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Information Services Group Inc. - Quarter Report: 2019 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, 2019

 

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

Name of each exchange on which registered

Shares of Common Stock, $0.001 par value

The Nasdaq Stock Market LLC

 

Trading symbol             III

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

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

 

Large accelerated filer ☐

 

Accelerated filer ☒

 

Non-accelerated filer ☐

 

Smaller reporting company ☒

 

 

 

 

 

 

Emerging growth company ☐

 

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

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

 

Class

 

Outstanding at October 31, 2019

Common Stock, $0.001 par value

 

47,535,463 shares

 

 

 

 

 

 

 

CAUTIONARY NOTE REGARDING

FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10–Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “continue,” or the negative of such terms or other similar expressions. The actual results of ISG may vary materially from those expected or anticipated in these forward-looking statements. The realization of such forward-looking statements may be impacted by certain important unanticipated factors.  Because of these and other factors that may affect ISG’s operating results, past performance should not be considered as an indicator of future performance, and investors should not use historical results to anticipate results or trends in future periods. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers should carefully review the risk factors described in this and other documents that ISG files from time to time with the Securities and Exchange Commission, including subsequent Current Reports on Form 8-K, Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K.

1

PART I — FINANCIAL INFORMATION

 

ITEM 1.FINANCIAL STATEMENTS (UNAUDITED)

 

INFORMATION SERVICES GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except par value)

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

    

2019

    

2018

 

ASSETS

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

14,208

 

$

18,636

 

Accounts receivable and contract assets, net of allowance of $1,024 and $401, respectively

 

 

82,632

 

 

75,934

 

Prepaid expenses and other current assets

 

 

4,152

 

 

3,620

 

Total current assets

 

 

100,992

 

 

98,190

 

Restricted cash

 

 

85

 

 

89

 

Furniture, fixtures and equipment, net

 

 

5,947

 

 

6,636

 

Right-of-use assets

 

 

7,059

 

 

 —

 

Goodwill

 

 

85,255

 

 

85,389

 

Intangible assets, net

 

 

17,595

 

 

20,622

 

Deferred tax assets

 

 

3,017

 

 

2,944

 

Other assets

 

 

777

 

 

861

 

Total assets

 

$

220,727

 

$

214,731

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

 

$

8,889

 

$

8,453

 

Current maturities of long-term debt

 

 

10,313

 

 

8,250

 

Contract liabilities

 

 

4,004

 

 

6,187

 

Accrued expenses and other current liabilities

 

 

16,671

 

 

17,759

 

Total current liabilities

 

 

39,877

 

 

40,649

 

Long-term debt, net of current maturities

 

 

84,922

 

 

89,212

 

Deferred tax liabilities

 

 

1,677

 

 

1,790

 

Lease liabilities

 

 

5,568

 

 

 —

 

Other liabilities

 

 

4,217

 

 

4,493

 

Total liabilities

 

 

136,261

 

 

136,144

 

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; 48,114 shares issued and 47,475 outstanding at September 30, 2019 and 45,477 shares issued and 45,430 outstanding at December 31, 2018

 

 

48

 

 

45

 

Additional paid-in capital

 

 

243,738

 

 

235,998

 

Treasury stock (639 and 47 common shares, respectively, at cost)

 

 

(2,332)

 

 

(203)

 

Accumulated other comprehensive loss

 

 

(8,137)

 

 

(7,155)

 

Accumulated deficit

 

 

(148,851)

 

 

(150,098)

 

Total stockholders’ equity

 

 

84,466

 

 

78,587

 

Total liabilities and stockholders’ equity

 

$

220,727

 

$

214,731

 

 

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

2

INFORMATION SERVICES GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 

(Unaudited)

(In thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

    

2019

    

2018

 

2019

    

2018

 

Revenues

 

$

68,143

 

$

67,965

 

$

200,262

 

$

207,868

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct costs and expenses for advisors

 

 

37,725

 

 

38,624

 

 

116,636

 

 

121,761

 

Selling, general and administrative

 

 

23,092

 

 

23,990

 

 

70,327

 

 

70,898

 

Depreciation and amortization

 

 

1,672

 

 

1,977

 

 

5,031

 

 

5,872

 

Operating income

 

 

5,654

 

 

3,374

 

 

8,268

 

 

9,337

 

Interest income

 

 

41

 

 

 3

 

 

133

 

 

113

 

Interest expense

 

 

(1,598)

 

 

(1,675)

 

 

(4,763)

 

 

(5,140)

 

Foreign currency transaction gain (loss)

 

 

 7

 

 

(6)

 

 

(28)

 

 

19

 

Income before taxes

 

 

4,104

 

 

1,696

 

 

3,610

 

 

4,329

 

Income tax provision (benefit)

 

 

2,373

 

 

(2,307)

 

 

2,363

 

 

(2,200)

 

Net income

 

$

1,731

 

$

4,003

 

$

1,247

 

$

6,529

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

47,426

 

 

45,115

 

 

46,704

 

 

44,491

 

Diluted

 

 

48,404

 

 

47,100

 

 

47,204

 

 

46,349

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.04

 

$

0.09

 

$

0.03

 

$

0.15

 

Diluted

 

$

0.04

 

$

0.08

 

$

0.03

 

$

0.14

 

Comprehensive income:

 

 

   

 

 

 

 

 

 

 

 

 

 

Net income

 

$

1,731

 

$

4,003

 

$

1,247

 

$

6,529

 

Foreign currency translation, net of tax benefit of $294,  $110,  $309 and $421, respectively.

