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Information Services Group Inc. - Quarter Report: 2023 September (Form 10-Q)

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, 2023

OR

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

For the transition period from               to              

Commission File Number 001-33287

INFORMATION SERVICES GROUP, INC.

(Exact name of Registrant as specified in its charter)

Delaware

20-5261587

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

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

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

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

Title of each class

Trading symbol

Name of each exchange on which registered

Shares of Common Stock, $0.001 par value

III

The Nasdaq Stock Market LLC

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

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

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

Class

    

Outstanding at October 31, 2023

Common Stock, $0.001 par value

48,873,566 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. Our actual results 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 our 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 we file 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,

    

2023

    

2022

 

ASSETS

Current assets

Cash and cash equivalents

$

18,650

$

30,587

Accounts receivable and contract assets, net of allowance of $433 and $272, respectively

 

92,499

 

80,170

Prepaid expenses and other current assets

 

7,268

 

4,724

Total current assets

 

118,417

 

115,481

Restricted cash

 

166

 

83

Furniture, fixtures and equipment, net

 

5,418

 

5,929

Right-of-use lease assets

 

5,379

 

6,780

Goodwill

 

94,874

 

94,972

Intangible assets, net

 

12,027

 

14,380

Deferred tax assets

 

3,224

 

2,818

Other assets

 

4,084

 

2,585

Total assets

$

243,589

$

243,028

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities

Accounts payable

$

11,771

$

15,925

Current maturities of long-term debt

 

4,300

Contract liabilities

 

6,688

7,058

Accrued expenses and other current liabilities

 

22,481

23,908

Total current liabilities

 

40,940

51,191

Long-term debt, net of current maturities

 

79,175

74,416

Deferred tax liabilities

 

2,553

2,391

Operating lease liabilities

 

3,591

4,857

Other liabilities

 

11,602

9,742

Total liabilities

 

137,861

142,597

Commitments and contingencies (Note 8)

Stockholders’ equity

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

 

Common stock, $0.001 par value; 100,000 shares authorized; 49,472 shares issued and 48,808 outstanding at September 30, 2023 and 49,472 shares issued and 48,300 outstanding at December 31, 2022

 

49

49

Additional paid-in capital

 

218,843

226,293

Treasury stock (664 and 1,172 common shares, respectively, at cost)

 

(3,384)

(7,487)

Accumulated other comprehensive loss

 

(9,948)

(9,677)

Accumulated deficit

 

(99,832)

(108,747)

Total stockholders’ equity

 

105,728

100,431

Total liabilities and stockholders’ equity

$

243,589

$

243,028

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

Nine Months Ended

September 30,

September 30,

    

2023

    

2022

2023

    

2022

Revenues

$

71,773

$

68,836

$

224,868

$

212,100

Operating expenses

Direct costs and expenses for advisors

 

43,032

 

39,786

 

138,048

 

125,111

Selling, general and administrative

 

20,992

 

20,334

 

63,992

 

60,806

Depreciation and amortization

 

1,526

 

1,286

 

4,692

 

3,872

Operating income

 

6,223

 

7,430

 

18,136

 

22,311

Interest income

 

104

 

37

 

285

 

126

Interest expense

 

(1,533)

 

(824)

 

(4,676)

 

(1,997)

Foreign currency transaction (loss) gain

 

(2)

 

131

 

(40)

 

248

Income before taxes

 

4,792

 

6,774

 

13,705

 

20,688

Income tax provision

 

1,591

 

1,218

 

4,680

 

5,245

Net income

$

3,201

$

5,556

$

9,025

$

15,443

Weighted average shares outstanding:

Basic

 

48,711

 

47,888

 

48,542

 

48,191

Diluted

 

50,257

 

49,844

 

50,287

 

50,637

Earnings per share:

Basic

$

0.07

$

0.12

$

0.19

$

0.32

Diluted

$

0.06

$

0.11

$

0.18

$

0.30

Comprehensive income:

Net income

$

3,201

$

5,556

$

9,025

$

15,443

Foreign currency translation loss, net of tax benefit of $128, $629, $86 and $1,515, respectively

 

(427)

 

(1,997)

 

(271)

 

(4,799)

Comprehensive income

$

2,774

$

3,559

$

8,754

$

10,644

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 June 30, 2023

49,472

$

49

$

221,094

$

(5,128)

$

(9,521)

$

(103,033)

$

103,461

Net Income

3,201

3,201

Other comprehensive loss

(427)

(427)

Treasury shares repurchased

(923)

(923)

Proceeds from issuance of ESPP shares

(63)

301

238

Issuance of treasury shares for RSUs vested

(2,366)

2,366

Accrued dividends on unvested shares

427

427

Cash dividends paid to shareholders ($0.045 per share)

(2,345)

(2,345)

Stock based compensation

2,096

2,096

Balance September 30, 2023

 

49,472

$

49

$

218,843

$

(3,384)

$

(9,948)

$

(99,832)

$

105,728

Accumulated

Additional

Other

Total

Common Stock

Paid-in-

Treasury

Comprehensive

Accumulated

Stockholders’

    

Shares

    

Amount

    

Capital

    

Stock

    

Loss

    

Deficit

    

