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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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
(Exact name of Registrant as specified in its charter)
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
(Address of principal executive offices and zip code)
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading symbol | Name of each exchange on which registered |
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.
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).
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 ◻ | 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).
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 July 29, 2022 | |
Common Stock, $0.001 par value | ||
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)
June 30, | December 31, | ||||||
| 2022 |
| 2021 |
| |||
ASSETS | |||||||
Current assets | |||||||
Cash and cash equivalents | $ | $ | | ||||
Accounts receivable and contract assets, net of allowance of $ |
|
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Prepaid expenses and other current assets |
|
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Total current assets |
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Restricted cash |
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Furniture, fixtures and equipment, net |
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Right-of-use lease assets |
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Goodwill |
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Intangible assets, net |
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Deferred tax assets |
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Other assets |
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Total assets | $ | | $ | | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
Current liabilities | |||||||
Accounts payable | $ | | $ | | |||
Current maturities of long-term debt |
| | | ||||
Contract liabilities |
| | | ||||
Accrued expenses and other current liabilities |
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Total current liabilities |
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Long-term debt, net of current maturities |
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Deferred tax liabilities |
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Operating lease liabilities |
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Other liabilities |
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Total liabilities |
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Commitments and contingencies (Note 8) | |||||||
Stockholders’ equity | |||||||
Preferred stock, $ |
| ||||||
Common stock, $ |
| | | ||||
Additional paid-in capital |
| | | ||||
Treasury stock ( |
| ( | ( | ||||
Accumulated other comprehensive loss |
| ( | ( | ||||
Accumulated deficit |
| ( | ( | ||||
Total stockholders’ equity |
| | | ||||
Total liabilities and stockholders’ equity | $ | | $ | | |||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
INFORMATION SERVICES GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
(In thousands, except per share data)
Three Months Ended | Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
| 2022 |
| 2021 | 2022 |
| 2021 | ||||||
Revenues | $ | | $ | | $ | | $ | | ||||
Operating expenses | ||||||||||||
Direct costs and expenses for advisors |
| |
| |
| |
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Selling, general and administrative |
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Depreciation and amortization |
| |
| |
| |
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Operating income |
| |
| |
| |
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Interest income |
| |
| |
| |
| | ||||
Interest expense |
| ( |
| ( |
| ( |
| ( | ||||
Foreign currency transaction gain (loss) |
| |
| |
| |
| ( | ||||
Income before taxes |
| |
| |
| |
| | ||||
Income tax provision |
| |
| |
| |
| | ||||
Net income | $ | | $ | | $ | | $ | | ||||
Weighted average shares outstanding: | ||||||||||||
Basic |
| |
| |
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| | ||||
Diluted |
| |
| |
| |
| | ||||
Earnings per share: | ||||||||||||
Basic | $ | | $ | | $ | | $ | | ||||
Diluted | $ | | $ | | $ | | $ | | ||||
Comprehensive income: |
|
| ||||||||||
Net income | $ | | $ | | $ | | $ | | ||||
Foreign currency translation, net of tax benefit (expense) of $ |
| ( |
| |
| ( |
| ( | ||||
Comprehensive income | $ | | $ | | $ | | $ | | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
INFORMATION SERVICES GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands)
Accumulated | ||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||
Common Stock | Paid-in- | Treasury | Comprehensive | Accumulated | Stockholders’ | |||||||||||||||
| Shares |
| Amount |
| Capital |
| Stock |
| Loss |
| Deficit |
| Equity | |||||||
Balance December 31, 2021 | | $ | | $ | | $ | ( | $ | ( | $ | ( | $ | | |||||||
Net Income | — | — | — | — | — | | | |||||||||||||
Other comprehensive loss | — | — | — | — | ( | — | ( | |||||||||||||
Treasury shares repurchased | — | — | — | ( | — | — | ( | |||||||||||||
Proceeds from issuance of ESPP shares | — | — | ( | | — | — | | |||||||||||||
Issuance of treasury shares for RSUs vested | — | — | ( | | — | — | — | |||||||||||||
Accrued dividends on unvested shares | — | — | ( | — | — | — | ( | |||||||||||||
Cash dividends paid to shareholders | — | — | ( | — | — | — | ( | |||||||||||||
Stock based compensation | — | — | | — | — | — | | |||||||||||||
Balance June 30, 2022 |
| | $ | | $ | | $ | ( | $ | ( | $ | ( | $ | | ||||||
Accumulated | ||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||
Common Stock | Paid-in- | Treasury | Comprehensive | Accumulated | Stockholders’ | |||||||||||||||
| Shares |
| Amount |
| Capital |
| Stock |
| Loss |
| Deficit |
| Equity | |||||||
Balance December 31, 2020 | | $ | | $ | | $ | ( | $ | ( | $ | ( | $ | | |||||||
Net Income | — | — | — | — | — | | | |||||||||||||
Other comprehensive loss | — | — | — | — | ( | — | ( | |||||||||||||
Treasury shares repurchased | — | — | — | ( | — | — | ( | |||||||||||||
Proceeds from issuance of ESPP shares | — | — | | | — | — | | |||||||||||||
Issuance of treasury shares for RSUs vested | — | — | ( | | — | — | — | |||||||||||||
Issuance of common stock for RSUs vested | | | ( | — | — | — | — | |||||||||||||
Accrued dividends on unvested shares | — | — | ( | — | — | — | ( | |||||||||||||
Cash dividends paid to shareholders | — | — | ( | — | — | — | ( | |||||||||||||
Stock based compensation | — | — | | — | — | — | | |||||||||||||
Balance June 30, 2021 |
| | $ | | $ | | $ | ( | $ | ( | $ | ( | $ | | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
INFORMATION SERVICES GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended | ||||||
June 30, | ||||||
| 2022 |
| 2021 | |||
Cash flows from operating activities | ||||||
Net income | $ | | $ | | ||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||
Depreciation expense |
| |
| | ||
Amortization of intangible assets |
