Toggle SGML Header (+)


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 September 30, 2018

 

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

 

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 26, 2018

Common Stock, $0.001 par value

 

45,186,419 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,

 

 

    

2018

    

2017

 

ASSETS

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

13,510

 

$

28,420

 

Accounts receivable and contract assets, net of allowance of $770 and $503, respectively

 

 

76,403

 

 

70,824

 

Prepaid expenses and other current assets

 

 

4,277

 

 

4,467

 

Total current assets

 

 

94,190

 

 

103,711

 

Restricted cash

 

 

91

 

 

94

 

Furniture, fixtures and equipment, net

 

 

6,896

 

 

5,229

 

Goodwill

 

 

85,446

 

 

85,619

 

Intangible assets, net

 

 

21,868

 

 

25,684

 

Deferred tax assets

 

 

2,997

 

 

2,521

 

Other assets

 

 

1,069

 

 

1,902

 

Total assets

 

$

212,557

 

$

224,760

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

 

$

8,016

 

$

7,192

 

Current maturities of long-term debt

 

 

8,250

 

 

15,499

 

Contract liabilities

 

 

4,794

 

 

8,898

 

Accrued expenses

 

 

17,621

 

 

21,486

 

Total current liabilities

 

 

38,681

 

 

53,075

 

Long-term debt, net of current maturities

 

 

91,113

 

 

98,838

 

Deferred tax liabilities

 

 

1,891

 

 

1,569

 

Other liabilities

 

 

4,362

 

 

7,741

 

Total liabilities

 

 

136,047

 

 

161,223

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

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

 

 

 —

 

 

 

Common stock, $0.001 par value, 100,000 shares authorized; 45,193 shares issued and 45,138 outstanding at September 30, 2018 and 44,490 shares issued and 43,560 outstanding at December 31, 2017

 

 

45

 

 

44

 

Additional paid-in capital

 

 

233,394

 

 

230,134

 

Treasury stock (55 and 930 common shares, respectively, at cost)

 

 

(228)

 

 

(3,161)

 

Accumulated other comprehensive loss

 

 

(7,456)

 

 

(5,666)

 

Accumulated deficit

 

 

(149,245)

 

 

(157,814)

 

Total stockholders’ equity

 

 

76,510

 

 

63,537

 

Total liabilities and stockholders’ equity

 

$

212,557

 

$

224,760

 

 

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,

 

 

    

2018

    

2017

 

2018

    

2017

 

Revenues

 

$

67,965

 

$

68,349

 

$

207,868

 

$

202,942

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct costs and expenses for advisors

 

 

38,624

 

 

38,214

 

 

121,761

 

 

119,153

 

Selling, general and administrative

 

 

23,990

 

 

23,710

 

 

70,898

 

 

68,815

 

Depreciation and amortization

 

 

1,977

 

 

2,951

 

 

5,872

 

 

9,773

 

Operating income

 

 

3,374

 

 

3,474

 

 

9,337

 

 

5,201

 

Interest income

 

 

 3

 

 

15

 

 

113

 

 

94

 

Interest expense

 

 

(1,675)

 

 

(1,716)

 

 

(5,140)

 

 

(5,132)

 

Foreign currency transaction (loss) gain

 

 

(6)

 

 

(111)

 

 

19

 

 

(292)

 

Income (loss) before taxes

 

 

1,696

 

 

1,662

 

 

4,329

 

 

(129)

 

Income tax (benefit) provision

 

 

(2,307)

 

 

234

 

 

(2,200)

 

 

(681)

 

Net income

 

$

4,003

 

$

1,428

 

$

6,529

 

$

552

 

Net income attributable to non-controlling interest

 

 

 —

 

 

 —

 

 

 —

 

 

32

 

Net income attributable to ISG

 

$

4,003

 

$

1,428

 

$

6,529

 

$

520

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

45,115

 

 

43,305

 

 

44,491

 

 

42,893

 

Diluted

 

 

47,100

 

 

44,658

 

 

46,349

 

 

43,344

 

Earnings per share attributable to ISG:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.09

 

$

0.03

 

$

0.15

 

$

0.01

 

Diluted

 

$

0.08

 

$

0.03

 

$

0.14

 

$

0.01

 

Comprehensive income:

 

 

   

 

 

 

 

 

 

 

 

 

 

Net income

 

$

4,003

 

$

1,428

 

$

6,529

 

$

552

 

Foreign currency translation, net of tax benefit (expense) of $110, $(232), $421 and $(1,161), respectively.