Equity

Balance December 31, 2022

49,472

$

49

$

226,293

$

(7,487)

$

(9,677)

$

(108,747)

$

100,431

Net Income

9,025

9,025

Other comprehensive loss

(271)

(271)

Impact of change in accounting policy (Note 3)

(110)

(110)

Treasury shares repurchased

(4,455)

(4,455)

Proceeds from issuance of ESPP shares

(285)

1,004

719

Issuance of treasury shares for RSUs vested

(7,554)

7,554

Accrued dividends on unvested shares

169

169

Cash dividends paid to shareholders ($0.13 per share)

(6,532)

(6,532)

Stock based compensation

6,752

6,752

Balance September 30, 2023

 

49,472

$

49

$

218,843

$

(3,384)

$

(9,948)

$

(99,832)

$

105,728

4

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 June 30, 2022

49,362

 

$

49

 

$

232,994

$

(10,523)

$

(9,742)

$

(118,586)

$

94,192

Net Income

5,556

5,556

Other comprehensive loss

(1,997)

(1,997)

Treasury shares repurchased

(4,281)

(4,281)

Proceeds from issuance of ESPP shares

(36)

283

247

Issuance of treasury shares for RSUs vested

(5,390)

5,390

Accrued dividends on unvested shares

(13)

(13)

Cash dividends paid to shareholders ($0.04 per share)

(2,049)

(2,049)

Stock based compensation

1,987

1,987

Balance September 30, 2022

 

49,362

$

49

$

227,493

$

(9,131)

$

(11,739)

$

(113,030)

$

93,642

Accumulated

Additional

Other

Total

Common Stock

Paid-in-

Treasury

Comprehensive

Accumulated

Stockholders’

    

Shares

    

Amount

    

Capital

    

Stock

    

Loss

    

Deficit

    

Equity

Balance December 31, 2021

49,362

$

49

$

237,628

$

(3,871)

$

(6,940)

$

(128,473)

$

98,393

Net Income

 

 

 

 

 

 

15,443

 

15,443

Other comprehensive loss

 

 

 

 

 

(4,799)

 

 

(4,799)

Treasury shares repurchased

 

 

 

 

(15,804)

 

 

 

(15,804)

Proceeds from issuance of ESPP shares

 

 

 

(136)

 

831

 

 

 

695

Issuance of treasury shares for RSUs vested

(9,713)

9,713

 

 

 

Accrued dividends on unvested shares

(270)

(270)

Cash dividends paid to shareholders ($0.11 per share)

(5,448)

(5,448)

Stock based compensation

 

 

 

5,432

 

 

 

5,432

Balance September 30, 2022

 

49,362

 

$

49

 

$

227,493

$

(9,131)

$

(11,739)

$

(113,030)

$

93,642

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

5

INFORMATION SERVICES GROUP, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

(In thousands)

Nine Months Ended

September 30,

    

2023

    

2022

Cash flows from operating activities

Net income

$

9,025

$

15,443

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

Depreciation expense

 

2,340

 

2,292

Amortization of intangible assets

 

2,352

 

1,580

Deferred tax benefit from stock issuances

 

(230)

 

(1,248)

Write-off of deferred financing costs

379

Amortization of deferred financing costs

 

182

 

257

Stock-based compensation

 

6,752

 

5,432

Change in fair value of contingent consideration

77

1,420

Provisions for credit losses

432

314

Deferred tax provision

 

125

 

1,426

Changes in operating assets and liabilities:

Accounts receivable and contract assets

 

(12,380)

 

(6,763)

Prepaid expenses and other assets

 

(2,145)

 

623

Accounts payable

 

(4,653)

 

(6,853)

Contract liabilities

 

(370)

 

7

Accrued expenses and other liabilities

 

720

 

(9,335)

Net cash provided by operating activities

 

2,606

 

4,595

Cash flows from investing activities

Purchase of furniture, fixtures and equipment

 

(1,640)

 

(2,614)

Net cash used in investing activities

 

(1,640)

 

(2,614)

Cash flows from financing activities

Proceeds from revolving facility (Note 10)

84,175

Repayment of outstanding debt (Note 10)

(84,175)

Principal payments on borrowings

 

 

(3,225)

Proceeds from issuance of employee stock purchase plan shares

 

719

695

Debt financing costs

 

(827)

Payments related to tax withholding for stock-based compensation

 

(2,461)

 

(3,734)

Payment of contingent consideration

(1,460)

(1,000)

Cash dividends paid to shareholders

(6,532)

(5,448)

Treasury shares repurchased

 

(1,994)

 

(12,070)

Net cash used in financing activities

 

(12,555)

 

(24,782)

Effect of exchange rate changes on cash

 

(265)

 

(4,983)

Net decrease in cash, cash equivalents, and restricted cash

 

(11,854)

 

(27,784)

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

 

30,670

 

47,609

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

$

18,816

$

19,825

Supplemental disclosures of cash flow information:

Cash paid for:

Interest

$

3,798

$

1,543

Taxes, net of refunds

$

6,848

$

10,761

Non-cash investing and financing activities:

Issuance of treasury stock for vested restricted stock units

$

7,554

$

9,713

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

6

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. (Nasdaq: III) (the “Company,” “ISG,” “we,” “us” or “our”) is a leading global technology research and advisory firm. A trusted business partner to more than 900 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. Based in Stamford, Connecticut, ISG employs approximately 1,600 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. The information on or accessible through our website is not part of and is not incorporated by reference into this Quarterly Report on Form 10-Q, and the inclusion of our website address in this Quarterly Report on Form 10-Q is only for reference.

