Information Services Group(III) - 2023 Q1 - Quarterly Report

PART I — FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements, management's discussion and analysis, market risk disclosures, and controls and procedures ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) This section presents the unaudited condensed consolidated financial statements for Information Services Group, Inc. for the period ended March 31, 2023, including balance sheets, income statements, statements of stockholders' equity, cash flows, and accompanying notes detailing significant accounting policies, acquisitions, revenue recognition, and financing arrangements Condensed Consolidated Balance Sheets Presents the company's financial position, detailing total assets, liabilities, and stockholders' equity at specific dates | Metric | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :-------------------------------- | :----------------------------- | :----------------------------- | | Total assets | $243,653 | $243,028 | | Total liabilities | $139,869 | $142,597 | | Total stockholders' equity | $103,784 | $100,431 | Condensed Consolidated Statement of Income and Comprehensive Income Details the company's revenues, operating income, net income, and earnings per share for the reporting periods | Metric | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | Change (in thousands) | Percent Change | | :-------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------- | :------------- | | Revenues | $78,486 | $72,563 | $5,923 | 8% | | Operating income | $7,050 | $7,732 | $(682) | -9% | | Net income | $3,491 | $4,930 | $(1,439) | -29% | | Basic EPS | $0.07 | $0.10 | $(0.03) | -30% | | Diluted EPS | $0.07 | $0.10 | $(0.03) | -30% | Condensed Consolidated Statement of Stockholders' Equity Outlines changes in stockholders' equity, including net income, dividends, and stock-based compensation - Total stockholders' equity increased from $100,431 thousand at December 31, 2022, to $103,784 thousand at March 31, 2023, primarily driven by net income of $3,491 thousand and stock-based compensation of $2,042 thousand, partially offset by cash dividends paid of $1,960 thousand and treasury shares repurchased of $698 thousand[8] Condensed Consolidated Statement of Cash Flows Summarizes cash inflows and outflows from operating, investing, and financing activities | Cash Flow Activity | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | | :--------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Net cash (used in) provided by operating activities | $(3,374) | $4,111 | | Net cash used in investing activities | $(501) | $(1,046) | | Net cash used in financing activities | $(3,176) | $(6,388) | | Net decrease in cash, cash equivalents, and restricted cash | $(6,864) | $(3,859) | | Cash, cash equivalents, and restricted cash, end of period | $23,806 | $43,750 | Notes to Condensed Consolidated Financial Statements Provides detailed explanations and disclosures supporting the condensed consolidated financial statements NOTE 1—Description of Organization and Business Operations Provides an overview of Information Services Group, Inc., its services, and strategic vision - Information Services Group, Inc (ISG) is a global technology research and advisory firm, serving over 900 clients, including more than 75 of the top 100 enterprises in its markets[11] - The company was founded in 2006 with a vision to be a leading provider of information-based advisory services, aiming for growth through acquisition, integration, and operation of market-leading brands in data, analytics, and advisory[12] NOTE 2—Basis of Presentation Explains the preparation basis for the unaudited interim financial statements and their relation to the annual report - The unaudited condensed consolidated financial statements for the three months ended March 31, 2023 and 2022, are prepared in accordance with GAAP for interim financial statements and Form 10-Q, with all necessary adjustments (normal recurring accruals) made[13] - These interim financial statements should be read in conjunction with the Company's 2022 Annual Report on Form 10-K, as certain information and disclosures normally included in annual financial statements have been omitted[14] NOTE 3—Summary of Significant Accounting Policies Outlines the key accounting principles and methods applied in preparing the financial statements Use of Estimates Highlights management's reliance on estimates and assumptions in preparing financial statements - The preparation of financial statements requires management to make estimates and assumptions, which affect reported amounts of assets, liabilities, revenues, and expenses[15][17] Restricted Cash Explains the nature