 

 

(786)

 

 

601

 

 

(1,790)

 

 

1,950

 

Comprehensive income

 

$

3,217

 

$

2,029

 

$

4,739

 

$

2,502

 

Comprehensive income attributable to non-controlling interest

 

 

 —

 

 

 —

 

 

 —

 

 

32

 

Comprehensive income attributable to ISG

 

$

3,217

 

$

2,029

 

$

4,739

 

$

2,470

 

 

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)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

    

2018

    

2017

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net income

 

$

6,529

 

$

552

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation expense

 

 

2,075

 

 

2,640

 

Amortization of intangible assets

 

 

3,797

 

 

7,133

 

Deferred tax (benefit) expense from stock issuances

 

 

(152)

 

 

315

 

Amortization of deferred financing costs

 

 

600

 

 

739

 

Loss on sublease

 

 

 —

 

 

578

 

Stock-based compensation

 

 

7,230

 

 

5,383

 

Changes in fair value of contingent consideration

 

 

362

 

 

145

 

Changes in accounts receivable allowance

 

 

501

 

 

398

 

Deferred tax provision (benefit)

 

 

(245)

 

 

(2,338)

 

Loss on disposal of fixed assets

 

 

32

 

 

23

 

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

Accounts receivable

 

 

(5,778)

 

 

(10,424)

 

Prepaid expense and other assets

 

 

(26)

 

 

1,628

 

Accounts payable

 

 

509

 

 

(1,458)

 

Deferred revenue

 

 

(1,865)

 

 

(980)

 

Debt issuance costs

 

 

 —

 

 

(38)

 

Accrued expenses

 

 

(2,415)

 

 

(1,023)

 

Net cash provided by operating activities

 

 

11,154

 

 

3,273

 

Cash flows from investing activities

 

 

 

 

 

 

 

Acquisitions, net of cash acquired

 

 

 —

 

 

(889)

 

Purchase of furniture, fixtures and equipment

 

 

(3,603)

 

 

(2,270)

 

Net cash used in investing activities

 

 

(3,603)

 

 

(3,159)

 

Cash flows from financing activities

 

 

 

 

 

 

 

Principal payments on borrowings

 

 

(8,574)

 

 

(7,151)

 

Payment of the Alsbridge Notes

 

 

(7,000)

 

 

 —

 

Proceeds from issuance of employee stock purchase plan shares

 

 

642

 

 

494

 

Installment payment for acquisitions

 

 

 —

 

 

(543)

 

Payment of contingent consideration

 

 

(1,200)

 

 

(2,665)

 

Payments related to tax withholding for stock-based compensation

 

 

(2,743)

 

 

(2,174)

 

Equity securities repurchased

 

 

(2,879)

 

 

(2,853)

 

Net cash used in financing activities

 

 

(21,754)

 

 

(14,892)

 

Effect of exchange rate changes on cash

 

 

(710)

 

 

2,115

 

Net decrease in cash, cash equivalents, and restricted cash

 

 

(14,913)

 

 

(12,663)

 

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

 

 

28,514

 

 

34,982

 

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

 

$

13,601

 

$

22,319

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

Issuance of treasury stock for vested restricted stock awards

 

$

5,151

 

$

6,437

 

 

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”, or “ISG”) 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”).  In December 2017, we consummated our transformational acquisition of Alsbridge Holdings, Inc. (“Alsbridge”), a U.S.-based sourcing, automation and transformation advisory firm.

 

NOTE 2—BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements as of September 30, 2018 and for the three and nine months ended September 30, 2018 and 2017, 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, 2018, the results of operations for the three and nine months ended September 30, 2018 and 2017 and the cash flows for the nine months ended September 30, 2018 and 2017.  The condensed consolidated balance sheet as of December 31, 2017 has been derived from the Company’s audited consolidated financial statements.  Operating results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.