Our Company was founded in 2006 with the strategic vision to become a high-growth, leading provider of information-based advisory services. We continue to believe that our vision will be realized through the acquisition, integration and successful operation of market leading brands within the data, analytics and advisory industry.

NOTE 2—BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements as of September 30, 2023 and for the three and nine months ended September 30, 2023 and 2022 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, 2023, the results of operations for the three and nine months ended September 30, 2023 and 2022 and the cash flows for the nine months ended September 30, 2023 and 2022. The condensed consolidated balance sheet as of December 31, 2022 has been derived from the Company’s audited consolidated financial statements. Operating results for the three and nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.

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, 2022, which are included in the Company’s 2022 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 are not limited to: allowance for credit

7

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(tabular amounts in thousands, except per share data)

(unaudited)

losses, 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.

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 as of September 30, 2023 and December 31, 2022 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 goodwill, intangible assets and other long-lived assets and assets acquired and liabilities assumed 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.

8

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(tabular amounts in thousands, except per share data)

(unaudited)

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

Basis of Fair Value Measurements

September 30, 2023

     

Level 1

     

Level 2

     

Level 3

     

Total

 

Assets:

Cash equivalents

 

$

18

 

$

 

$

 

$

18

Total

 

$

18

 

$

 

$

 

$

18

Liabilities:

Contingent consideration (1)

 

$

 

$

 

$

4,210

 

$

4,210

Total

 

$

 

$

 

$

4,210

 

$

4,210

Basis of Fair Value Measurements

December 31, 2022

     

Level 1

     

Level 2

     

Level 3

     

Total

 

Assets:

Cash equivalents

 

$

18

 

$

 

$

 

$

18

Total

 

$

18

 

$

 

$

 

$

18

Liabilities:

Contingent consideration (1)

 

$

 

$

 

$

5,593

 

$

5,593

Total

 

$

 

$

 

$

5,593

 

$

5,593

(1)The current and noncurrent contingent consideration are included in “Accrued expenses and other current liabilities” and “Other liabilities,” respectively, as of September 30, 2023 and December 31, 2022.

The following table represents the change in the contingent consideration liability during the nine months ended September 30, 2023:

 

Nine Months Ended

 

September 30,

     

2023

Beginning Balance

$

5,593

Change 4 Growth contingent consideration payment

(1,460)

Accretion of contingent consideration

 

77

Ending Balance

$

4,210

The Company’s financial instruments include outstanding borrowings of $79.2 million both as of September 30, 2023, and December 31, 2022, 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 was approximately $79.9 million and $76.5 million as of September 30, 2023 and December 31, 2022, 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 was 7.0% and 6.3% as of September 30, 2023 and December 31, 2022, 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. In the third quarter of 2023, the Company borrowed $5.0 million against the revolver and subsequently repaid $5.0 million during the quarter. The Company is currently in compliance with its financial covenants.

9

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(tabular amounts in thousands, except per share data)

(unaudited)

Recently Issued Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (FASB) issued new guidance on the measurement of credit losses for financial assets measured at amortized cost, which includes accounts receivable and contract assets, 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. We adopted this standard using the modified retrospective approach with an effective date of January 1, 2023. The Company recognized a cumulative-effect adjustment increasing accumulated deficit and increasing the allowance for credit losses by $0.1 million.

NOTE 4ACQUISITIONS

Change 4 Growth Acquisition

On October 31, 2022, a subsidiary of the Company executed an Asset Purchase Agreement with Change 4 Growth, LLC (“Change 4 Growth”) and consummated the acquisition of substantially all the assets, and assumed certain liabilities, of Change 4 Growth. The purchase price was comprised of $3.8 million of cash consideration, $0.6 million of shares of ISG common stock issued promptly after closing and Change 4 Growth will also have the right to receive additional consideration paid via earn-out payments, if certain financial targets are met. At the agreement date, the Company estimated such earn-out payment would be $5.6 million.

The following table summarizes the consideration transferred to acquire Change 4 Growth and the amounts of identified assets acquired, and liabilities assumed, as of the agreement date:

Cash

    

$

3,450

Accrued working capital adjustment

378

ISG common stock

 

600

Contingent consideration

 

5,560

Total allocable purchase price

$

9,988

This acquisition was accounted for under the acquisition method of accounting, and as such, the aggregate purchase price was allocated to the assets acquired and liabilities assumed based on the fair values as of the closing date. Based on the valuation and other factors as described above, the purchase price assigned to intangible assets were as follows:

Accounts receivable and contract assets

$

1,841

Intangible assets

 

4,300

Accounts payable and accrued expense

(428)

Contract liabilities

 

(85)

Net assets acquired

$

5,628

Goodwill

$

4,360

The primary factors that drove the goodwill recognized, the majority of which is deductible for tax purposes, were the inclusion of the legacy Change 4 Growth workforce and associated organizational change management expertise to enhance and expand the offerings of the ISG Enterprise Change service line.