| |
| | ||
Deferred tax benefit from stock issuances |
| ( |
| ( | ||
Amortization of deferred financing costs |
| |
| | ||
Stock-based compensation |
| |
| | ||
Change in fair value of contingent consideration | | | ||||
Provisions (benefits) for accounts receivable | | ( | ||||
Deferred tax provision |
| |
| | ||
Changes in operating assets and liabilities: | ||||||
Accounts receivable and contract assets |
| ( |
| ( | ||
Prepaid expense and other assets |
| |
| | ||
Accounts payable |
| ( |
| | ||
Contract liabilities |
| |
| | ||
Accrued expenses |
| ( |
| | ||
Net cash provided by operating activities |
| |
| | ||
Cash flows from investing activities | ||||||
Purchase of furniture, fixtures and equipment |
| ( |
| ( | ||
Net cash used in investing activities |
| ( |
| ( | ||
Cash flows from financing activities | ||||||
Principal payments on borrowings |
| ( |
| ( | ||
Proceeds from issuance of employee stock purchase plan shares |
| | | |||
Payments related to tax withholding for stock-based compensation |
| ( |
| ( | ||
Cash dividends paid to shareholders | ( | ( | ||||
Treasury shares repurchased |
| ( |
| ( | ||
Net cash used in financing activities |
| ( |
| ( | ||
Effect of exchange rate changes on cash |
| ( |
| ( | ||
Net (decrease) increase in cash, cash equivalents, and restricted cash |
| ( |
| | ||
Cash, cash equivalents, and restricted cash, beginning of period |
| |
| | ||
Cash, cash equivalents, and restricted cash, end of period | $ | | $ | | ||
Non-cash investing and financing activities: | ||||||
Issuance of treasury stock for vested restricted stock awards | $ | | $ | | ||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
INFORMATION SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands, except per share data)
(unaudited)
NOTE 1—DESCRIPTION OF ORGANIZATION AND BUSINESS OPERATIONS
Information Services Group, Inc. (the “Company”, or “ISG”) is a leading global technology research and advisory firm. A trusted business partner to over
NOTE 2—BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements as of June 30, 2022 and for the three and six months ended June 30, 2022 and 2021, 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, 2022 and the results of operations for the three and six months ended June 30, 2022 and 2021 and the cash flows for the six months ended June 30, 2022 and 2021. The condensed consolidated balance sheet as of December 31, 2021 has been derived from the Company’s audited consolidated financial statements. Operating results for the three and six months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.
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, 2021, which are included in the Company’s 2021 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. The complexity of the estimation process and issues related to the assumptions, risks and uncertainties inherent in the application of the revenue recognition guidance for contracts in which control is transferred to the customer over time affect the amounts of revenues, expenses, contract assets and contract liabilities. 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 evaluating goodwill 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 and are not available for general corporate purposes.
6
INFORMATION SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)
(tabular amounts in thousands, except per share data)
(unaudited)
Fair Value
The carrying value of the Company’s cash and cash equivalents, receivables, accounts payable, other current liabilities, and accrued interest approximated their fair values at June 30, 2022 and December 31, 2021 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 primarily consist of measurements 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 the assets measured at fair value on a recurring basis at the dates indicated:
Basis of Fair Value Measurements | |||||||||||||
June 30, 2022 | |||||||||||||
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| |||||
Assets: | |||||||||||||
Cash equivalents |
| $ | |
| $ | — |
| $ | — |
| $ | | |
Total |
| $ | |
| $ | — |
| $ | — |
| $ | | |
Basis of Fair Value Measurements | |||||||||||||
December 31, 2021 | |||||||||||||
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| |||||
Assets: | |||||||||||||
Cash equivalents |
| $ | |
| $ | — |
| $ | — |
| $ | | |
Total |
| $ | |
| $ | — |
| $ | — |
| $ | | |
Liabilities: | |||||||||||||
Contingent consideration (1) |
| $ | — |
| $ | — |
| $ | |
| $ | | |
Total |
| $ | — |
| $ | — |
| $ | |
| $ | | |
(1) Contingent consideration is included in “Accrued expenses and other current liabilities” as of December 31, 2021.
7
INFORMATION SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)
(tabular amounts in thousands, except per share data)
(unaudited)
Due to a restructuring of the earn-out provision associated with the 2020 acquisition of Neuralify, the $
The following table represents the change in the contingent consideration liability during the six months ended June 30, 2022:
| Six Months Ended | ||
| June 30, | ||
| 2022 | ||
Beginning Balance | $ | | |
Neuralify earnout adjustment(1) |
| ( | |
Ending Balance | $ | | |
(1) Neuralify earnout adjustment relates to a change in the expected achievement of a certain milestone specific to the acquisition.
The Company’s financial instruments include outstanding borrowings of $
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued new guidance on the measurement of credit losses for financial assets measured at amortized cost, which includes accounts receivable, and available-for-sale debt securities. The new guidance replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses and additional disclosures. As a smaller reporting company, this guidance is effective for fiscal years beginning after December 15, 2022, which is not expected to have a material impact on the Company’s consolidated financial statements.
NOTE 4—ACQUISITIONS
Neuralify Acquisition
On July 8, 2020, a subsidiary of the Company executed an Asset Purchase Agreement with Neuralify, LLC (“the Agreement”), a firm focused on intelligent automation enablement solutions and services, and consummated the acquisition of substantially all of the assets and assumed certain liabilities of Neuralify, LLC. The primary reason for the acquisition was to expand the capabilities of ISG’s pure-play automation service line, ISG Automation. The purchase price was comprised of $
The following table summarizes the consideration transferred to acquire Neuralify, LLC and the amounts of identified assets acquired, and liabilities assumed as of the Agreement date:
8
INFORMATION SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)
(tabular amounts in thousands, except per share data)
(unaudited)
Cash |
| $ | |
Contingent consideration |
| | |
Total allocable purchase price | $ | |
The primary factors that drove the goodwill recognized, the majority of which is deductible for tax purposes, are the inclusion of legacy Neuralify workforce and know-how which expands the Company’s pure-play automation service line, ISG Automation.