and purpose of cash and cash equivalents not available for general corporate use - Restricted cash comprises cash and cash equivalents committed for rent deposits, which are not available for general corporate purposes[18] Fair Value Describes the valuation methodologies for financial instruments and nonfinancial assets and liabilities - The carrying value of current financial instruments (cash, receivables, payables) approximates fair value due to their short-term nature[19][20] - The fair value of outstanding borrowings was approximately $79.8 million as of March 31, 2023, and $76.5 million as of December 31, 2022, estimated using a discounted cash flow analysis with incremental borrowing rates of 6.5% and 6.3%, respectively[24] | Fair Value Measurement | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :-------------------------------- | :----------------------------- | :----------------------------- | | Cash equivalents (Level 1) | $18 | $18 | | Contingent consideration (Level 3) | $5,618 | $5,593 | Recently Issued Accounting Pronouncements Discusses the impact of newly adopted accounting standards on the financial statements - The Company adopted new FASB guidance on credit losses (CECL) effective January 1, 2023, using the modified retrospective approach, resulting in a cumulative-effect adjustment increasing accumulated deficit and allowance for credit losses by $0.1 million[25] NOTE 4—Acquisitions Details recent business acquisitions, including their financial impact and strategic rationale Agreemint Acquisition Details the acquisition of Agreemint and its accounting treatment as an asset acquisition - On March 28, 2022, ISG acquired substantially all assets of Agreemint, an automated contracting solution, classified as an asset acquisition[26] Change 4 Growth Acquisition Describes the acquisition of Change 4 Growth, including purchase price allocation and goodwill recognition - On October 31, 2022, ISG acquired substantially all assets of Change 4 Growth for $3.8 million cash, $0.6 million in common stock, and an estimated $5.6 million in earn-out payments[27] - The acquisition resulted in $4.36 million in goodwill, primarily due to the acquired workforce and organizational change management expertise, enhancing ISG's Enterprise Change service line[29] | Amortizable Intangible Assets | Purchase Price Allocation (in thousands) | Estimated Useful Lives | | :---------------------------- | :------------------------------------- | :--------------------- | | 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 Explains the company's revenue recognition policies, contract balances, and performance obligations Contract Balances Presents the company's contract assets and liabilities related to revenue recognition - Revenue recognized for the three months ended March 31, 2023, from the January 1, 2023, contract liability balance was $3.5 million, primarily from subscription contracts[33] | Metric | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :---------------- | :----------------------------- | :----------------------------- | | Contract assets | $40,177 | $32,249 | | Contract liabilities | $6,140 | $7,058 | Remaining Performance Obligations Outlines the total value of unsatisfied performance obligations and their expected timing of satisfaction - As of March 31, 2023, the Company had $132.6 million in remaining performance obligations, with the majority expected to be satisfied within the next twelve months[34] NOTE 6—Net Income Per Common Share Presents the calculation of basic and diluted net income per common share | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net income | $3,491 | $4,930 | | Basic weighted average common shares | 48,438 | 48,526 | | Basic earnings per share | $0.07 | $0.10 | | Diluted weighted average common shares | 50,288 | 51,326 | | Diluted earnings per share | $0.07 | $0.10 | NOTE 7—Income Taxes Discusses the company's income tax expense and effective tax rate - The Company's effective tax rate was 32.9% for the three months ended March 31, 2023, up from 31.9% in the prior year, primarily due to non-deductible expenses and the mix of earnings and losses in foreign jurisdictions, as well as the impact of vesting restricted stock units[38] NOTE 8—Commitments and Contingencies Discloses the company's contractual commitments and potential contingent liabilities Change 4 Growth Contingent Consideration Details the contingent consideration liability related to the Change 4 Growth acquisition - As of March 31, 2023, the Company recorded a $5.6 million liability for contingent consideration related to the Change 4 Growth acquisition, with $1.5 million classified as current[40] NOTE 9—Segment and Geographical Information