10

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(tabular amounts in thousands, except per share data)

(unaudited)

Costs associated with this acquisition are included in the selling, general and administrative expense in the Consolidated Statement of Income and Comprehensive Income and totaled $0.2 million during year ended December 31, 2022. Based on the valuation and other factors as described above, the purchase price assigned to intangible assets and the amortization period were as follows:

    

Purchase Price

    

Estimated

     

Allocation

     

Useful Lives

Amortizable intangible assets:

Trademark and trade name

$

1,100

 

3 years

Customer relationships

2,900

8 years

Noncompete agreements

300

2 years

Total intangible assets

$

4,300

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 the contract type, are sometimes capable of being distinct. If services are determined to be distinct, they are accounted for as separate performance obligations. A performance obligation is a promise in a contract to transfer a distinct good or service to the client and is the unit of account. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of our contracts have a single performance obligation as the promise to transfer the individual services is not separately identifiable from other promises in the contracts and, therefore, is not distinct. For contracts with multiple performance obligations, the Company allocates the transaction price to each performance obligation using our best estimate of the standalone selling price, or SSP, of each distinct product or service in the contract. The Company establishes SSP based on management’s estimated selling price or observable prices of products or services sold separately in comparable circumstances to similar clients.

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 result 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:

11

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(tabular amounts in thousands, except per share data)

(unaudited)

    

September 30,

    

December 31,

    

2023

    

2022

Contract assets

$

44,585

$

32,249

Contract liabilities

$

6,688

$

7,058

Revenue recognized for the three and nine months ended September 30, 2023 that was included in the contract liability balance at January 1, 2023 was $0.6 million and $5.9 million, respectively, and primarily represented revenue from our subscription contracts.

Remaining Performance Obligations

As of September 30, 2023, the Company had $109.2 million of remaining performance obligations, the majority of which are expected to be satisfied within the next twelve months.

NOTE 6—NET INCOME PER COMMON SHARE

Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that would share in the net income of the Company. For the three months and nine months ended September 30, 2023, 0.5 million and 1.2 million restricted stock units, respectively, and for both the three and nine months ended September 30, 2022, 0.0 million restricted stock units, have not been considered in the diluted earnings per share calculation, as the effect would be anti-dilutive.      

The following table sets forth the computation of basic and diluted earnings per share:

Three Months Ended September 30,

Nine Months Ended September 30,

    

2023

    

2022

    

2023

    

2022

Basic:

Net income

$

3,201

$

5,556

$

9,025

$

15,443

Weighted average common shares

 

48,711

 

47,888

 

48,542

 

48,191

Earnings per share

$

0.07

$

0.12

$

0.19

$

0.32

Diluted:

Net income

$

3,201

$

5,556

$

9,025

$

15,443

Basic weighted average common shares

 

48,711

 

47,888

 

48,542

 

48,191

Potential common shares

 

1,546

 

1,956

 

1,745

 

2,446

Diluted weighted average common shares

 

50,257

 

49,844

 

50,287

 

50,637

Diluted earnings per share

$

0.06

$

0.11

$

0.18

$

0.30

NOTE 7—INCOME TAXES

The Company’s effective tax rate for the three and nine months ended September 30, 2023 was 33.2% and 34.1%, respectively, based on pretax income of $4.8 million and $13.7 million, respectively. The Company’s effective tax rate for the quarter ended September 30, 2023 was impacted by non-deductible expenses and earnings and losses in certain foreign jurisdictions and the impact of the vesting of restricted stock units. The Company’s effective tax rate for the three and nine

12

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(tabular amounts in thousands, except per share data)

(unaudited)

months ended September 30, 2022 was 18.0% and 25.4%, respectively. The difference is primarily due to the impact of earnings and losses in certain foreign jurisdictions and the impact of the vesting of restricted stock units.

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 as of September 30, 2023 and December 31, 2022.

Change 4 Growth Contingent Consideration

As of September 30, 2023, the Company has recorded a liability of $4.2 million representing the estimated fair value of contingent consideration related to the acquisition of Change 4 Growth, which is classified as “Accrued expenses and other current liabilities” and “Other liabilities” on the consolidated balance sheet. In April 2023, the Company made a contingent consideration payment of $1.5 million.

NOTE 9—SEGMENT AND GEOGRAPHICAL INFORMATION

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

Geographical revenue information for the segment is as follows:

Three Months Ended

Nine Months Ended

September 30,

September 30,

    

2023

    

2022

    

2023

    

2022

Revenues

Americas

$

42,469

$

42,174

$

133,149

$

123,059

Europe

 

22,090

 

19,321

 

69,496

 

66,039

Asia Pacific

 

7,214

 

7,341

 

22,223

 

23,002

$

71,773

$

68,836

$

224,868

$

212,100

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 February 22, 2023, the Company amended and restated its senior secured credit facility to increase the revolving commitments per the revolving facility (the “2023 Credit Agreement”) from $54.0 million to $140.0 million and eliminate its term loan. The material terms under the 2023 Credit Agreement are as follows: Capitalized terms used but not defined herein have the meanings ascribed to them in the 2023 Credit Agreement:

The revolving credit facility has a maturity date of February 22, 2028.
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.