 

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, 2017, which are included in the Company’s 2017 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.

 

5


 

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, 2018 and December 31, 2017 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, 2018

 

 

     

Level 1

     

Level 2

     

Level 3

     

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

315

 

$

 —

 

$

 —

 

$

315

 

Total

 

$

315

 

$

 —

 

$

 —

 

$

315

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration (1)

 

$

 —

 

$

 —

 

$

1,704

 

$

1,704

 

Total

 

$

 —

 

$

 —

 

$

1,704

 

$

1,704

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basis of Fair Value Measurements

 

 

 

December 31, 2017

 

 

     

Level 1

     

Level 2

     

Level 3

     

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

303

 

$

 —

 

$

 —

 

$

303

 

Total

 

$

303

 

$

 —

 

$

 —

 

$

303

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration (1)

 

$

 —

 

$

 —

 

$

3,698

 

$

3,698

 

Total

 

$

 —

 

$

 —

 

$

3,698

 

$

3,698

 

6


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 


(1)  The short-term portion is included in “Accrued expenses.”  The long-term portion is included in “Other 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, 2018 and 2017:

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

     

2018

     

2017

  

Beginning Balance

 

$

3,698

 

$

6,073

 

Payments of contingent consideration

 

 

(2,401)

 

 

(3,386)

 

Change in value of contingent consideration

 

 

362

 

 

145

 

Accretion of contingent consideration

 

 

44

 

 

1,030

 

Unrealized gain related to currency translation

 

 

 1

 

 

28

 

Ending Balance

 

$

1,704

 

$

3,890

 

 

The Company’s financial instruments include outstanding borrowings of $101.2 million at September 30, 2018 and $116.7 million at December 31, 2017, 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 $100.9 million and $116.5 million at September 30, 2018 and December 31, 2017, 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 5.01% to 5.15%. 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 February 2016, the Financial Accounting Standards Board (“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 has less than fifty leases for which a corresponding asset and liability will be recorded on the balance sheet as of January 1, 2019. The adoption of this guidance will not have a material impact on our results of operations and will have no impact on our cash flows.

 

In August 2016, the FASB issued new guidance intended to reduce diversity in practice in how certain cash receipts and payments are classified in the statement of cash flows, including debt prepayment or extinguishment costs, the settlement of contingent liabilities arising from a business combination, proceeds from insurance settlements, and distributions from certain equity method investees. The guidance became effective for interim and annual periods beginning after December 15, 2017, and we adopted the guidance as of January 1, 2018. The guidance requires application using a retrospective transition method. The adoption of this guidance by the Company did not have a material impact on our results of operations.

7


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

In August 2018, the 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.

 

 

NOTE 4—REVENUE

 

In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (“ASC Topic 606”), “Revenue from Contracts with Customers”.  ASC Topic 606 supersedes the revenue recognition requirements in ASC Topic 605, “Revenue Recognition” (“ASC Topic 605”), and requires the recognition of revenue upon transfer of control of promised services and products to clients in an amount that reflects the consideration we expect to receive in exchange for those services and products.  We adopted ASC Topic 606 as of January 1, 2018 using the cumulative catch-up transition method.  The most significant changes resulting from the adoption of ASC Topic 606, as previously disclosed in our 2017 Form 10-K, are as follows:

 

·

For software and implementation contracts, revenue recognition on the software component will be accelerated to the point at which the software is installed, while revenue on the implementation component will be recognized over the software implementation period as a percentage of hours incurred to date as compared to the total expected hours.

 

·

For network contingency contracts with termination for convenience clauses, revenue will be recognized over time due to the existence of provisions for payment for progress incurred to date plus a reasonable profit margin.

 

·

For managed service implementation contracts, revenue will be recognized over time as a percentage of hours incurred to date as compared to the total expected hours of the implementation.