Costs associated with this acquisition are included in the selling, general and administrative expenses in the Consolidated Statement of Income and Comprehensive Income and totaled $
Accounts receivable | $ | | |
Contract assets |
| | |
Intangible assets |
| | |
Accounts payable |
| ( | |
Contract liabilities |
| ( | |
Net assets acquired | $ | | |
Goodwill | $ | |
The Consolidated Statement of Income and Comprehensive Income includes the results of the Neuralify acquisition subsequent to the closing. Had the acquisition occurred as of January 1, 2020, the impact on the Company’s results of operations would not have been material.
As of June 30, 2022, the Company has recorded a liability of $
Agreemint Acquisition
On March 28, 2022, ISG executed an asset purchase agreement for the purchase of substantially all of the assets of Agreemint, which is an automated, platform-based contracting solution that will enhance the value of ISG GovernX and our other platform solutions now in development. We determined the transaction to be an asset acquisition as substantially all the fair value of the gross assets acquired is concentrated in a single identifiable asset: the software and related intellectual property rights. The cash paid for the acquisition as of the balance sheet date is reflected in Cash flows from investing activities of the Statement of Cash Flows. The related software acquired, which is capitalized within “Furniture, fixtures and equipment, net”, will be depreciated over
NOTE 5—REVENUE
The majority of our revenue is derived from contracts that can span from a few months to several years. We enter into contracts that can include various combinations of services, 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
9
INFORMATION SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)
(tabular amounts in thousands, except per share data)
(unaudited)
performance obligation is a promise in a contract to transfer a distinct good or service to the client and is the unit of account. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of our contracts have a single performance obligation as the promise to transfer the individual services is not separately identifiable from other promises in the contracts and, therefore, not distinct. For contracts with multiple performance obligations, including our managed service (GovernX) implementation, software and implementation, and research and subscription contracts, 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.
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.
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 before revenue is recognized, resulting in contract liabilities. Contract assets and liabilities are generally reported in the current assets and current liabilities sections of the consolidated balance sheet, at the end of each reporting period, based on the timing of the satisfaction of the related performance obligation(s). For multi-year software sales with annual invoicing, we perform a significant financing component calculation and recognize the associated interest income throughout the duration of the financing period. In addition, we reclassify the resulting contract asset balances as current and noncurrent receivables as receipt of the consideration is conditional only on the passage of time and there are no performance risk factors present. See the table below for a breakdown of contract assets and contract liabilities.
| June 30, |
| December 31, | |||
| 2022 |
| 2021 | |||
Contract assets | $ | | $ | | ||
Contract liabilities | $ | | $ | | ||
Revenue recognized for the three and six months ended June 30, 2022 that was included in the contract liability balance at January 1, 2022 was $
Remaining Performance Obligations
As of June 30, 2022, the Company had $
NOTE 6—NET INCOME PER COMMON SHARE
Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that would share in the net income of the Company. For both the three and six
10
INFORMATION SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)
(tabular amounts in thousands, except per share data)
(unaudited)
months ended June 30, 2022,
The following tables set forth the computation of basic and diluted earnings per share:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Basic: | ||||||||||||
Net income | $ | | $ | | $ | | $ | | ||||
Weighted average common shares |
| |
| |
| |
| | ||||
Earnings per share | $ | | $ | | $ | | $ | | ||||
Diluted: | ||||||||||||
Net income | $ | | $ | | $ | | $ | | ||||
Basic weighted average common shares |
| |
| |
| |
| | ||||
Potential common shares |
| |
| |
| |
| | ||||
Diluted weighted average common shares |
| |
| |
| |
| | ||||
Diluted earnings per share | $ | | $ | | $ | | $ | | ||||
NOTE 7—INCOME TAXES
The Company’s effective tax rate for the three and six months ended June 30, 2022 was
NOTE 8—COMMITMENTS AND CONTINGENCIES
The Company is subject to contingencies which arise through the ordinary course of business. All material liabilities of which management is aware are properly reflected in the financial statements at June 30, 2022 and December 31, 2021.
NOTE 9—SEGMENT AND GEOGRAPHICAL INFORMATION
The Company operates as
11
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 | |||||||||||
June 30, | June 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Revenues | ||||||||||||
Americas | $ | | $ | | $ | | $ | | ||||
Europe |
| |
| |
| |
| | ||||
Asia Pacific |
| |
| |
| |
| | ||||
$ | | $ | | $ | | $ | | |||||
The segregation of revenues by geographic region is based upon the location of the legal entity performing the services. The Company does not measure or monitor gross profit or operating income by geography or by service line for the purposes of making operating decisions or allocating resources.
NOTE 10—FINANCING ARRANGEMENTS AND LONG-TERM DEBT
On March 10, 2020, the Company amended and restated its senior secured credit facility to include a $
| ● | Each of the term loan facility and revolving credit facility has a maturity date of March 10, 2025 (the “Maturity Date”). |
| ● | The credit facility is secured by all of the equity interests owned by the Company, and its direct and indirect domestic subsidiaries and, subject to agreed exceptions, the Company’s direct and indirect “first-tier” foreign subsidiaries and a perfected first priority security interest in all of the Company’s and its direct and indirect domestic subsidiaries’ tangible and intangible assets. |
| ● | The Company’s direct and indirect existing and future wholly owned domestic subsidiaries serve as guarantors to the Company’s obligations under the senior secured facility. |
| ● | At the Company’s option, the credit facility bears interest at a rate per annum equal to either (i) the “Base Rate” (which is the highest of (a) the rate publicly announced from time to time by the administrative agent as its “prime rate”, (b) the Federal Funds Rate plus |
| ● | The term loan is repayable in |
| ● | Mandatory repayments of term loans shall be required from (subject to agreed exceptions) (i) |
| ● | The senior secured credit facility contains a number of covenants that, among other things, place restrictions on matters customarily restricted in senior secured credit facilities, including restrictions on indebtedness (including guarantee obligations), liens, fundamental changes, sales or disposition of property or assets, investments (including loans, advances, guarantees and acquisitions), transactions with affiliates, dividends and other payments in respect of capital stock, optional payments and modifications of other material debt |
12
INFORMATION SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)
(tabular amounts in thousands, except per share data)
(unaudited)
| instruments, negative pledges and agreements restricting subsidiary distributions and changes in line of business. In addition, the Company is required to comply with a total leverage ratio and fixed charge coverage ratio. |
| ● | The senior secured credit facility contains customary events of default, including cross-default to other material agreements, judgment default and change of control. |
The Company’s financial statements include outstanding borrowings of $
The Company is currently in compliance with its financial covenants.