Provides financial information broken down by geographic regions of operation - The Company operates as one reportable segment, primarily offering fact-based sourcing advisory services across the Americas, Europe, and Asia Pacific[41] | Geographic Area | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | | :---------------- | :--------------------------------------------- | :--------------------------------------------- | | Americas | $48,408 | $41,437 | | Europe | $23,051 | $23,463 | | Asia Pacific | $7,027 | $7,663 | | Total revenues | $78,486 | $72,563 | NOTE 10—Financing Arrangements and Long-Term Debt Details the company's credit facilities, outstanding debt, and related covenants - On February 22, 2023, the Company amended its senior secured credit facility, increasing revolving commitments from $54.0 million to $140.0 million and eliminating its term loan[44] - Outstanding borrowings were $79.2 million at both March 31, 2023, and December 31, 2022[45] - The credit facility is secured by equity interests and tangible/intangible assets of the Company and its domestic subsidiaries, and includes customary covenants, with which the Company is currently in compliance[44][45] NOTE 11—Subsequent Events Reports on significant events occurring after the balance sheet date - No events occurred after the balance sheet date requiring adjustments to financial statement disclosures[46] - In May 2023, the Company announced a quarterly dividend of $0.045 per share of common stock, expecting a total cash dividend of $0.18 per share for the four quarters ending March 31, 2024[47] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's perspective on the company's financial condition and results of operations for the three months ended March 31, 2023, discussing business overview, detailed financial performance, non-GAAP measures, and liquidity and capital resources BUSINESS OVERVIEW Provides an overview of ISG's global technology research and advisory services, strategy, and revenue streams - ISG is a global technology research and advisory firm specializing in digital transformation, sourcing advisory, and managed governance, serving over 900 clients in more than 20 countries[50] - The company's strategy focuses on strengthening market position, developing new services, geographical expansion, productizing market data, expanding managed services, and growth through acquisitions[51] - Revenues are primarily derived from project-based fees (time and materials or fixed-fee) and recurring revenue streams from annuity-based offerings like ISG GovernX, Research, and Software as a Subscription[52][54] Results of Operations for the Three Months Ended March 31, 2023 and March 31, 2022 Analyzes the company's financial performance for the three months ended March 31, 2023, compared to the prior year Revenues Analyzes the company's revenue performance by geographic area and key drivers - Total revenues increased by $5.9 million, or 8%, for Q1 2023[58] - The Americas saw a 17% increase, driven by Advisory, Network & Software Advisory Services (NaSa), and GovernX[58] - Europe and Asia Pacific experienced decreases, partially due to a $2.1 million negative impact from foreign currency translation[58] | Geographic Area | 2023 (in thousands) | 2022 (in thousands) | Change (in thousands) | Percent Change | | :---------------- | :------------------ | :------------------ | :-------------------- | :------------- | | Americas | $48,408 | $41,437 | $6,971 | 17% | | Europe | $23,051 | $23,463 | $(412) | (2)% | | Asia Pacific | $7,027 | $7,663 | $(636) | (8)% | | Total revenues | $78,486 | $72,563 | $5,923 | 8% | Operating Expenses Examines the changes in direct costs, selling, general and administrative, and depreciation expenses - Total operating expenses increased by $6.6 million, or 10%, in Q1 2023, primarily due to higher contract labor ($2.7 million), license fees ($1.6 million), travel and entertainment ($1.2 million), non-cash stock compensation ($0.5 million), and professional fees ($0.5 million)[59][60] - These increases were partially offset by lower compensation expense ($1.1 million) and a prior year earnout adjustment ($1.4 million)[59][60] - Depreciation and amortization expense increased by $0.3 million, mainly due to the acquisition of Change 4 Growth[65] | Operating Expenses | 2023 (in thousands) | 2022 (in thousands) | Change (in thousands) | Percent Change | | :-------------------------------- | :------------------ | :------------------ | :-------------------- | :------------- | | Direct costs and expenses for advisors | $49,169 | $43,955 | $5,214 | 12% | | Selling, general and administrative | $20,670 | $19,587 | $1,083 | 6% | | Depreciation and amortization | $1,597 | $1,289 | $308 | 24% | | Total operating expenses | $71,436 | $64,831 | $6,605 | 10% | Other Income (Expense), Net Details non-operating income and expenses, including interest and foreign currency impacts - The total increase in other expense of $1.4 million was primarily driven by higher interest expense due to increased interest rates and a higher debt balance, along with a $0.4 million write-off of deferred financing costs[67] | Metric | 2023 (in thousands) | 2022 (in thousands) | Change (in thousands) | Percent Change | | :-------------------------------- | :------------------ | :------------------ | :-------------------- | :------------- | | Interest income | $84 | $45 | $39 | 87% | | Interest expense | $(1,736) | $(563) | $(1,173) | (208)% | | Foreign currency transaction (loss) gain | $(194) | $24 | $(218) | (908)% | | Total other income (expense), net | $(1,846) | $(494) | $(1,352) | (274)% | Income Tax Expense Discusses the company's effective tax rate and factors influencing it - The effective tax rate for Q1 2023 was 32.9%, up from 31.9% in Q1 2022, mainly due to the mix of earnings in various foreign jurisdictions, non-deductible expenses, and the impact of restricted stock unit vesting[69] Non-GAAP Financial Presentation Presents and reconciles non-GAAP financial measures used to assess the company's core operating performance Non-GAAP Financial Measures Presents key non-GAAP financial metrics used by management and investors to assess performance - The Company uses non-GAAP financial measures, including Adjusted EBITDA, Adjusted Net Income, and Adjusted Net Income per Diluted Share, to provide useful information to management and investors by excluding certain non-cash and special charges not indicative of core operations[71] | Metric | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | | :-------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Net income | $3,491 | $4,930 | | Adjusted EBITDA | $10,980 | $10,644 | | Adjusted net income | $6,007 | $6,376 | | Adjusted net income per diluted share | $0.12 | $0.12 | Liquidity and Capital Resources Discusses the company's cash position, financing arrangements, and ability to meet future obligations Liquidity Identifies the primary sources and uses of cash, and the overall cash position - Primary liquidity sources are cash flows from operations, existing cash, and the revolving credit facility[74] - Cash, cash equivalents, and restricted cash decreased by $6.9 million from $30.7 million at December 31, 2022, to $23.8 million at March 31, 2023[74][75] - The net decrease in cash was primarily due to repayment of outstanding debt ($79.2 million), net cash used in operating activities ($3.4 million), cash dividends paid ($2.0 million), and debt financing costs ($0.8 million), partially offset by proceeds from the revolving facility ($79.2 million)[75][76] Capital Resources Describes the company's financing arrangements, debt levels, and future capital needs - On February 22, 2023, the Company amended its senior secured credit facility, increasing revolving commitments from $54.0 million to $140.0 million and eliminating its term loan[76] - Outstanding borrowings were $79.2 million at both March 31, 2023, and December 31, 2022[76][77] - The Company anticipates current cash and ongoing cash flows will meet working capital, capital expenditure, and debt financing needs for at least the next twelve months[78] Dividend Program Details the company's quarterly dividend payments and future dividend expectations - In May 2023, the Company announced a quarterly dividend of $0.045 per share, expecting a total cash dividend of $0.18 per share for the four quarters ending March 31, 2024[79] Off-Balance Sheet Arrangements Confirms the absence of any off-balance sheet financing arrangements or liabilities - The Company does not have any off-balance sheet financing arrangements or liabilities[80] Recently Issued Accounting Pronouncements Discusses the impact of newly adopted accounting standards on the financial statements - Refer to Note 3 for details on recently issued accounting pronouncements[81] Critical Accounting Policies and Accounting Estimates States whether there have been material changes to the company's critical accounting policies - There have been no material changes or developments in the Company's critical accounting policies and estimates as disclosed in its 2022 Annual Report on Form 10-K[82] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK This section outlines the Company's exposure to various market risks, including interest rate risk, foreign currency risk, and credit risk, and discusses their potential impact on financial performance Interest Rate Risk Assesses the