 

We recognized the cumulative effect of applying the new revenue standard as an adjustment to the opening balance of retained earnings at the beginning of 2018.  The comparative information has not been adjusted for the effect of ASC Topic 606 and continues to be reported under the accounting standards in effect for the periods presented.  Upon the adoption of ASC Topic 606 on January 1, 2018, we recorded a net increase to opening retained earnings of $2.0 million.  The cumulative effect of the changes made to our Condensed Consolidated Balance Sheet as of January 1, 2018 for the adoption of ASC Topic 606 was as follows:

 

 

 

 

 

 

8


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of January 1, 2018

 

    

    

As Previously

    

 

    

 

 

 

 

Reported

 

 

 

 

As Adjusted

 

    

    

Under ASC 605

    

Adjustments

    

for ASC 606

Assets

 

 

 

 

 

 

 

 

 

 

Accounts receivables and contract assets, net of allowance of $503

 

 

$

70,824

 

$

1,468

 

$

72,292

Prepaid expenses and other current assets

 

 

$

4,467

 

$

(1,071)

 

$

3,396

Deferred tax assets

 

 

$

2,521

 

$

(549)

 

$

1,972

Liabilities

 

 

 

 

 

 

 

 

 

 

Contract liabilities

 

 

$

8,898

 

$

(2,418)

 

$

6,480

Accrued expenses

 

 

$

21,486

 

$

133

 

$

21,619

Deferred tax liabilities

 

 

$

1,569

 

$

95

 

$

1,664

Stockholders' equity

 

 

 

 

 

 

 

 

 

 

Accumulated deficit

 

 

$

(157,814)

 

$

2,038

 

$

(155,776)

 

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 in ASC Topic 606.  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, 2018, the Company had $89.4 million of remaining performance obligations, the majority of which are expected to be satisfied within the next year. 

 

As part of our adoption of ASC Topic 606, we used practical expedients permitted by the standard when applicable.  These practical expedients included:

 

·

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

 

·

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

 

·

presenting all revenue net of any related sales tax.

 

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

 

Estimates were required to determine the SSP for each distinct performance obligation identified within our managed service implementation contracts and software and implementation contracts.  Further details of our approach to determining the SSP for each contract type is described below.

 

·

For our software and implementation contracts, we had to determine the SSP for both the software license and implementation service performance obligations.  For the software license performance obligation, we utilized

9


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

the adjusted market assessment approach and determined that our listed price of the software licenses generally approximated the SSP.  For the implementation service performance obligation, we utilized the residual approach, which resulted in the difference between the total contract value and the software license price in the arrangement being allocated to the implementation service.

 

·

For our managed service implementation contracts, we had to determine the SSP for both the managed services and implementation performance obligations.  For each performance obligation, we estimated the SSP using the expected cost plus a reasonable profit margin approach, under which we forecasted our expected costs of satisfying a performance obligation and then added an appropriate margin for the distinct service.

 

Adjustments to Financial Statements from the Adoption of Accounting Pronouncements 

 

The following table presents the effect of the adoption of ASC Topic 606 on our condensed consolidated balance sheet as of September 30, 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

    

    

As Reported

    

 

    

 

 

    

    

Under ASC 606

    

Adjustments

    

ASC 605

Assets

 

 

 

 

 

 

 

 

 

 

Accounts receivable and contract assets, net of allowance of $770

 

 

$

76,403

 

$

(4,305)

 

$

72,098

Prepaid expenses and other current assets

 

 

$

4,277

 

$

2,285

 

$

6,562

Deferred tax assets

 

 

$

2,997

 

$

549

 

$

3,546

Liabilities

 

 

 

 

 

 

 

 

 

 

Contract liabilities

 

 

$

4,794

 

$

6,166

 

$

10,960

Accrued expenses

 

 

$

17,621

 

$

(150)

 

$

17,471

Deferred tax liabilities

 

 

$

1,891

 

$

(1,380)

 

$

511

Stockholders' equity

 

 

 

 

 

 

 

 

 

 

Accumulated deficit

 

 

$

(149,245)

 

$

(6,107)

 

$

(155,352)

 