13
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 2022 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, current competitive conditions and the impact of COVID-19. 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 2021 Annual Report on Form 10-K titled “Risk Factors” and in this Quarterly Report on Form 10-Q under Item 1A of Part II, “Risk Factors.”
BUSINESS OVERVIEW
ISG (Information Services Group) (Nasdaq: III) is a leading global technology research and advisory firm. A trusted business partner to over 800 clients, including more than 75 of the top 100 enterprises in our markets, ISG is committed to helping corporations, public sector organizations, and service and technology providers achieve operational excellence and faster growth. The firm specializes in digital transformation services, including automation, cloud and data analytics; sourcing advisory; managed governance and risk services; network carrier services; technology strategy and operations design; change management; market intelligence and technology research and analysis. Founded in 2006, and based in Stamford, Conn., ISG employs more than 1,300 digital-ready professionals operating in more than 20 countries—a global team known for its innovative thinking, market influence, deep industry and technology expertise, and world-class research and analytical capabilities based on the industry’s most comprehensive marketplace data. For more information, visit www.isg-one.com.
Our strategy is to strengthen our existing market position and develop new services and products to support future growth plans. As a result, we are focused on growing our existing service model, expanding geographically, developing new industry sectors, productizing market data assets, expanding our managed services offerings and growing via acquisitions. Although we do not expect any adverse conditions that will impact our ability to execute against our strategy over the next twelve months, the more significant factors that could limit our ability to grow in these areas include global macro-economic conditions and the impact on the overall sourcing market, competition, our ability to retain advisors and reductions in discretionary spending with our top client accounts or other significant client events. Other areas that could impact the business would also include natural disasters, pandemics, such as COVID-19, legislative and regulatory changes and capital market disruptions.
We principally derive revenues from fees for services generated on a project by project basis. Prior to the commencement of a project, we reach agreement with the client on rates for services based upon the scope of the project, staffing requirements and the level of client involvement. Revenues for services rendered are recognized on a time and materials basis or on a fixed fee or capped fee basis in accordance with accounting and disclosure requirements for revenue recognition.
Revenues for time and materials contracts are recognized based on the number of hours worked by our advisors at an agreed upon rate per hour and are recognized in the period in which services are performed. Revenues for time and materials contracts are billed monthly, semimonthly or in accordance with the specific contractual terms of each project.
We also derive our revenues from certain recurring revenue streams. These include such annuity-based ISG offerings as ISG GovernX, Research, Software as a Subscription (Automation licenses), ISG Inform and the multi-year Public Sector contracts. These offerings are characterized by subscriptions (i.e., renewal centric as opposed to project centric revenue streams) or, in some instances, multi-year contracts. Our digital services now span a volume of offerings and have become
14
embedded as part of even our traditional transaction services. Digital enablement provides capabilities, digital insights and better engagement with clients and partners.
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 workdays is also affected by the number of vacation days taken by our consultants and holidays in each quarter. We typically have fewer business workdays available in the fourth quarter of the year, which can impact revenues during that period. Time-and-expense engagements do not provide us with a high degree of predictability as to performance in future periods. Unexpected changes in the demand for our services can result in significant variations in utilization and revenues and present a challenge to optimal hiring and staffing. The volume of work performed for any particular client can vary widely from period to period.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2022 AND JUNE 30, 2021
Revenues
Geographical revenue information for the segment is as follows:
Three Months Ended June 30, |
| |||||||||||||
Percent |
| |||||||||||||
Geographic Area |
| 2022 |
| 2021 |
| Change |
| Change |
|
| ||||
(in thousands) |
| |||||||||||||
Americas |
| $ | 39,448 |
| $ | 40,339 |
| $ | (891) |
| (2) | % | ||
Europe |
| 23,255 |
| 23,715 |
| (460) |
| (2) | % | |||||
Asia Pacific |
| 7,998 |
| 6,543 |
| 1,455 |
| 22 | % | |||||
Total revenues | $ | 70,701 | $ | 70,597 | $ | 104 |
| 0 | % | |||||
Revenues increased $0.1 million for the second quarter of 2022. The decrease in revenue in the Americas was primarily attributable to a decrease in our Automation service line, partially offset by an increase in our Advisory, Research, and GovernX service lines. The decrease in revenue in Europe was primarily attributable to a decrease in our Advisory and Network Software Advisory Services (NaSa) service lines, partially offset by an increase in our Automation and Research service lines. The increase in revenue in Asia Pacific was primarily attributable to an increase in our Advisory and NaSa service lines, partially offset by a decrease in our Research service line. The translation of foreign currency revenues into U.S. dollars negatively impacted performance in Europe and Asia Pacific compared to the prior year by $3.5 million.
Operating Expenses
The following table presents a breakdown of our operating expenses by category:
Three Months Ended June 30, |
| |||||||||||||
Percent |
| |||||||||||||
Operating Expenses |
| 2022 |
| 2021 |
| Change |
| Change |
|
| ||||
(in thousands) |
| |||||||||||||
Direct costs and expenses for advisors |
| $ | 41,370 |
| $ | 43,007 |
| $ | (1,637) |
| (4) | % | ||
Selling, general and administrative |
| 20,885 |
| 20,492 |
| 393 |
| 2 | % | |||||
Depreciation and amortization |
| 1,298 |
| 1,255 |
| 43 |
| 3 | % | |||||
Total operating expenses | $ | 63,553 | $ | 64,754 | $ | (1,201) |
| (2) | % | |||||
Total operating expenses decreased $1.2 million, or approximately 2%, for the second quarter of 2022. The decrease in operating expenses were primarily due to lower; contract labor of $1.7 million, compensation costs of $1.0 million, and severance, integration and other expense of $0.8 million. These costs were partially offset by higher: travel and
15
entertainment expense of $1.0 million, event related expenses of $0.5 million, non-cash stock compensation of $0.5 million, and professional fees of $0.3 million.