13

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(tabular amounts in thousands, except per share data)

(unaudited)

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) Term SOFR, plus 1.0%), plus the applicable margin (as defined below) or (ii) Term SOFR (which is the Term SOFR screen rate for the relevant interest period plus a credit spread adjustment of 0.10%) as determined by the administrative agent, plus the applicable margin. The applicable margin is adjusted quarterly based upon the Company’s consolidated leverage ratio. Prior to the end of the first quarter-end following the closing of the credit facility, the applicable margin shall be a percentage per annum equal to 0.50% for the revolving loans maintained as Base Rate loans or 1.50% for the revolving loans maintained as Term SOFR loans.
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 dispositions 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 consolidated leverage ratio and consolidated interest 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 $79.2 million both as of September 30, 2023 and December 31, 2022, 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 was approximately $79.9 million and $76.5 million as of September 30, 2023 and December 31, 2022, 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 was 7.0% and 6.3% as of September 30, 2023 and December 31, 2022, 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. In the third quarter of 2023, the Company borrowed $5.0 million against the revolver and subsequently repaid $5.0 million during the quarter. The Company is currently in compliance with its financial covenants.

NOTE 11—SUBSEQUENT EVENTS

On October 31, 2023, a subsidiary of the Company executed an Asset Purchase Agreement with Ventana Research, Inc. and consummated the acquisition of substantially all assets, and assumed certain liabilities, of Ventana Research, Inc. The purchase price was comprised of $1.0 million of cash consideration paid at closing. Ventana Research, Inc. will also have the right to receive additional consideration paid via earn-out payments during the next 26 months, if certain financial targets are met.

On November 1, 2023, the Board approved a fourth-quarter dividend of $0.045 per share, payable December 20, 2023, to shareholders of record as of December 5, 2023.

14

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

You should read the following discussion and analysis in conjunction with our financial statements and related notes included elsewhere in this report. Except for historical information, the discussion in this report contains certain forward-looking statements that involve risks and uncertainties. We have based these forward-looking statements on our current expectations and assumptions about future events. In some cases, you can identify forward-looking statements by terminology, such as “may,” “should,” “could,” “predict,” “potential,” “continue,” “expect,” “anticipate,” “future,” “intend,” “plan,” “believe,” “estimate,” “forecast” and similar expressions (or the negative of such expressions). Forward-looking statements include statements concerning 2023 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 2022 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

Information Services Group, Inc. (Nasdaq: III) (the “Company,” “ISG,” “we,” “us” or “our”) is a leading global technology research and advisory firm. A trusted business partner to over 900 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, Connecticut, ISG employs approximately 1,600 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. The information on or accessible through our website is not part of and is not incorporated by reference into this Quarterly Report on Form 10-Q, and the inclusion of our website address in this Quarterly Report on Form 10-Q is only for reference.

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 may impact the business include natural disasters, pandemics, such as COVID-19, wars, 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 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

15

become 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 SEPTEMBER 30, 2023 AND SEPTEMBER 30, 2022

Revenues

Geographical revenue information for the segment is as follows:

Three Months Ended September 30,

 

Percent

 

Geographic Area

    

2023

    

2022

    

Change

    

    Change

  

    

(in thousands)

 

Americas

    

$

42,469

    

$

42,174

    

$

295

    

    

1

%

Europe

 

22,090

 

19,321

 

2,769

 

14

%

Asia Pacific

 

7,214

 

7,341

 

(127)

 

(2)

%

Total revenues

$

71,773

$

68,836

$

2,937

 

4

%

Revenues increased $2.9 million, or approximately 4%, for the third quarter of 2023. The increase in revenue for the Americas was primarily attributable to an increase in our Advisory and Automation service lines, partially offset by a decrease in our Network & Software Advisory Services (NaSa) service line. The increase in revenue in Europe was primarily attributable to an increase in our Automation and Research service lines, partially offset by a decrease in our Advisory service line. The revenue decrease in Asia Pacific was primarily attributable to a decrease in our GovernX and NaSa service lines, partially offset by an increase in our Advisory service line. The translation of foreign currency revenues into U.S. dollars positively impacted performance in Europe and Asia Pacific compared to the prior year by $1.4 million.      

Operating Expenses

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

Three Months Ended September 30,

 

Percent

 

Operating Expenses

    

2023

    

2022

    

Change

    

Change

  

    

(in thousands)

 

Direct costs and expenses for advisors

    

$

43,032

    

$

39,786

    

$

3,246

    

    

8

%

Selling, general and administrative

 

20,992

 

20,334

 

658

 

3

%

Depreciation and amortization

 

1,526

 

1,286

 

240

 

19

%

Total operating expenses

$

65,550

$

61,406

$

4,144

 

7

%

Total operating expenses increased $4.1 million, or approximately 7%, for the third quarter of 2023. The increase in operating expenses was primarily due to higher license fees of $2.5 million, contract labor expense of $1.2 million,

16

severance and integration and other expense of $0.7 million, and computer expense of $0.2 million. These costs were partially offset by lower compensation expense of $0.8 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 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 expenses 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 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 third quarter of 2023 and 2022 was $1.5 million and $1.3 million, respectively. The increase of $0.2 million in depreciation and amortization expense was primarily due to the acquisition of Change 4 Growth. 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 September 30,

 

Percent

 

Other income (expense), net

    

2023

    

2022

    

Change

    

Change

 

(in thousands)

 

Interest income

    

$

104

    

$

37

    

$

67

    

181

%

Interest expense

 

(1,533)

 

(824)

 

(709)

    

(86)

%

Foreign currency transaction gain

 

(2)

 

131

 

(133)

 

(102)

%

Total other income (expense), net

$

(1,431)

$

(656)

$

(775)

 

(118)

%

17

The total increase in other expenses of $0.8 million was primarily the result of higher interest expenses attributable to higher interest rates and our higher debt balance.