 

 

(927)

 

 

(786)

 

 

(982)

 

 

(1,790)

 

Comprehensive income:

 

$

804

 

$

3,217

 

$

265

 

$

4,739

 

 

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

3

INFORMATION SERVICES GROUP, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-in-

 

 

Treasury

 

Comprehensive

 

Accumulated

 

Stockholders’

 

 

 

Shares

 

Amount

 

 

Capital

 

 

Stock

 

Loss

 

Deficit

 

Equity

 

Balance December 31, 2018

 

45,477

 

$

45

 

$

235,998

 

$

(203)

 

$

(7,155)

 

$

(150,098)

 

$

78,587

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,247

 

 

1,247

 

Other comprehensive loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(982)

 

 

 —

 

 

(982)

 

Treasury shares repurchased

 

 —

 

 

 —

 

 

 —

 

 

(2,976)

 

 

 —

 

 

 —

 

 

(2,976)

 

Proceeds from issuance of ESPP

 

173

 

 

 —

 

 

575

 

 

 —

 

 

 —

 

 

 —

 

 

575

 

Issuance of treasury shares

 

 —

 

 

 —

 

 

(847)

 

 

847

 

 

 —

 

 

 —

 

 

 —

 

Issuance of common stock for contingent earn-out

 

243

 

 

 1

 

 

864

 

 

 —

 

 

 —

 

 

 —

 

 

865

 

Issuance of common stock for RSU vested

 

2,221

 

 

 2

 

 

(2)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Stock based compensation

 

 —

 

 

 —

 

 

7,150

 

 

 —

 

 

 —

 

 

 —

 

 

7,150

 

Balance September 30, 2019

 

48,114

 

$

48

 

$

243,738

 

$

(2,332)

 

$

(8,137)

 

$

(148,851)

 

$

84,466

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

 

 

    

 

 

    

 

 

    

Accumulated

    

 

 

    

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

 

 

 

Total

 

 

 

Common Stock

 

Paid-in-

 

Treasury

 

Comprehensive

 

Accumulated

 

Stockholders’

 

 

 

Shares

 

Amount

 

Capital

 

Stock

 

Loss

 

Deficit

 

Equity

 

Balance December 31, 2017

 

44,490

 

$

44

 

$

230,134

 

$

(3,161)

 

$

(5,666)

 

$

(157,814)

 

$

63,537

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

6,529

 

 

6,529

 

Other comprehensive loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(1,790)

 

 

 —

 

 

(1,790)

 

Impact of change in accounting policy

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

2,040

 

 

2,040

 

Treasury shares repurchased

 

 —

 

 

 —

 

 

 —

 

 

(2,879)

 

 

 —

 

 

 —

 

 

(2,879)

 

Proceeds from issuance of ESPP

 

 —

 

 

 —

 

 

(18)

 

 

660

 

 

 —

 

 

 —

 

 

642

 

Issuance of treasury shares for RSU vested

 

 —

 

 

 —

 

 

(5,152)

 

 

5,152

 

 

 —

 

 

 —

 

 

 —

 

Issuance of common stock for contingent earn-out

 

290

 

 

 —

 

 

1,200

 

 

 —

 

 

 —

 

 

 —

 

 

1,200

 

Issuance of common stock for RSU vested

 

413

 

 

 1

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 1

 

Stock based compensation

 

 —

 

 

 —

 

 

7,230

 

 

 —

 

 

 —

 

 

 —

 

 

7,230

 

Balance September 30, 2018

 

45,193

 

$

45

 

$

233,394

 

$

(228)

 

$

(7,456)

 

$

(149,245)

 

$

76,510

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

4

INFORMATION SERVICES GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

    

2019

    

2018

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net income

 

$

1,247

 

$

6,529

 

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

 

 

 

 

 

 

 

Depreciation expense

 

 

2,022

 

 

2,075

 

Amortization of intangible assets

 

 

3,009

 

 

3,797

 

Deferred tax expense (benefit) from stock issuances

 

 

172

 

 

(152)

 

Amortization of deferred financing costs

 

 

460

 

 

600

 

Stock-based compensation

 

 

7,150

 

 

7,230

 

Change in fair value of contingent consideration

 

 

 —

 

 

362

 

Provisions for accounts receivable

 

 

738

 

 

501

 

Deferred tax provision

 

 

68

 

 

(245)

 

Loss on disposal of fixed assets

 

 

 4

 

 

32

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable and contract assets

 

 

(8,090)

 

 

(5,778)

 

Prepaid expense and other assets

 

 

1,008

 

 

(26)

 

Accounts payable

 

 

189

 

 

509

 

Contract liabilities

 

 

(2,184)

 

 

(1,865)

 

Accrued expenses

 

 

 9

 

 

(2,415)

 

Net cash provided by operating activities

 

 

5,802

 

 

11,154

 

Cash flows from investing activities

 

 

 

 

 

 

 

Purchase of furniture, fixtures and equipment

 

 

(1,115)

 

 

(3,603)

 

Net cash used in investing activities

 

 

(1,115)

 

 

(3,603)

 

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from debt

 

 

5,000

 

 

 —

 

Principal payments on borrowings

 

 

(7,688)

 

 

(8,574)

 

Payment of Alsbridge Notes

 

 

 —

 

 

(7,000)

 

Proceeds from issuance of employee stock purchase plan shares

 

 

575

 

 

642

 

Payment of contingent consideration

 

 

(865)

 

 

(1,200)

 

Payments related to tax withholding for stock-based compensation

 

 

(2,732)

 

 

(2,743)

 

Equity securities repurchased

 

 

(2,976)

 

 

(2,879)

 

Net cash used in financing activities

 

 

(8,686)

 

 

(21,754)

 

Effect of exchange rate changes on cash

 

 

(433)

 

 

(710)

 

Net decrease in cash, cash equivalents, and restricted cash

 

 

(4,432)

 

 

(14,913)

 

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

 

 

18,725

 

 

28,514

 

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

 

$

14,293

 

$

13,601

 

 

 

 

 

 

 

 

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

Issuance of treasury stock for vested restricted stock awards

 

$

847

 

$

5,151

 

 

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

 

5

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(tabular amounts in thousands, except per share data)

(unaudited)

 

NOTE 1—DESCRIPTION OF ORGANIZATION AND BUSINESS OPERATIONS

 

Information Services Group, Inc. (the “Company” or “ISG”) was founded in 2006 with the strategic vision to become a high-growth, leading provider of information-based advisory services.  The Company 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.