Compensation costs consist of a mix of fixed and variable salaries, annual bonuses, benefits and profit sharing plan contributions. A portion of compensation expenses for certain billable employees are allocated between direct costs and selling, general and administrative costs based on relative time spent between billable and non-billable activities. Bonus compensation is determined based on achievement against Company financial and individual targets and is accrued monthly throughout the year based on management’s estimates of target achievement. Statutory and elective profit sharing plans are offered to employees as appropriate. Direct costs also include employee taxes, health insurance, workers compensation and disability insurance.
Sales and marketing costs consist principally of compensation expense related to business development, proposal preparation and delivery and negotiation of new client contracts. Costs also include travel expenses relating to the pursuit of sales opportunities, expenses for hosting periodic client conferences, public relations activities, participation in industry conferences, industry relations, website maintenance and business intelligence activities. The Company maintains a dedicated global marketing function responsible for developing and managing sales campaigns, brand promotion, the ISG Index and assembling proposals.
We maintain a comprehensive program for training and professional development. Related expenses include product training, updates on new service offerings or methodologies and development of project management skills. Also included in training and professional development are expenses associated with the development, enhancement and maintenance of our proprietary methodologies and tools and the systems that support them.
General and administrative expenses consist principally of executive management compensation, allocations of billable employee compensation related to general management activities, IT infrastructure, and costs for the finance, accounting, information technology and human resource functions. General and administrative costs also reflect continued investment associated with implementing and operating client and employee management systems. Because our billable personnel operate primarily on client premises or work remotely, all occupancy expenses are recorded as general and administrative.
Depreciation and amortization expense in the second quarter of 2022 and 2021 was $1.3 million, respectively. Our fixed assets consist of furniture, fixtures, equipment (mainly personal computers) and leasehold improvements. Depreciation expense is generally computed by applying the straight-line method over the estimated useful lives of assets. We also capitalize certain costs associated with the purchase and development of internal-use software, system conversions and website development costs. These costs are amortized over the estimated useful life of the software or system.
We amortize our intangible assets (e.g. client relationships and databases) over their estimated useful lives. Goodwill related to acquisitions is not amortized but is subject to annual impairment testing and interim impairment tests, if triggering events are identified.
Other Income (Expense), Net
The following table presents a breakdown of other income (expense), net:
Three Months Ended June 30, |
| ||||||||||||
Percent |
| ||||||||||||
Other income (expense), net |
| 2022 |
| 2021 |
| Change |
| Change |
| ||||
(in thousands) |
| ||||||||||||
Interest income |
| $ | 44 |
| $ | 60 |
| $ | (16) |
| (27) | % | |
Interest expense |
| (610) |
| (613) |
| 3 |
| 0 | % | ||||
Foreign currency transaction gain |
| 94 |
| 8 |
| 86 |
| 1,075 | % | ||||
Total other income (expense), net | $ | (472) | $ | (545) | $ | 73 |
| 13 | % | ||||
The total decrease of $0.1 million, or approximately 13%, was primarily the result of higher foreign currency transaction gains.
16
Income Tax Expense
Our quarterly effective tax rate varies from period to period based on the mix of earnings among the various state and foreign tax jurisdictions in which business is conducted and the level of non-deductible expenses projected to be incurred during the current fiscal year. Our effective tax rate for the quarter ended June 30, 2022 was 25.7% compared to 22.5% for the quarter ended June 30, 2021. The difference for the quarter ended June 30, 2022 was primarily due to the impact of earnings and losses in certain foreign jurisdictions and the impact of vesting of restricted stock units. The Company’s effective tax rate for the quarter ended June 30, 2022 was higher than the statutory rate primarily due to the impact of foreign operations. There were no significant changes in uncertain tax position reserves or valuation allowances during the quarter ended June 30, 2022.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2022 AND JUNE 30, 2021
Revenues
Geographical revenue information for the segment is as follows:
Six Months Ended June 30, |
| |||||||||||
Percent |
| |||||||||||
Geographic Area |
| 2022 |
| 2021 |
| Change |
| Change |
| |||
(in thousands) |
| |||||||||||
Americas |
| $ | 80,885 |
| $ | 78,429 |
| $ | 2,456 |
| 3 | % |
Europe |
| 46,718 |
| 46,457 |
| 261 |
| 1 | % | |||
Asia Pacific |
| 15,661 |
| 12,282 |
| 3,379 |
| 28 | % | |||
Total revenues | $ | 143,264 | $ | 137,168 | $ | 6,096 |
| 4 | % | |||
Revenues increased $6.1 million, or approximately 4%, for the six months of 2022. The increase in revenue in the Americas was primarily attributable to an increase in our Research, and GovernX service lines, partially offset by a decrease in our Automation service line. The increase in revenue in Europe was primarily attributable to an increase in our Automation, Research, and GovernX service lines, partially offset by a decrease in our NaSa and Advisory service lines. The increase in revenue in Asia Pacific was primarily attributable to an increase in our Advisory and NaSa service lines. The translation of foreign currency revenues into U.S. dollars negatively impacted performance in Europe and Asia Pacific compared to the prior year by $5.5 million.