Income Tax Expense

Our quarterly effective tax rate varies from period to period based on the mix of our earnings among the various state and foreign tax jurisdictions in which our 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 September 30, 2023 was 33.2% compared to 18.0% for the quarter ended September 30, 2022. The difference for the quarter ended September 30, 2023 was primarily due to the impact of earnings and losses in certain foreign jurisdictions and the impact of the vesting of restricted stock units. The Company’s effective tax rate for the quarter ended September 30, 2023 was higher than the statutory rate primarily due to non-deductible expenses and the impact of earnings in foreign jurisdictions. There were no significant changes in uncertain tax position reserves or valuation allowances during the quarter ended September 30, 2023.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2023 AND SEPTEMBER 30, 2022

Revenues

Geographical revenue information for the segment is as follows:

Nine Months Ended September 30,

 

Percent

 

Geographic Area

    

2023

    

2022

    

Change

    

Change

  

(in thousands)

 

Americas

    

$

133,149

    

$

123,059

    

$

10,090

    

8

%

Europe

 

69,496

 

66,039

 

3,457

 

5

%

Asia Pacific

 

22,223

 

23,002

 

(779)

 

(3)

%

Total revenues

$

224,868

$

212,100

$

12,768

 

6

%

Revenues increased $12.8 million, or approximately 6%, for the nine months ended September 30, 2023. The increase in revenue in the Americas was primarily attributable to an increase in our Advisory and Automation service lines. The increase in revenue in Europe was primarily attributable to an increase in our Automation and Research service lines, partially offset by a decrease in our Advisory service line. The decrease in revenue in Asia Pacific was primarily attributable to a decrease in our Advisory service line, being partially offset by an increase in our GovernX 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 $0.8 million.      

Operating Expenses

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

Nine Months Ended September 30,

 

Percent

 

Operating Expenses

    

2023

    

2022

    

Change

    

Change

  

(in thousands)

 

Direct costs and expenses for advisors

    

$

138,048

    

$

125,111

    

$

12,937

    

10

%

Selling, general and administrative

 

63,992

 

60,806

 

3,186

 

5

%

Depreciation and amortization

 

4,692

 

3,872

 

820

 

21

%

Total operating expenses

$

206,732

$

189,789

$

16,943

 

9

%

18

Total operating expenses increased $16.9 million, or approximately 9%, for the nine months ended September 30, 2023.  The increase in operating expenses was primarily due to higher contract labor expense of $5.9 million, license fees of $5.3 million, severance and integration and other expenses of $1.6 million, travel and entertainment expenses of $1.5 million, non-cash compensation of $1.3 million, and computer expenses of $0.8 million. These costs were partially offset by lower compensation expenses of $1.0 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 expenses 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 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 nine months ended September 30, 2023 and 2022 was $4.7 million and $3.9 million, respectively. The increase of $0.8 million was primarily due to the acquisition of Change 4 Growth. 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.

19

Other Income (Expense), Net

The following table presents a breakdown of other income (expense), net:

Nine Months Ended September 30,

 

Percent

 

Other income (expense), net

    

2023

    

2022

    

Change

    

Change

  

(in thousands)

 

Interest income

    

$

285

    

$

126

    

$

159

    

126

%

Interest expense

 

(4,676)

 

(1,997)

 

(2,679)

 

(134)

%

Foreign currency transaction (loss) gain

 

(40)

 

248

 

(288)

 

(116)

%

Total other income (expense), net

$

(4,431)

$

(1,623)

$

(2,808)

 

(173)

%

The total increase in other expenses of $2.8 million was primarily the result of higher interest expenses attributable to higher interest rates, our higher debt balance and $0.4 million associated with the write-off of deferred financing costs.

Income Tax Expense

Our quarterly effective tax rate varies from period to period based on our mix of earnings among the various state and foreign tax jurisdictions in which our 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 nine months ended September 30, 2023 was 34.1% compared to 25.4% for the nine months ended September 30, 2022.  The difference for the nine months ended September 30, 2023 was primarily due to the impact of earnings and losses in certain foreign jurisdictions and the impact of the vesting of restricted stock units.  The Company’s effective tax rate for the nine months ended September 30, 2023 was higher than the statutory rate primarily due to non-deductible expenses and the impact of foreign operations. There were no significant changes in uncertain tax position reserves or valuation allowances during the nine months ended September 30, 2023.

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 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 net income 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, severance, integration and other expense and write-off of deferred financing costs, 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.