 

NOTE 2—BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements as of September 30, 2019 and for the three and nine months ended September 30, 2019 and 2018, 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, 2019, the results of operations for the three and nine months ended September 30, 2019 and 2018 and the cash flows for the nine months ended September 30, 2019 and 2018.  The condensed consolidated balance sheet as of December 31, 2018 has been derived from the Company’s audited consolidated financial statements.  Operating results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.

 

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, 2018, which are included in the Company’s 2018 Annual Report on Form 10-K filed with the SEC.

 

NOTE 3—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the periods reported.  Actual results may differ from those estimates.  Additionally, ISG has to determine the nature and timing of the satisfaction of performance obligations, the standalone selling price (“SSP”) of certain performance obligations, among other judgments associated with revenue recognition.  Numerous internal and external factors can affect estimates.  Estimates are also used for (but not limited to): allowance for doubtful accounts; useful lives of furniture, fixtures and equipment and definite-lived intangible assets; depreciation expense; fair value assumptions in analyzing goodwill and other long-lived assets for impairment; income taxes and deferred tax asset valuation; and the valuation of stock-based compensation.

 

Restricted Cash

 

Restricted cash consists of cash and cash equivalents which the Company has committed for rent deposits.

 

6

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

Fair Value

 

The carrying value of the Company’s cash and cash equivalents, restricted cash, receivables, accounts payable, other current liabilities, and accrued interest approximated their fair values at September 30, 2019 and December 31, 2018 due to the short-term nature of these accounts.

 

Fair value measurements were applied with respect to our nonfinancial assets and liabilities measured on a nonrecurring basis, which would consist of measurements primarily to contingent consideration in a business combination.

 

Fair value is the price that would be received upon a sale of an asset or paid upon a transfer of a liability in an orderly transaction between market participants at the measurement date (exit price).  Market participants can use market data or assumptions in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique.  These inputs can be readily observable, market-corroborated, or generally unobservable. The use of unobservable inputs is intended to allow for fair value determinations in situations where there is little, if any, market activity for the asset or liability at the measurement date.  Under the fair-value hierarchy:

 

·

Level 1 measurements include unadjusted quoted market prices for identical assets or liabilities in an active market;

 

·

Level 2 measurements include quoted market prices for identical assets or liabilities in an active market that have been adjusted for items such as effects of restrictions for transferability and those that are not quoted but are observable through corroboration with observable market data, including quoted market prices for similar assets; and

 

·

Level 3 measurements include those that are unobservable and of a highly subjective measure.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basis of Fair Value Measurements

 

 

 

September 30, 2019

 

 

     

Level 1

     

Level 2

     

Level 3

     

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

17

 

$

 —

 

$

 —

 

$

17

 

Total

 

$

17

 

$

 —

 

$

 —

 

$

17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration (1)

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

Total

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basis of Fair Value Measurements

 

 

 

December 31, 2018

 

 

     

Level 1

     

Level 2

     

Level 3

     

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

315

 

$

 —

 

$

 —

 

$

315

 

Total

 

$

315

 

$

 —

 

$

 —

 

$

315

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration (1)

 

$

 —

 

$

 —

 

$

1,703

 

$

1,703

 

Total

 

$

 —

 

$

 —

 

$

1,703

 

$

1,703

 

7

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 


(1)  Contingent consideration is included in “Accrued expenses and other current liabilities.” 

 

The fair value measurement of this contingent consideration is classified within Level 3 of the fair value hierarchy and reflects the Company’s own assumptions in measuring fair values using the income approach. In developing these estimates, the Company considered certain performance projections, historical results, and industry trends.  This amount was estimated through a valuation model that incorporated probability-weighted assumptions related to the achievement of these milestones and the likelihood of the Company making payments.  These cash outflow projections have then been discounted using a rate ranging from 14.5% to 28.5%.

 

The following table represents the change in the contingent consideration liability during the nine months ended September 30, 2019 and 2018:  

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

     

2019

     

2018

  

Beginning Balance

 

$

1,703

 

$

3,698

 

Payment of contingent consideration

 

 

(1,730)

 

 

(2,401)

 

Change in value of contingent consideration

 

 

 —

 

 

362

 

Accretion of contingent consideration

 

 

30

 

 

44

 

Unrealized (loss) gain related to currency translation

 

 

(3)

 

 

 1

 

Ending Balance

 

$

 —

 

$

1,704

 

 

The Company’s financial instruments include outstanding borrowings of $96.4  million at September 30, 2019 and $99.1 million at December 31, 2018, which are carried at amortized cost.  The fair value of debt is classified within Level 3 of the fair value hierarchy. The fair value of the Company's outstanding borrowings is approximately $96.3 million and $98.9 million at September 30, 2019 and December 31, 2018, respectively.  The fair values of debt have been estimated using a discounted cash flow analysis based on the Company's incremental borrowing rate for similar borrowing arrangements.  The incremental borrowing rate used to discount future cash flows ranged from 5.27% to 5.34%. The Company also considered recent transactions of peer group companies for similar instruments with comparable terms and maturities as well as an analysis of current market conditions.

 

Recently Issued Accounting Pronouncements

 

In August 2018, the Financial Accounting Standards Board (“FASB”) issued an update that modifies the disclosure requirements for fair value measurements by removing, modifying or adding disclosures. The guidance is effective for fiscal year beginning after December 15, 2019 and early adoption is permitted. Certain disclosures in the update are applied retrospectively, while others are applied prospectively. The Company is currently evaluating the potential impact of adopting this guidance on its financial statements.

 

In September 2018, the FASB issued new guidance which requires a customer in a cloud computing arrangement to determine which implementation costs to capitalize as assets or expense as incurred. Under the new guidance, capitalized implementation costs related to a hosting arrangement that is a service contract will be amortized over the term of the hosting arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use. This update is effective for annual periods beginning after December 15, 2019, and interim periods within those periods, and early adoption is permitted. The Company is currently evaluating the potential impact of adopting this guidance on its financial statements.