Operating Expenses
The following table presents a breakdown of our operating expenses by category:
Six Months Ended June 30, |
| |||||||||||
Percent |
| |||||||||||
Operating Expenses |
| 2022 |
| 2021 |
| Change |
| Change |
| |||
(in thousands) |
| |||||||||||
Direct costs and expenses for advisors |
| $ | 85,325 |
| $ | 84,163 |
| $ | 1,162 |
| 1 | % |
Selling, general and administrative |
| 40,472 |
| 39,532 |
| 940 |
| 2 | % | |||
Depreciation and amortization |
| 2,587 |
| 2,615 |
| (28) |
| (1) | % | |||
Total operating expenses | $ | 128,384 | $ | 126,310 | $ | 2,074 |
| 2 | % | |||
Total operating expenses increased $2.1 million, or approximately 2%, for the six months of 2022. The increase in operating expenses were primarily due to higher: compensation costs of $2.4 million, travel and entertainment expense of $1.8 million, event related expenses of $0.9 million, and bad debt expense of $0.5 million. These costs were partially offset by lower; contract labor of $1.9 million, severance, integration and other expense of $0.9 million, and occupancy expense of $0.3 million.
17
Compensation costs consist of a mix of fixed and variable salaries, annual bonuses, benefits and profit sharing plan contributions. A portion of compensation expenses for certain billable employees are allocated between direct costs and selling, general and administrative costs based on relative time spent between billable and non-billable activities. Bonus compensation is determined based on achievement against Company financial and individual targets and is accrued monthly throughout the year based on management’s estimates of target achievement. Statutory and elective profit sharing plans are offered to employees as appropriate. Direct costs also include employee taxes, health insurance, workers compensation and disability insurance.
Sales and marketing costs consist principally of compensation expense related to business development, proposal preparation and delivery and negotiation of new client contracts. Costs also include travel expenses relating to the pursuit of sales opportunities, expenses for hosting periodic client conferences, public relations activities, participation in industry conferences, industry relations, website maintenance and business intelligence activities. The Company maintains a dedicated global marketing function responsible for developing and managing sales campaigns, brand promotion, the ISG Index and assembling proposals.
We maintain a comprehensive program for training and professional development. Related expenses include product training, updates on new service offerings or methodologies and development of project management skills. Also included in training and professional development are expenses associated with the development, enhancement and maintenance of our proprietary methodologies and tools and the systems that support them.
General and administrative expenses consist principally of executive management compensation, allocations of billable employee compensation related to general management activities, IT infrastructure, and costs for the finance, accounting, information technology and human resource functions. General and administrative costs also reflect continued investment associated with implementing and operating client and employee management systems. Because our billable personnel operate primarily on client premises or work remotely, all occupancy expenses are recorded as general and administrative.
Depreciation and amortization expense in the six months of 2022 and 2021 was $2.6 million, respectively. Our fixed assets consist of furniture, fixtures, equipment (mainly personal computers) and leasehold improvements. Depreciation expense is generally computed by applying the straight-line method over the estimated useful lives of assets. We also capitalize certain costs associated with the purchase and development of internal-use software, system conversions and website development costs. These costs are amortized over the estimated useful life of the software or system.
We amortize our intangible assets (e.g. client relationships and databases) over their estimated useful lives. Goodwill related to acquisitions is not amortized but is subject to annual impairment testing and interim impairment tests, if triggering events are identified.
Other Income (Expense), Net
The following table presents a breakdown of other income (expense), net:
Six Months Ended June 30, |
| |||||||||||
Percent |
| |||||||||||
Other income (expense), net |
| 2022 |
| 2021 |
| Change |
| Change |
| |||
(in thousands) |
| |||||||||||
Interest income |
| $ | 89 |
| $ | 131 |
| $ | (42) |
| (32) | % |
Interest expense |
| (1,173) |
| (1,256) |
| 83 |
| 7 | % | |||
Foreign currency transaction gain (loss) |
| 118 |
| (3) |
| 121 |
| 4,033 | % | |||
Total other income (expense), net | $ | (966) | $ | (1,128) | $ | 162 |
| 14 | % | |||
The total decrease of $0.2 million, or approximately 14%, was primarily the result of higher foreign currency transaction gains.
18
Income Tax Expense
Our quarterly effective tax rate varies from period to period based on the mix of earnings among the various state and foreign tax jurisdictions in which business is conducted and the level of non-deductible expenses projected to be incurred during the current fiscal year. Our effective tax rate for the six months ended June 30, 2022 was 28.9% compared to 22.6% for the six months ended June 30, 2021. The difference for the six months ended June 30, 2022 was primarily due to the impact of earnings and losses in certain foreign jurisdictions and the impact of vesting of restricted stock units. The Company’s effective tax rate for the six months ended June 30, 2022 was higher than the statutory rate primarily due to the impact of foreign operations. There were no significant changes in uncertain tax position reserves or valuation allowances during the quarter ended June 30, 2022.
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.