20

Three Months Ended September 30,

Nine Months Ended September 30,

    

2023

    

2022

 

    

2023

    

2022

(in thousands)

Net income

    

$

3,201

    

$

5,556

    

$

9,025

    

$

15,443

Plus:

Interest expense (net of interest income)

 

1,429

 

787

 

4,391

 

1,871

Income taxes

 

1,591

 

1,218

 

4,680

 

5,245

Depreciation and amortization

 

1,526

 

1,286

 

4,692

 

3,872

Interest accretion associated with contingent consideration

 

26

 

 

77

 

8

Acquisition-related costs (1)

 

99

 

25

 

99

 

41

Severance, integration and other expense

 

674

 

8

 

2,016

 

458

Foreign currency transaction loss (gain)

 

2

 

(131)

 

40

 

(248)

Non-cash stock compensation

 

2,098

 

1,987

 

6,752

 

5,432

Adjusted EBITDA

$

10,646

$

10,736

$

31,772

$

32,122

Three Months Ended September 30,

Nine Months Ended September 30,

2023

    

2022

 

    

2023

    

2022

(in thousands)

Net income

    

$

3,201

    

$

5,556

    

$

9,025

    

$

15,443

Plus:

Non-cash stock compensation

 

2,098

 

1,987

 

6,752

 

5,432

Intangible amortization

769

525

2,352

1,580

Interest accretion associated with contingent consideration

 

26

 

 

77

 

8

Acquisition-related costs (1)

 

99

 

25

 

99

 

41

Severance, integration and other expense

 

674

 

8

 

2,016

 

458

Write-off of deferred financing costs

379

Foreign currency transaction loss (gain)

 

2

 

(131)

 

40

 

(248)

Tax effect (2)

 

(1,174)

 

(772)

 

(3,749)

 

(2,327)

Adjusted net income

$

5,695

$

7,198

$

16,991

$

20,387

Three Months Ended September 30,

Nine Months Ended September 30,

2023

    

2022

 

    

2023

    

2022

Net income per diluted share

    

$

0.06

    

$

0.11

    

$

0.18

    

$

0.30

Non-cash stock compensation

 

0.04

 

0.04

 

0.13

 

0.11

Intangible amortization

 

0.02

 

0.01

 

0.05

 

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

 

0.01

 

0.00

 

0.04

 

0.01

Write-off of deferred financing costs

-

-

0.01

-

Foreign currency transaction loss (gain)

 

0.00

 

(0.00)

 

-

 

(0.00)

Tax effect (2)

 

(0.02)

 

(0.02)

 

(0.07)

 

(0.05)

Adjusted net income per diluted share

$

0.11

$

0.14

$

0.34

$

0.40

(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.

21

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 September 30, 2023, our cash, cash equivalents and restricted cash were $18.8 million compared to $30.7 million as of December 31, 2022, a net decrease of $11.9 million, which was primarily attributable to the following:

repayment of outstanding debt of $84.2 million;

net cash provided by operating activities of $2.6 million;

cash dividends paid to shareholders of $6.5 million;

payments related to debt financing costs of $0.8 million;

purchase of furniture, fixtures and equipment of $1.6 million;

treasury shares repurchased of $2.0 million;

payments related to tax withholding for stock-based compensation of $2.5 million;

payment of contingent consideration for Change 4 Growth of $1.5 million;

proceeds from revolving facility of $84.2 million; and

proceeds from issuance of employees stock purchase plan shares of $0.7 million.

Capital Resources

On February 22, 2023, the Company amended and restated its senior secured credit facility to increase the revolving commitments per the revolving facility from $54.0 million to $140.0 million and eliminate its term loan. The material terms under the 2023 Credit Agreement are as follows. Capitalized terms used but not defined herein have the meanings ascribed to them in the 2023 Credit Agreement:

The revolving credit facility has a maturity date of February 22, 2028.
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) Term SOFR, plus 1.0%), plus the applicable margin (as defined below) or (ii) Term SOFR (which is the Term SOFR screen rate for the

22

relevant interest period plus a credit spread adjustment of 0.10%) as determined by the administrative agent, plus the applicable margin. The applicable margin is adjusted quarterly based upon the Company’s consolidated leverage ratio. Prior to the end of the first quarter-end following the closing of the credit facility, the applicable margin shall be a percentage per annum equal to 0.50% for the revolving loans maintained as Base Rate loans or 1.50% for the revolving loans maintained as Term SOFR loans.
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 consolidated leverage ratio and consolidated interest 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 $79.2 million both as of September 30, 2023 and December 31, 2022, 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 was approximately $79.9 million and $76.5 million as of September 30, 2023 and December 31, 2022, 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 was 7.0% and 6.3% as of September 30, 2023 and December 31, 2022, 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. In the third quarter of 2023, the Company borrowed $5.0 million against the revolver and subsequently repaid $5.0 million during the quarter. The Company is currently in compliance with its financial covenants.

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. If we require additional capital resources to grow our business, either internally or through acquisition, or to 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.