 

In November 2018, the FASB issued guidance to clarify that certain transactions between parties to collaborative arrangements should be accounted for in accordance with FASB revenue guidance when the counterparty is a customer.

8

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

This guidance also prohibits the presentation of collaborative arrangements as revenues from contracts with customers if the counterparty is not a customer. This guidance, which is required to be applied retrospectively and is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted, is not expected to have an impact on the Company’s consolidated financial statement.

 

In June 2016, the FASB issued new guidance on the measurement of credit losses for financial assets measured at amortized cost, which includes accounts receivable, and available-for-sale debt securities. The new guidance replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. This update is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods. Early adoption is permitted for annual periods beginning after December 15, 2018, including interim periods within those annual periods. At its July 17th meeting, the FASB voted to propose a deferral of the effective date of this guidance to smaller reporting companies to fiscal years beginning after December 15, 2022.  The FASB expects to issue the final amendments by December 31, 2019.  The Company is currently evaluating the potential impact of adopting this guidance on its financial statements.

 

NOTE 4—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 and products, which, depending on contract type, are sometimes capable of being distinct.  If services are determined to be distinct, they are accounted for as separate performance obligations.  A performance obligation is a promise in a contract to transfer a distinct good or service to the client and is the unit of account.  A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied.  The majority of our contracts have a single performance obligation as the promise to transfer the individual services is not separately identifiable from other promises in the contracts and, therefore, not distinct.  For contracts with multiple performance obligations, including our managed service implementation and software and implementation contract types, the Company allocates the transaction price to each performance obligation using our best estimate of the standalone selling price, or SSP, of each distinct good or service in the contract.  As of September 30, 2019, the Company had $76.6 million of remaining performance obligations, the majority of which are expected to be satisfied within the next year. 

 

We used practical expedients permitted by the standard when applicable.  These practical expedients included:

 

·

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

 

·

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

 

·

presenting all revenue net of any related sales tax.

 

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

 

Estimates were required to determine the SSP for each distinct performance obligation identified within our managed service implementation contracts, software and implementation contracts, and research and subscription contracts. 

 

Contract Balances

 

9

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

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

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31,

 

    

2019

    

2018

Contract assets

 

$

37,455

 

$

22,878

Contract liabilities

 

$

4,004

 

$

6,187

 

Revenue recognized for the three months ended September 30, 2019 that was included in the contract liability balance at July 1, 2019 was $2.9 million and represented primarily revenue from our research and subscription contracts.

 

Revenue recognized for the nine months ended September 30, 2019 that was included in the contract liability balance at January 1, 2019 was $5.9 million and represented primarily revenue from our research and subscription contracts.

 

Disaggregation of Revenue

 

The following table presents our revenue disaggregated by geographic area for the three and nine months ended September 30, 2019 and 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

Geographic area

    

2019

    

2018

    

2019

    

2018

Americas

 

$

40,253

 

$

38,502

 

$

118,738

 

$

121,009

Europe

 

 

22,558

 

 

24,033

 

 

67,562

 

 

69,834

Asia Pacific

 

 

5,332

 

 

5,430

 

 

13,962

 

 

17,025

 

 

$

68,143

 

$

67,965

 

$

200,262

 

$

207,868

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOTE 5—LEASES

 

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, “Leases” (Topic 842) (“ASC 842”).  ASC 842 requires companies to recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets.  We adopted ASC 842 using the effective date of January 1, 2019 as the date of our initial application of the standard. Consequently, financial information for the comparative periods will not be updated. The Company determines if a contract is, or contains, a lease at contract inception.  The Company elected the package of practical expedients for leases that commenced prior to January 1, 2019 and will not reassess: (i) whether any expired or existing contracts are or contain leases; (ii) lease classification for any expired or existing leases; and (iii) initial direct costs capitalization for any existing leases. The Company elected upon adoption, including the use of hindsight in assessing factors that impact determination of the lease term, such as the likelihood that any renewal or purchase options are exercised.  The Company elected to make an accounting policy election to keep leases with an initial term of 12 months or less off the balance sheet. The Company also elected not to separate non-lease components from lease components and instead to account for each separate lease component and the non-lease components associated with that lease component

10

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

as a single lease component. The Company will recognize those lease payments in the consolidated statements of income on a straight-line basis over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of the lease payments.

 

The Company leases its office space and office equipment under long-term operating lease agreements which expire at various dates through August 2026, some of which include options to extend the leases for up to 3 years, and some of which included options to terminate the leases within 1 year. Under the operating leases, the Company pays certain operating expenses relating to the office equipment and leased property.

 

The components of lease expense were as follows:

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

    

2019

    

2019

Lease cost

 

 

 

 

 

 

Operating lease cost

 

$

725

 

$

2,235

Finance lease cost:

 

 

 

 

 

 

Amortization of right-of-use assets

 

 

 6

 

 

 9

Interest on lease liabilities

 

 

 1

 

 

 2

Short-term lease cost

 

 

 9

 

 

19

Variable lease cost

 

 

76

 

 

247

Sublease income

 

 

(61)

 

 

(183)

Total lease cost

 

$

756

 

$

2,329

 

 

 

 

 

 

 

Supplemental cash flow information related to leases was as follows

 

 

 

 

 

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

 

 

Operating cash flows from finance leases

 

$

 5

 

$

 8

Operating cash flows from operating leases

 

$

849

 

$

2,658

Financing cash flows from finance leases

 

$

 1

 

$

 2

11

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

Supplemental balance sheet information related to leases was as follows:

 

 

 

 

 

 

 

 

(In thousands, except lease term and discount rate)

 

 

 

 

September 30,

 

    

 

 

2019

Operating leases

 

 

 

 

 

 

Operating lease right-of-use assets

 

 

 

 

$

7,059

 

 

 

 

 

 

 

Current operating lease liabilities (1)

 

 

 

 