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, plus interest, taxes, depreciation and amortization, foreign currency transaction gains/losses, non-cash stock compensation, interest accretion associated with contingent consideration, acquisition-related costs, and severance, integration and other expense), adjusted net income (defined as net income, plus amortization of intangible assets, non-cash stock compensation, foreign currency transaction gains/losses, interest accretion associated with contingent consideration, acquisition-related costs, and severance, integration and other expense on a tax-adjusted basis) and adjusted net income per diluted share, excluding the net of tax effect of the items set forth in the table below. These 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 that 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, | Six Months Ended June 30, | ||||||||||||
| 2022 |
| 2021 |
|
| 2022 |
| 2021 | |||||
(in thousands) | |||||||||||||
Net income |
| $ | 4,957 |
| $ | 4,106 |
| $ | 9,887 |
| $ | 7,530 | |
Interest expense (net of interest income) |
| 566 |
| 553 |
| 1,084 |
| 1,125 | |||||
Income taxes |
| 1,719 |
| 1,192 |
| 4,027 |
| 2,200 | |||||
Depreciation and amortization |
| 1,298 |
| 1,255 |
| 2,587 |
| 2,615 | |||||
Interest accretion associated with contingent consideration |
| 8 |
| 34 |
| 8 |
| 66 | |||||
Acquisition-related costs (1) |
| 6 |
| 13 |
| 16 |
| (32) | |||||
Severance, integration and other expense |
| 340 |
| 1,165 |
| 450 |
| 1,300 | |||||
Foreign currency transaction (gain) loss |
| (94) |
| (8) |
| (118) |
| 3 | |||||
Non-cash stock compensation |
| 1,942 |
| 1,428 |
| 3,445 |
| 3,576 | |||||
Adjusted EBITDA | $ | 10,742 | $ | 9,738 | $ | 21,386 | $ | 18,383 | |||||
19
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
2022 |
| 2021 |
|
| 2022 |
| 2021 | |||||||
(in thousands) | ||||||||||||||
Net income |
| $ | 4,957 |
| $ | 4,106 |
| $ | 9,887 |
| $ | 7,530 |
| |
Non-cash stock compensation |
| 1,942 |
| 1,428 |
| 3,445 |
| 3,576 | ||||||
Intangible amortization |
| 527 |
| 644 |
| 1,055 |
| 1,358 | ||||||
Interest accretion associated with contingent consideration |
| 8 |
| 34 |
| 8 |
| 66 | ||||||
Acquisition-related costs (1) |
| 6 |
| 13 |
| 16 |
| (32) | ||||||
Severance, integration and other expense |
| 340 |
| 1,165 |
| 450 |
| 1,300 | ||||||
Foreign currency transaction (gain) loss |
| (94) |
| (8) |
| (118) |
| 3 | ||||||
Tax effect (2) |
| (873) |
| (1,048) |
| (1,554) |
| (2,007) | ||||||
Adjusted net income | $ | 6,813 | $ | 6,334 | $ | 13,189 | $ | 11,794 | ||||||
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||
2022 |
| 2021 |
|
| 2022 |
| 2021 | ||||||
Net income per diluted share |
| $ | 0.10 |
| $ | 0.08 |
| $ | 0.19 |
| $ | 0.15 | |
Non-cash stock compensation |
| 0.04 |
| 0.03 |
| 0.07 |
| 0.07 | |||||
Intangible amortization |
| 0.01 |
| 0.01 |
| 0.02 |
| 0.03 | |||||
Interest accretion associated with contingent consideration |
| 0.00 |
| 0.00 |
| 0.00 |
| 0.00 | |||||
Acquisition-related costs (1) |
| 0.00 |
| 0.00 |
| 0.00 |
| 0.00 | |||||
Severance, integration and other expense |
| 0.00 |
| 0.02 |
| 0.01 |
| 0.02 | |||||
Foreign currency transaction (gain) loss |
| (0.00) |
| (0.00) |
| (0.00) |
| 0.00 | |||||
Tax effect (2) |
| (0.02) |
| (0.02) |
| (0.03) |
| (0.04) | |||||
Adjusted net income per diluted share | $ | 0.13 | $ | 0.12 | $ | 0.26 | $ | 0.23 | |||||
_________________________________
| (1) | Consists of expenses from acquisition-related costs and non-cash fair value adjustments on pre-acquisition contract liabilities. |
| (2) | Marginal tax rate of 32%, reflecting U.S. federal income tax rate of 21% plus 11% attributable to U.S. states and foreign jurisdictions. |
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Our primary sources of liquidity are cash flows from operations, existing cash and cash equivalents and our revolving credit facility. Operating assets and liabilities consist primarily of receivables from billed and unbilled services, accounts payable, accrued expenses, and accrued payroll and related benefits. The volume of billings and timing of collections and payments affect these account balances.
As of June 30, 2022, our cash, cash equivalents and restricted cash were $31.6 million, a net decrease of $16.1 million from December 31, 2021, which was primarily attributable to the following:
| ● | net cash provided by operating activities of $4.9 million; |
| ● | treasury shares repurchased of $9.6 million; |
| ● | cash dividends paid to shareholders of $3.4 million; |
| ● | negative effects of exchange rate changes of $2.8 million; |
| ● | principal payments on borrowings of $2.2 million; |
20
| ● | purchase of furniture, fixtures and equipment of $2.1 million; and |
| ● | payments related to tax withholding for stock-based compensation of $1.4 million. |
Capital Resources
On March 10, 2020, the Company amended and restated its senior secured credit facility to include a $86.0 million term facility and to increase the revolving commitments per the revolving facility (as amended by that certain First Amendment to Credit Agreement, dated as of June 1, 2022, the “2020 Credit Agreement”) from $30.0 million to $54.0 million. The material terms under the 2020 Credit Agreement are as follows:
| ● | Each of the term loan facility and revolving credit facility has a maturity date of March 10, 2025 (the “Maturity Date”). |
| ● | The credit facility is secured by all of the equity interests owned by the Company, and its direct and indirect domestic subsidiaries and, subject to agreed exceptions, the Company’s direct and indirect “first-tier” foreign subsidiaries and a perfected first priority security interest in all of the Company’s and its direct and indirect domestic subsidiaries’ tangible and intangible assets. |
| ● | The Company’s direct and indirect existing and future wholly owned domestic subsidiaries serve as guarantors to the Company’s obligations under the senior secured facility. |
| ● | At the Company’s option, the credit facility bears interest at a rate per annum equal to either (i) the “Base Rate” (which is the highest of (a) the rate publicly announced from time to time by the administrative agent as its “prime rate”, (b) the Federal Funds Rate plus 0.5% per annum and (c) the Eurodollar Rate, plus 1.0%), plus the applicable margin (as defined below) or (ii) Eurodollar Rate (adjusted for maximum reserves) as determined by the Administrative Agent, plus the applicable margin. The applicable margin is adjusted quarterly based upon the Company’s quarterly leverage ratio. |
| ● | The term loan is repayable in nineteen consecutive quarterly installments of $1,075,000 each that commenced on June 30, 2020 and a final payment of the outstanding principal amount of the term loan on the Maturity Date. |
| ● | Mandatory repayments of term loans shall be required from (subject to agreed exceptions) (i) 100% of the net proceeds from issuances of debt and equity by the Company and its subsidiaries and (ii) 100% of the net proceeds from insurance recovery and condemnation events of the Company and its subsidiaries. |
| ● | The senior secured credit facility contains a number of covenants that, among other things, place restrictions on matters customarily restricted in senior secured credit facilities, including restrictions on indebtedness (including guarantee obligations), liens, fundamental changes, sales or disposition of property or assets, investments (including loans, advances, guarantees and acquisitions), transactions with affiliates, dividends and other payments in respect of capital stock, optional payments and modifications of other material debt instruments, negative pledges and agreements restricting subsidiary distributions and changes in line of business. In addition, the Company is required to comply with a total leverage ratio and fixed charge coverage ratio. |
| ● | The senior secured credit facility contains customary events of default, including cross-default to other material agreements, judgment default and change of control. |
The Company’s financial statements include outstanding borrowings of $72.3 million at June 30, 2022 and $74.5 million at December 31, 2021, 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 $70.7 million and $73.6 million at June 30, 2022 and December 31, 2021, 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 is 3.8% and 2.0% at June 30, 2022 and December 31, 2021, respectively. 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 and interest rates. As of June 30, 2022 and December 31, 2021, there were no borrowings under the revolver.