Dividend Program

In May 2023, the Company announced it will pay a quarterly dividend of $0.045 per share of common stock.  The Company expects to pay a total cash dividend of $0.18 per share for the four quarters ending June 30, 2024. On August 1, 2023, the Board approved a third-quarter dividend of $0.045 per share, which was paid on September 28, 2023, to shareholders of record as of September 6, 2023. On November 1, 2023, the Board of Directors of the Company (the “Board”) approved a fourth-quarter dividend of $0.045 per share, payable December 20, 2023, to shareholders of record as of December 5, 2023. The dividends are accounted for as a decrease to Stockholders’ Equity. All future dividends will be subject to the Board’s 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.

23

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 condensed consolidated financial statements. We prepare these financial statements in conformity with GAAP. 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 ongoing 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, 2022.

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Interest Rate Risk

As of September 30, 2023, the Company had $79.2 million in total debt principal outstanding. Note 10 — Financing Arrangements and Long-Term Debt in the Notes to Condensed Consolidated Financial Statements provides additional information regarding the Company’s outstanding debt obligations.

All of the Company’s total debt outstanding as of September 30, 2023 was based on a floating base rate (SOFR – Secured Overnight Financing Rate) of interest, which potentially exposes the Company to increases in interest rates. However, due to our debt to EBITDA ratio of 1.8 times and forecasted rates from external banks, we believe that our total exposure is limited and is considered in our forecasted cash uses.

Foreign Currency Risk

A significant portion of our revenues are typically derived from sales outside of the United States. Among the major foreign currencies in which we conduct business are the Euro, the British Pound and the Australian dollar. The reporting currency of our condensed consolidated financial statements is the U.S. dollar. As the values of the foreign currencies in which we operate fluctuate over time relative to the U.S. dollar, the Company is exposed to both foreign currency translation and transaction risk.

Translation risk arises as our foreign currency assets and liabilities are translated into U.S. dollars because the functional currencies of our foreign operations are generally denominated in the local currency. Adjustments resulting from the translation of these assets and liabilities are deferred and recorded as a component of stockholders’ equity. In 2022, the impact of foreign currency translation on our Statement of Stockholders’ Equity was $2.7 million. The translation of our foreign currency revenues and expenses historically has not had a material impact on our consolidated earnings because movements in and among the major currencies in which we operate tend to impact our revenues and expenses fairly equally. However, our earnings could be impacted during periods of significant exchange rate volatility, or when some or all of the major currencies in which we operate move in the same direction against the U.S. dollar.

Transaction risk arises when we enter into a transaction that is denominated in a currency that may differ from the local functional currency. As these transactions are translated into the local functional currency, a gain or loss may result, which is recorded in current period earnings. In 2022, the impact on revenues from foreign currency transactions was $12.7 million, representing 4.4% of revenues. The amount is not material to our condensed consolidated financial statements.

 

24

Credit Risk

Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of short-term, highly liquid investments classified as cash equivalents and accounts receivable and contract assets. The majority of the Company’s cash and cash equivalents are with large investment-grade commercial banks. Accounts receivable and contract assets balances deemed to be collectible from customers have limited concentration of credit risk due to our diverse customer base and geographies.

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, 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 September 30, 2023, as required by  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 September 30, 2023.

Internal Control Over Financial Reporting

There have been no 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.

25

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, 2022 have not materially changed.

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Dividend Program

In May 2023, the Company announced it will pay a quarterly dividend of $0.045 per share of common stock.  The Company expects to pay a total cash dividend of $0.18 per share for the four quarters ending June 30, 2024. On August 1, 2023, the Board approved a third-quarter dividend of $0.045 per share, which was paid on September 28, 2023, to shareholders of record as of September 6, 2023. On November 1, 2023, the Board approved a fourth-quarter dividend of $0.045 per share, payable December 20, 2023, to shareholders of record as of December 5, 2023. The dividends are accounted for as a decrease to Stockholders’ Equity. All future dividends will be subject to the Board’s approval.

Issuer Purchases of Equity Securities

On August 1, 2023, the Board approved a new share repurchase authorization of an additional $25.0 million. The new share repurchase program will take effect upon completion of the Company’s current program, which had approximately $2.7 million remaining as of October 1, 2023. 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, the amount and the method 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 September 30, 2023.

    

    

    

Total Numbers of

    

Approximate Dollar

Securities

Value of Securities

Total Number of

Purchased

That May Yet Be

Securities

Average

as Part of Publicly

Purchased Under

Purchased

Price per

Announced Plan

The Plan

Period

 

(In thousands)

Securities

 

(In thousands)

 

(In thousands)

July 1 - July 31

 

8

$

5.36

 

8

$

3,573

August 1 - August 31

88

$

5.16

 

88

$

28,119

September 1 - September 30

 

84

$

5.09

 

84

$

27,691

ITEM 5.OTHER INFORMATION

During the three months ended September 30, 2023, none of the Company’s directors or officers adopted, modified or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement (each as defined in Item 408 of Regulation S-K under the Exchange Act).

26

ITEM 6.EXHIBITS

The following exhibits are filed as part of this report:

Exhibit

Number

Description

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

*

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

*

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101

*

The following materials from ISG’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023 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 Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).

*

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: November 3, 2023

/s/ Michael P. Connors

Michael P. Connors, Chairman of the

Board and Chief Executive Officer

Date:  November 3, 2023

/s/ Michael A. Sherrick

Michael A. Sherrick, Executive Vice

President and Chief Financial Officer

27