$

3,062

Non-current operating lease liabilities

 

 

 

 

 

5,534

Total operating lease liabilities

 

 

 

 

$

8,596

 

 

 

 

 

 

 

Finance leases

 

 

 

 

 

 

Finance lease right-of-use assets

 

 

 

 

$

57

 

 

 

 

 

 

 

Current finance lease liabilities (1)

 

 

 

 

$

24

Non-current finance lease liabilities

 

 

 

 

 

34

Total finance lease liabilities

 

 

 

 

$

58

 

 

 

 

 

 

 

Weighted average remaining lease term (in years)

 

 

 

 

 

 

Operating leases

 

 

 

 

 

4.3

Finance leases

 

 

 

 

 

2.6

Weighted average discount rate

 

 

 

 

 

 

Operating leases

 

 

 

 

 

7.7%

Finance leases

 

 

 

 

 

7.9%

 

(1)

Current lease liabilities are included in “Accrued expenses and other current liabilities.”

 

Maturities of lease liabilities were as follows:

 

 

 

 

 

 

 

 

 

 

Operating

 

Finance

 

    

Leases

 

Leases

Year Ending December 31,

 

 

 

 

 

 

2019 (excluding the nine months ended September 30, 2019)

 

$

836

 

$

 6

2020

 

 

3,100

 

 

25

2021

 

 

2,123

 

 

25

2022

 

 

1,359

 

 

 8

2023

 

 

952

 

 

 —

Thereafter

 

 

1,756

 

 

 —

Total lease payments

 

 

10,126

 

 

64

Less imputed interest

 

 

(1,530)

 

 

(6)

Total

 

$

8,596

 

$

58

 

12

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

The minimum rental commitments under non-cancelable operating leases under ASC 840 as disclosed in our 2018 Annual Report, with initial or remaining terms of one year or more consist of the following at December 31, 2018:

 

 

 

 

 

 

 

    

Operating

 

 

 

Leases

 

2019

 

$

3,034

 

2020

 

 

2,654

 

2021

 

 

1,808

 

2022

 

 

1,218

 

2023

 

 

925

 

Thereafter

 

 

1,795

 

Total minimum lease payments

 

$

11,434

 

 

 

 

 

 

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 and nine months ended September 30,  2019, 2.2 million and 8.2 million restricted stock units have not been considered in the diluted earnings per share calculation, as the effect would be anti-dilutive, respectively.    

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

    

2019

    

2018

    

2019

    

2018

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

1,731

 

$

4,003

 

$

1,247

 

$

6,529

 

 

Weighted average common shares

 

 

47,426

 

 

45,115

 

 

46,704

 

 

44,491

 

 

Earnings per share

 

$

0.04

 

$

0.09

 

$

0.03

 

$

0.15

 

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

1,731

 

$

4,003

 

$

1,247

 

$

6,529

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average common shares

 

 

47,426

 

 

45,115

 

 

46,704

 

 

44,491

 

 

Potential common shares

 

 

978

 

 

1,985

 

 

500

 

 

1,858

 

 

Diluted weighted average common shares

 

 

48,404

 

 

47,100

 

 

47,204

 

 

46,349

 

 

Diluted earnings per share

 

$

0.04

 

$

0.08

 

$

0.03

 

$

0.14

 

 

 

 

 

 

 

NOTE 7—INCOME TAXES

 

The Company’s effective tax rate for the three and nine months ended September 30, 2019 was 57.8% and 65.5% based on pretax income of $4.1 million and $3.6 million, respectively.   The Company’s effective tax rate for the quarter was impacted by foreign rate differentials and the effects of the Tax Cuts and Jobs Act reducing the Company's ability to fully utilize foreign tax credits in the U.S. and new limitations imposed on executive compensation deductibility.   The effective tax rate was (136.0)% and (50.8)% for the three and nine months ended September 30, 2018, respectively.  The difference for the nine months ended September 30, 2019 was primarily due to the impact of earnings and losses in certain foreign jurisdiction, the release of accruals for uncertain tax positions of $1.7 million due to the expiration of statute of limitations in a foreign and U.S. jurisdictions and $1.3 million due to Company establishing its position on foreign source

13

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

income component of its U.S. foreign tax credit claims, as well as the release of $1.3 million of valuation allowance against U.S. foreign tax credit positions, during the nine months ended September 30, 2018. The difference for the three months ended September 30, 2019 was primarily due to the reversals of $2.3 million of accruals for these uncertain tax positions and the $1.3 million of valuation allowance release related to foreign tax credits.

 

 

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 were aware are properly reflected in the financial statements at September 30, 2019 and December 31, 2018. 

 

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,

 

 

    

2019

    

2018

    

2019

    

2018

    

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas

 

$

40,253

 

$

38,502

 

$

118,738

 

$

121,009

 

Europe

 

 

22,558

 

 

24,033

 

 

67,562

 

 

69,834

 

Asia Pacific

 

 

5,332

 

 

5,430

 

 

13,962

 

 

17,025

 

 

 

$

68,143

 

$

67,965

 

$

200,262

 

$

207,868

 

 

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 December 1, 2016, the Company amended and restated its senior secured credit facility to include a $110.0 million term facility and a $30.0 million revolving facility (the “2016 Credit Agreement”).  The material terms under the 2016 Credit Agreement are as follows:

Each of the term loan facility and revolving credit facility has a maturity date of December 1, 2021 (the “Maturity Date”).

The credit facility is secured by all of the equity interests owned by the Company, and its direct and indirect domestic subsidiaries and, subject to agreed exceptions, the Company’s direct and indirect “first-tier” foreign subsidiaries and a perfected first priority security interest in all of the Company’s and its direct and indirect domestic subsidiaries’ tangible and intangible assets.

The Company’s direct and indirect existing and future wholly-owned domestic subsidiaries serve as guarantors to the Company’s obligations under the senior secured facility.