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We anticipate that our current cash and the ongoing cash flows from our operations will be adequate to meet our working capital, capital expenditure, and debt financing needs for at least the next twelve months. The anticipated cash needs of our business could change significantly if we pursue and complete additional business acquisitions, if our business plans change, if economic conditions change from those currently prevailing or from those now anticipated, or if other unexpected circumstances arise that may have a material effect on the cash flow or profitability of our business, including the potential impacts of the COVID-19 pandemic and the severity of the related economic downturn and length of time of an economic recovery. If we require additional capital resources to grow our business, either internally or through acquisition, or maintain liquidity, we may seek to sell additional equity securities or to secure additional debt financing. The sale of additional equity securities or certain forms of debt financing could result in additional dilution to our stockholders. We may not be able to obtain financing arrangements in amounts or on terms acceptable to us in the future.
The Company is currently in compliance with its financial covenants.
Dividend Program
In May 2022, the Company announced it will pay a second-quarter dividend of $0.04 per share of common stock. The Company expects to pay a total cash dividend of $0.16 per share for the four quarters ending March 2023. On August 2, 2022, the Board of Directors approved the third-quarter dividend of $0.04 per share, payable September 19, 2022, to shareholders of record as of September 6, 2022. The dividends are accounted for as a decrease to Stockholders’ Equity. All future dividends will be subject to Board approval.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet financing arrangements or liabilities, guarantee contracts, retained or contingent interests in transferred assets or any obligation arising out of a material variable interest in an unconsolidated entity.
Recently Issued Accounting Pronouncements
See Note 3 to our condensed consolidated financial statements included elsewhere in this report.
Critical Accounting Policies and Accounting Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements. We prepare these financial statements in conformity with U.S. generally accepted accounting principles. As such, we are required to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. We base our estimates on historical experience, available information and various other assumptions we believe to be reasonable under the circumstances. On an on-going basis, we evaluate our estimates; however, actual results may differ from these estimates under different assumptions or conditions. There have been no material changes or developments in our evaluation of the accounting estimates and the underlying assumptions or methodologies that we believe to be Critical Accounting Policies and Estimates as disclosed in our Annual Report on Form 10-K, for the year ended December 31, 2021.
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
As a smaller reporting company, we are not required to provide the information required by this item.
ITEM 4.CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 as amended (the “Exchange Act”) is recorded, processed,
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summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2022, as required by the Rule 13a-15(b) under the Exchange Act. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2022.
Internal Control Over Financial Reporting
There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1.LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
The risk factors included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 have not materially changed.
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Dividend Program
In May 2022, the Company announced it will pay a second-quarter dividend of $0.04 per share of common stock. The Company expects to pay a total cash dividend of $0.16 per share for the four quarters ending March 2023. On August 2, 2022, the Board of Directors approved the third-quarter dividend of $0.04 per share, payable September 19, 2022, to shareholders of record as of September 6, 2022. The dividends are accounted for as a decrease to Stockholders’ Equity. All future dividends will be subject to Board approval.
Issuer Purchases of Equity Securities
The Company has approximately $11.5 million in aggregate available under its share repurchase program as of June 30, 2022. 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.
The following table details the repurchases that were made during the three months ended June 30, 2022.
|
|
| Total Numbers of |
| Approximate Dollar | |||||
Securities | Value of Securities | |||||||||
Total Number of | Average | Purchased | That May Yet Be | |||||||
Securities | Price per | as Part of Publicly | Purchased Under | |||||||
Period | Purchased | Securities | Announced Plan | The Plan | ||||||
| (In thousands) |
| (In thousands) |
| (In thousands) | |||||
April 1 - April 30 |
| 182 | $ | 6.56 |
| 182 | $ | 16,375 | ||
May 1 - May 31 |
| 133 | $ | 6.18 |
| 133 | $ | 15,553 | ||
June 1 - June 30 |
| 648 | $ | 6.19 |
| 648 | $ | 11,542 | ||
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ITEM 6.EXHIBITS
The following exhibits are filed as part of this report:
Exhibit Number | Description | |
10.1 | ||
31.1 | * | Certification of Chief Executive Officer Pursuant to SEC Rule 13a−14(a)/15d−14(a). |
31.2 | * | Certification of Chief Financial Officer Pursuant to SEC Rule 13a−14(a)/15d−14(a). |
32.1 | * | |
32.2 | * | |
101 | * | The following materials from ISG’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022 formatted in Inline XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheet, (ii) Consolidated Statement of Income and Comprehensive Income, (iii) Consolidated Statement of Cash Flows and (iv) the Notes to Consolidated Financial Statements. |
104 | * | Cover Page formatted in Inline XBRL and contained in Exhibit 101 attachments. |
* | Filed herewith |
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
INFORMATION SERVICES GROUP, INC. | |
Date: August 8, 2022 | /s/ Michael P. Connors |
Michael P. Connors, Chairman of the | |
Board and Chief Executive Officer | |
Date: August 8, 2022 | /s/ Humberto P. Alfonso |
Humberto P. Alfonso, Executive Vice | |
President and Chief Financial Officer |
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