 

 

3,315

 

 

2,225

 

 

Adjusted EBITDA

 

$

10,369

 

$

9,758

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

June 30,

 

 

 

    

2016

    

2015

 

 

 

 

(in thousands)

 

 

Net income attributable to ISG

    

$

913

    

$

1,787

 

 

Intangible amortization

 

 

2,657

 

 

2,653

 

 

Foreign currency transaction

 

 

262

 

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