At the Company’s option, the credit facility bears interest at a rate per annum equal to either (i) the “Base Rate” (which is the highest of (a) the rate publicly announced from time to time by the administrative agent

14

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

as its “prime rate”, (b) the Federal Funds Rate plus 0.5% per annum and (c) the Eurodollar Rate, plus 1.0%), plus the applicable margin (as defined below) or (ii) Eurodollar Rate (adjusted for maximum reserves) as determined by the Administrative Agent, plus the applicable margin.  The applicable margin is adjusted quarterly based upon the Company’s quarterly leverage ratio. 

The Term Loan is repayable in four consecutive quarterly installments of $1,375,000 each, that commenced March 31, 2017, followed by eight consecutive quarterly installments in the amount of $2,062,500 each, that commenced March 31, 2018, followed by seven consecutive quarterly installments of $2,750,000 each, commencing March 31, 2020 and a final payment of the outstanding principal amount of the Term Loan on the Maturity Date.

Mandatory repayments of term loans shall be required from (subject to agreed exceptions) (i) 100% of the proceeds from asset sales by the Company and its subsidiaries, (ii) 100% of the net proceeds from issuances of debt and equity by the Company and its subsidiaries and (iii) 100% of the net proceeds from insurance recovery and condemnation events of the Company and its subsidiaries.

The senior secured credit facility contains a number of covenants that, among other things, place restrictions on matters customarily restricted in senior secured credit facilities, including restrictions on indebtedness (including guarantee obligations), liens, fundamental changes, sales or disposition of property or assets, investments (including loans, advances, guarantees and acquisitions), transactions with affiliates, dividends and other payments in respect of capital stock, optional payments and modifications of other material debt instruments, negative pledges and agreements restricting subsidiary distributions and changes in line of business. In addition, the Company is required to comply with a total leverage ratio and fixed charge coverage ratio.

·

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

On February 10, 2017, as required by the 2016 Credit Agreement, the Company entered into an agreement to cap the interest rate at 4% on the LIBOR component of its borrowings under the term loan facility until December 31, 2019. This interest rate cap was not designated for hedging or speculative purposes. The expense related to this interest rate cap was not material.

During the nine months ended September 30, 2019, the Company received $5.0 million in proceeds from a draw on the revolving credit facility for general corporate purposes.  Such amount is not due until the Maturity Date of the revolving credit facility and is, therefore, included within Long-term debt, net of current maturities, on the condensed consolidated balance sheet as of September 30, 2019.  As of September 30, 2019, the total principal outstanding under the term loan facility and revolving credit facility was $88.9 million and $7.5 million, respectively. The effective interest rate for the term loan facility and revolving credit facility as of September 30, 2019 was 5.3% and 5.3%, respectively.

 

 

 

 

15

 

 

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 2019 revenue growth rates and capital expenditures. Forward-looking statements are based on our beliefs as well as assumptions based on information currently available to us, including financial and operational information, the volatility of our stock price, and current competitive conditions. As a result, these statements are subject to various risks and uncertainties. For a discussion of material risks and uncertainties that the Company faces, see the discussion in our 2018 Annual Report on Form 10-K titled “Risk Factors.”

 

BUSINESS OVERVIEW

 

ISG (Information Services Group) (Nasdaq: III) is a leading global technology research and advisory firm. A trusted business partner to more than 700 clients, including more than 70 of the top 100 enterprises in the world, ISG is committed to helping corporations, public sector organizations, and service and technology providers achieve operational excellence and faster growth. The firm specializes in digital transformation services, including automation, cloud and data analytics; sourcing advisory; managed governance and risk services; network carrier services; technology strategy and operations design; change management; market intelligence and technology research and analysis. Founded in 2006, and based in Stamford, Conn., ISG employs more than 1,300 digital-ready professionals operating in more than 20 countries—a global team known for its innovative thinking, market influence, deep industry and technology expertise, and world-class research and analytical capabilities based on the industry’s most comprehensive marketplace data. For more information, visit www.isg-one.com.

 

Our strategy is to strengthen our existing market position and develop new services and products to support future growth plans. As a result, we are focused on growing our existing service model, expanding geographically, developing new industry sectors, productizing market data assets, expanding our managed services offerings and growing via acquisitions. Although we do not expect any adverse conditions that will impact our ability to execute against our strategy over the next twelve months, the more significant factors that could limit our ability to grow in these areas include global macro-economic conditions and the impact on the overall sourcing market, competition, our ability to retain advisors and reductions in discretionary spending with our top client accounts or other significant client events. Other areas that could impact the business would also include natural disasters, 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 recurring revenue streams.  This includes Managed Services, Research, Public Sector, subscription services around Robotic Process Automation and analytic benchmarking.  All are characterized by subscriptions (i.e., renewal centric as opposed to project centric revenue streams) or multi-year contracts.  Our digital services now span a volume of offerings and have become embedded as part of even our traditional transaction services.  Digital enablement provides capabilities, digital insights and better engagement with clients and partners.

16

 

 

 

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 results in a temporary drop in our utilization rate. Our utilization rate can also be affected by seasonal variations in the demand for our services from our clients. The number of business work days is also affected by the number of vacation days taken by our consultants and holidays in each quarter. We typically have fewer business work days available in the fourth quarter of the year, which can impact revenues during that period. Time and expense engagements do not provide us with a high degree of predictability as to performance in future periods. Unexpected changes in the demand for our services can result in 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, 2019 AND SEPTEMBER 30, 2018

 

Revenues

 

Revenues are generally derived from fixed fee contracts as well as engagements priced on a time and materials basis, which are recorded based on actual time worked as the services are performed. In addition, from time to time, we also earn incremental revenues, in addition to hourly or fixed fee billings, which are contingent on the attainment of certain contractual milestones.  Revenues related to materials (mainly out-of-pocket expenses such as airfare, lodging and meals) required during an engagement generally do not include a profit mark up and can be charged and reimbursed separately or as part of the overall fee arrangement. Invoices are issued to clients monthly, semimonthly or in accordance with the specific contractual terms of each project.