The following table presents the effect of the adoption of ASC Topic 606 on our condensed consolidated statement of comprehensive income for the three months ended September 30, 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2018

 

    

    

As Reported

    

 

    

 

 

    

    

Under ASC 606

    

Adjustments

    

ASC 605

Revenues

 

 

$

67,965

 

$

(2,620)

 

$

65,345

Operating expenses

 

 

 

 

 

 

 

 

 

 

Direct costs and expenses for advisors

 

 

 

38,624

 

 

(211)

 

 

38,413

Selling, general and administrative

 

 

 

23,990

 

 

 —

 

 

23,990

Depreciation and amortization

 

 

 

1,977

 

 

 —

 

 

1,977

Operating income

 

 

 

3,374

 

 

(2,409)

 

 

965

Interest income

 

 

 

 3

 

 

 —

 

 

 3

Interest expense

 

 

 

(1,675)

 

 

 —

 

 

(1,675)

Foreign currency transaction loss

 

 

 

(6)

 

 

 —

 

 

(6)

Income (loss) before taxes

 

 

 

1,696

 

 

(2,409)

 

 

(713)

Income tax benefit

 

 

 

(2,307)

 

 

(578)

 

 

(2,885)

Net income

 

 

$

4,003

 

$

(1,831)

 

$

2,172

 

 

10


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

The following table presents the effect of the adoption of ASC Topic 606 on our condensed consolidated statement of comprehensive income for the nine months ended September 30, 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2018

 

    

    

As Reported

    

 

    

 

 

    

    

Under ASC 606

    

Adjustments

    

ASC 605

Revenues

 

 

$

207,868

 

$

(6,587)

 

$

201,281

Operating expenses

 

 

 

 

 

 

 

 

 

 

Direct costs and expenses for advisors

 

 

 

121,761

 

 

(1,230)

 

 

120,531

Selling, general and administrative

 

 

 

70,898

 

 

 —

 

 

70,898

Depreciation and amortization

 

 

 

5,872

 

 

 —

 

 

5,872

Operating income

 

 

 

9,337

 

 

(5,357)

 

 

3,980

Interest income

 

 

 

113

 

 

 —

 

 

113

Interest expense

 

 

 

(5,140)

 

 

 —

 

 

(5,140)

Foreign currency transaction gain

 

 

 

19

 

 

 —

 

 

19

Income (loss) before taxes

 

 

 

4,329

 

 

(5,357)

 

 

(1,028)

Income tax benefit

 

 

 

(2,200)

 

 

(1,286)

 

 

(3,486)

Net income

 

 

$

6,529

 

$

(4,071)

 

$

2,458

 

Contract Balances

 

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

 

 

 

 

 

 

 

 

 

 

    

    

 

 

January 1, 2018

 

    

    

September 30, 2018

 

(as adjusted)

Contract assets (i.e., unbilled receivables)

 

 

$

30,680

 

$

18,838

Contract liabilities (i.e., deferred revenue)

 

 

$

4,794

 

$

6,480

 

Revenue recognized for the three months ended September 30, 2018 that was included in the contract liability balance at July 1, 2018 was $4.2 million and represented primarily revenue from our software and implementation contracts and managed services contracts.

 

Revenue recognized for the nine months ended September 30, 2018 that was included in the contract liability balance at January 1, 2018 was $6.2 million and represented primarily revenue from our software and implementation contracts and managed services contracts.

 

 

 

 

 

 

11


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

Disaggregation of Revenue

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

Geographic area

    

    

September 30, 2018

    

September 30, 2018

Americas

 

 

$

38,502

 

$

121,009

Europe

 

 

 

24,033

 

 

69,834

Asia Pacific

 

 

 

5,430

 

 

17,025

 

 

 

$

67,965

 

$

207,868

 

 

 

 

 

 

 

 

 

 

 

NOTE 5—NET INCOME PER COMMON SHARE

 

Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that would share in the net income of the Company. For the three and nine months ended September 30, 2017, the effect of 34,374 stock appreciation rights (“SARs”) have not been considered in the diluted earnings per share, because the market price of the stock was less than the exercise price during the period in the computation, respectively. In addition, 2.5 million restricted shares have not been considered in the diluted earnings per share calculation for the nine months ended September 30, 2017, as the effect would be anti-dilutive.     