company's exposure to fluctuations in interest rates on its variable-rate debt - As of March 31, 2023, the Company had $79.2 million in total debt outstanding, all based on a floating SOFR interest rate, exposing it to increases in interest rates[83][84] - However, the Company believes its total exposure is limited due to its debt to EBITDA ratio of 1.8 times[83][84] Foreign Currency Risk Evaluates the impact of exchange rate movements on the company's revenues and financial results - The Company is exposed to foreign currency translation and transaction risk due to significant revenues from outside the U.S., primarily in Euro, British Pound, and Australian dollar[85] - Foreign currency translation impacted stockholders' equity by $2.7 million in 2022, and transaction risk impacted revenues by $12.7 million (4.4% of revenues) in 2022[86][87] Credit Risk Discusses the company's exposure to credit losses from cash equivalents and accounts receivable - Concentration of credit risk is primarily in cash equivalents with large investment-grade commercial banks and accounts receivable/contract assets[88] - Credit risk from accounts receivable is limited due to a diverse customer base and geographies[88] ITEM 4. CONTROLS AND PROCEDURES This section details the effectiveness of the Company's disclosure controls and procedures and reports on the implementation of a new Enterprise Resources Planning (ERP) system to enhance internal control over financial reporting Disclosure Controls and Procedures Reports on the effectiveness of the company's controls for ensuring timely and accurate financial disclosures - As of March 31, 2023, the Company's management, including the CEO and CFO, concluded that its disclosure controls and procedures were effective[89] Internal Control Over Financial Reporting Describes changes and improvements to the company's internal controls over financial reporting - During Q1 2023, the Company implemented a new Enterprise Resources Planning (ERP) system for accounting, financial reporting, human resources, payroll, and talent management to enhance financial record maintenance and data management[90] - There have been no other changes in internal control over financial reporting during the fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting[92] PART II - OTHER INFORMATION This section covers legal proceedings, risk factors, equity security sales, and a list of exhibits ITEM 1. LEGAL PROCEEDINGS This section states that there are no legal proceedings to report for the Company - The Company has no legal proceedings to report[95] ITEM 1A. RISK FACTORS This section refers to the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022, indicating no material changes - The risk factors included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2022, have not materially changed[96] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS This section provides details on the Company's dividend program and the repurchases of its equity securities during the first quarter of 2023 Dividend Program Details the company's quarterly dividend payments and future dividend expectations - In May 2023, the Company announced a quarterly dividend of $0.045 per share of common stock, with a total expected cash dividend of $0.18 per share for the four quarters ending March 31, 2024[97] Issuer Purchases of Equity Securities Reports on the company's share repurchase program and activity during the period - As of March 31, 2023, approximately $6.5 million remained available under the Company's share repurchase program[98] | Period | Total Number of Securities Purchased (in thousands) | Average Price per Securities | Total Numbers of Securities Purchased as Part of Publicly Announced Plan (in thousands) | Approximate Dollar Value of Securities That May Yet Be Purchased Under The Plan (in thousands) | | :-------------------- | :------------------------------------------------ | :--------------------------- | :------------------------------------------------------------------------------------ | :------------------------------------------------------------------------------------------------ | | January 1 - January 31 | 28 | $4.60 | 28 | $7,023 | | February 1 - February 28 | 4 | $5.33 | 4 | $7,002 | | March 1 - March 31 | 111 | $4.96 | 111 | $6,452 | ITEM 6. EXHIBITS This section lists the exhibits filed as part of this Quarterly Report on Form 10-Q, including the Third Amended and Restated Credit Agreement and various certifications - Exhibits filed include the Third Amended and Restated Credit Agreement, certifications from the CEO and CFO (pursuant to SEC Rule 13a−14(a)/15d−14(a) and 18 U.S.C Section 1350), and Inline XBRL formatted financial statements[101]