 

We operate in one segment, fact-based sourcing advisory services. We operate principally in the Americas, Europe, and Asia Pacific. Our foreign operations are subject to local government regulations and to the uncertainties of the economic and political conditions of those areas, and the revenue for our foreign operations is predominantly invoiced and collected in local currency.

 

Geographical revenue information for the segment is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent

 

 

 

Geographic Area

    

2019

    

2018

    

Change

    

Change

  

 

    

 

 

(in thousands)

 

 

 

Americas

    

$

40,253

    

$

38,502

    

$

1,751

    

 5

%

 

 

Europe

 

 

22,558

 

 

24,033

 

 

(1,475)

 

(6)

%

 

 

Asia Pacific

 

 

5,332

 

 

5,430

 

 

(98)

 

(2)

%

 

 

Total revenues

 

$

68,143

 

$

67,965

 

$

178

 

 —

%

 

 

 

Revenues increased $0.2 million in the third quarter of 2019.  The increase in revenues in the Americas was primarily attributable to  an increase in our Advisory service line.  The decrease in revenues in Europe was primarily attributable to a decline in our Advisory 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.     

 

17

 

 

Operating Expenses

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent

 

 

 

Operating Expenses

    

2019

    

2018

    

Change

    

Change

  

 

    

 

 

(in thousands)

 

 

 

Direct costs and expenses for advisors

    

$

37,725

    

$

38,624

    

$

(899)

    

(2)

%

 

 

Selling, general and administrative

 

 

23,092

 

 

23,990

 

 

(898)

 

(4)

%

 

 

Depreciation and amortization

 

 

1,672

 

 

1,977

 

 

(305)

 

(15)

%

 

 

Total operating expenses

 

$

62,489

 

$

64,591

 

$

(2,102)

 

(3)

%

 

 

 

Total operating expenses decreased $2.1 million for the quarter with decreases in direct costs and expenses for advisors,  selling, general and administrative (“SG&A”) expenses and depreciation and amortization.  The decreases in operating expenses were primarily due to lower:  compensation and benefits of $1.5 million,  tax indemnity receivable of $0.9 million, professional fees of $0.7 million, travel expenses of $0.3 million, and computer expense of $0.2 million.    These cost decreases were partially offset by higher: contingent consideration of $0.7 million, contract labor of $0.5 million,  and events expense of $0.4 million. 

 

Compensation costs consist of a mix of fixed and variable salaries, annual bonuses, benefits and profit sharing plan contributions. A portion of compensation expenses for certain billable employees are allocated between direct costs and selling, general and administrative costs based on relative time spent between billable and non-billable activities. Bonus compensation is determined based on achievement against Company financial and individual targets, and is accrued monthly throughout the year based on management’s estimates of target achievement. Statutory and elective profit sharing plans are offered to employees as appropriate. Direct costs also include employee taxes, health insurance, workers compensation and disability insurance.

 

Sales and marketing costs consist principally of compensation expense related to business development, proposal preparation and delivery and negotiation of new client contracts. Costs also include travel expenses relating to the pursuit of sales opportunities, expenses for hosting periodic client conferences, public relations activities, participation in industry conferences, industry relations, website maintenance and business intelligence activities. The Company maintains a dedicated global marketing function responsible for developing and managing sales campaigns, brand promotion, the ISG Index and assembling proposals.

 

We maintain a comprehensive program for training and professional development. Related expenses include product training, updates on new service offerings or methodologies and development of project management skills. Also included in training and professional development are expenses associated with the development, enhancement and maintenance of our proprietary methodologies and tools and the systems that support them.

 

General and administrative expenses consist principally of executive management compensation, allocations of billable employee compensation related to general management activities, IT infrastructure, and costs for the finance, accounting, information technology and human resource functions. General and administrative costs also reflect continued investment associated with implementing and operating client and employee management systems. Because our billable personnel operate primarily on client premises, all occupancy expenses are recorded as general and administrative.

 

Depreciation and amortization expense in the third  quarter of 2019 and 2018 was $1.7 million and $2.0 million, respectively.  The decrease of $0.3 million in depreciation and amortization expense was primarily due to prior year intangible assets that are now fully amortized.  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.

18

 

 

 

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.

 

Other Income (Expense), Net

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent

 

 

 

    

2019

    

2018

    

Change

    

Change

 

 

 

 

(in thousands)

 

 

Interest income

    

$

41

    

$

 3

    

$

38

    

1,267

%

 

Interest expense

 

 

(1,598)

 

 

(1,675)

 

 

77

 

 5

%

 

Foreign currency gain (loss)

 

 

 7

 

 

(6)

 

 

13

 

217

%

 

Total other expense, net

 

$

(1,550)

 

$

(1,678)

 

$

128

 

 8

%

 

 

The total decrease of $0.1 million was primarily the result of lower interest expense attributable to our lower debt balance.

 

Income Tax Expense

 

Our quarterly effective tax rate varies from period to period based on the mix of earnings among the various state and foreign tax jurisdictions in which business is conducted and the level of non-deductible expenses projected to be incurred during the current fiscal year.  Our effective tax rate for the three months ended September 30, 2019 was 57.8% compared to (136.0)% for the three months ended September 30, 2018.  The difference for the three months ended September 30, 2019 was primarily due to the impact of earnings and losses in certain foreign jurisdictions.  Additionally, during the three months ended September 30, 2018, the Company released $2.3 million of accruals for uncertain tax positions due to the expiration of statute limitations in a foreign jurisdiction as well as reversed $1.3 million of valuation allowance established against U.S. foreign tax credit positions.  There were no significant changes in uncertain tax position reserves or valuation allowances during the three months ended September 30, 2019.