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

    

2018

    

2017

    

2018

    

2017

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to ISG

 

$

4,003

 

$

1,428

 

$

6,529

 

$

520

 

 

Weighted average common shares

 

 

45,115

 

 

43,305

 

 

44,491

 

 

42,893

 

 

Earnings per share attributable to ISG

 

$

0.09

 

$

0.03

 

$

0.15

 

$

0.01

 

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to ISG

 

$

4,003

 

$

1,428

 

$

6,529

 

$

520

 

 

Interest expense of convertible debt, net of tax

 

 

 —

 

 

 2

 

 

 —

 

 

 6

 

 

Net income attributable to ISG, as adjusted

 

$

4,003

 

$

1,430

 

$

6,529

 

$

526

 

 

Basic weighted average common shares

 

 

45,115

 

 

43,305

 

 

44,491

 

 

42,893

 

 

Potential common shares

 

 

1,985

 

 

1,353

 

 

1,858

 

 

451

 

 

Diluted weighted average common shares

 

 

47,100

 

 

44,658

 

 

46,349

 

 

43,344

 

 

Diluted earnings per share attributable to ISG

 

$

0.08

 

$

0.03

 

$

0.14

 

$

0.01

 

 

 

 

 

 

NOTE 6—INCOME TAXES

 

The Company’s effective tax rate for the three and nine months ended September 30, 2018 was (136.0)% and (50.8)% based on pretax income of $1.7 million and $4.3 million, respectively.   The Company’s effective tax rate for the quarter was less than the statutory rate primarily due to discrete tax benefits related to the release of a valuation allowance and the reversal of an uncertain tax position reserve.  The effective tax rate was 14.1% and 527.9% for the three and nine months

12


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

ended September 30, 2017.  The difference for the nine months ended September 30, 2018 was primarily due to the impact of current quarter earnings in jurisdictions where the Company is currently precluded from recording a tax provision,  the release of accruals for uncertain tax positions of $1.7 million due to the expiration of statute of limitations in a foreign and U.S. jurisdictions and $1.3 million due to Company establishing its position on foreign source income component of its U.S. foreign tax credit claims, as well as the release of $1.3 million of valuation allowance against U.S. foreign tax credit positions, during the nine months ended September 30, 2018. The difference for the three months ended September 30, 2018 was primarily due to the reversals of $2.3 million of accruals for these uncertain tax positions and the $1.3 million of valuation allowance release related to foreign tax credits.

 

As of September 30, 2018, the Company had total unrecognized tax benefits of approximately $1.4 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 September 30, 2018, the Company’s accrual of interest and penalties amounted to $0.7 million.  The Company recorded no material year-to-date change in the accrual of unrecognized tax benefits and associated interest and penalties.

 

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 September 30, 2018 and December 31, 2017.

 

Saugatuck Contingent Consideration

 

During the quarter ended September 30, 2018, the Company reversed the remaining $0.3 million contingent consideration liability related to the acquisition of Saugatuck as the related earn-out payment is no longer expected.  The Company paid $0.3 million in April 2018 related to 2017 performance, of which 50% was paid with shares of ISG common stock. 

 

Experton Contingent Consideration 

 

As of September 30, 2018, the Company has recorded a liability of $0.3 million representing the estimated fair value of contingent consideration related to the acquisition of Experton which is classified as current and included in accrued expenses on the consolidated balance sheet. The Company paid $0.5 million in April 2018 related to 2017 performance, of which 50% was paid with shares of ISG common stock.

 

TracePoint Contingent Consideration

 

As of September 30, 2018, the Company has recorded a liability of $1.4 million representing the estimated fair value of contingent consideration related to the acquisition of TracePoint which is classified as current and included in accrued expenses on the consolidated balance sheet. The Company paid $1.6 million in April 2018 related to 2017 performance, of which 50% was paid with shares of ISG common stock.

 

 

NOTE 8—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)