 

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND SEPTEMBER 30, 2018

 

Revenues

 

Geographical revenue information for the segment is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

Geographic Area

 

 

 

 

 

 

 

 

 

 

Percent

 

 

 

    

2019

    

2018

    

Change

    

Change

  

    

 

 

(in thousands)

 

 

Americas

    

$

118,738

    

$

121,009

    

$

(2,271)

    

(2)

%

 

Europe

 

 

67,562

 

 

69,834

 

 

(2,272)

 

(3)

%

 

Asia Pacific

 

 

13,962

 

 

17,025

 

 

(3,063)

 

(18)

%

 

Total revenues

 

$

200,262

 

$

207,868

 

$

(7,606)

 

(4)

%

 

 

Revenues decreased $7.6 million, or approximately 4%, in 2019.  The decrease in revenues in the Americas was primarily attributable to a  decline in our Managed Services service line.  The decrease in revenues in Europe was primarily attributable to a  decline in our Advisory service line.  The decrease in revenues in Asia Pacific was primarily attributable to a decline in our Advisory and Managed Services service lines.  The translation of foreign currency revenues into U.S. dollars negatively impacted performance in Europe and Asia Pacific compared to the prior year.

19

 

 

 

 

 

 

Operating Expenses

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

Percent

 

 

 

    

2019

    

2018

    

Change

    

Change

  

    

 

 

(in thousands)

 

 

Direct costs and expenses for advisors

    

$

116,636

    

$

121,761

    

$

(5,125)

    

(4)

%

 

Selling, general and administrative

 

 

70,327

 

 

70,898

 

 

(571)

 

(1)

%

 

Depreciation and amortization

 

 

5,031

 

 

5,872

 

 

(841)

 

(14)

%

 

Total operating expenses

 

$

191,994

 

$

198,531

 

$

(6,537)

 

(3)

%

 

 

Total operating expenses decreased $6.5 million for 2019 with decreases in direct costs and expenses for advisors, SG&A expenses, and depreciation and amortization.  The decreases in operating expenses were primarily due to lower: compensation and benefits of $6.0 million, professional fees of $1.4 million,  travel expenses of $1.0 million,  tax indemnity receivable of $0.9 million, change in contingent consideration of $0.3 million, computer expense of $0.2 million, and occupancy of $0.2 million.  These cost decreases were partially offset by higher: license expense of $1.8 million, contract labor expenses of $1.2 million,  severance and integration expenses of $0.9 million, events expense of $0.7 million, bad debt expense of $0.2 million, and marketing expense of $0.2 million.

 

Depreciation and amortization expense in 2019 and 2018 were $5.0 million and $5.9 million, respectively.  The decrease of $0.9 million in depreciation and amortization expense was primarily due to intangible assets that were fully amortized.

 

Other (Expense), Net

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent

 

 

 

    

2019

    

2018

    

Change

    

Change

  

    

 

 

(in thousands)

 

 

Interest income

    

$

133

    

$

113

    

$

20

    

18

%

 

Interest expense

 

 

(4,763)

 

 

(5,140)

 

 

377

 

 7

%

 

Foreign currency (loss) gain

 

 

(28)

 

 

19

 

 

(47)

 

(247)

%

 

Total other income (expense), net

 

$

(4,658)

 

$

(5,008)

 

$

350

 

 7

%

 

 

The total decrease of $0.4 million was primarily the result of lower interest expense attributable to our lower debt balance.

 

Income Tax Expense

 

Our effective tax rate for the nine months ended September 30, 2019 was 65.5% compared to (50.8)% for the nine months ended September 30, 2018.  The difference was primarily due to the impact of earnings and losses in certain foreign jurisdictions and the release of accruals for uncertain tax positions of $1.7 million due to the expiration of statute of limitations in the U.S. and foreign jurisdictions and $1.3 million due to the Company establishing its position on foreign

20

 

 

source income component of its U.S. foreign tax credit claims, as well as the release of $1.3 million of valuation allowance against U.S. foreign tax credit positions, during the nine months ended September 30, 2018.

 

 

 

 

NON-GAAP FINANCIAL PRESENTATION

 

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

 

NON-GAAP FINANCIAL MEASURES

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

    

2019

    

2018

 

    

2019

    

2018

 

    

 

 

(in thousands)

 

Net income

    

$

1,731

    

$

4,003

 

    

$

1,247

    

$

6,529

 

 

Interest expense (net of interest income)

 

 

1,557

 

 

1,672

 

 

 

4,630

 

 

5,027

 

 

Income taxes

 

 

2,373

 

 

(2,307)

 

 

 

2,363

 

 

(2,200)

 

 

Depreciation and amortization

 

 

1,672

 

 

1,977

 

 

 

5,031

 

 

5,872

 

 

Change in contingent consideration

 

 

 —

 

 

(668)

 

 

 

30

 

 

378

 

 

Acquisition-related costs

 

 

50

 

 

280

 

 

 

58

 

 

280

 

 

Severance and integration expense

 

 

462

 

 

332

 

 

 

1,371

 

 

439

 

 

Tax indemnity receivable

 

 

31

 

 

931

 

 

 

31

 

 

931

 

 

Foreign currency transaction (gain) loss

 

 

(7)

 

 

 6

 

 

 

28

 

 

(19)

 

 

Non-cash stock compensation

 

 

2,456

 

 

2,585

 

 

 

7,150

 

 

7,230

 

 

Adjusted EBITDA

 

$

10,325

 

$

8,811

 

 

$

21,939

 

$

24,467

 

 

 

21

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

 

2019

 

2018

 

 

2019

 

2018

 

    

 

 

(in thousands)

 

Net income

    

$

1,731

    

$

4,003

 

 

$

1,247

    

$

6,529

 

 

Non-cash stock compensation

 

 

2,456

 

 

2,585

 

 

 

7,150

 

 

7,230

 

 

Intangible amortization

 

 

1,001

 

 

1,259

 

 

 

3,009

 

 

3,797

 

 

Change in contingent consideration

 

 

 —

 

 

(668)

 

 

 

30

 

 

378

 

 

Acquisition-related costs

 

 

50

 

 

280

 

 

 

58

 

 

280

 

 

Severance and integration expense

 

 

462

 

 

332

 

 

 

1,371

 

 

439

 

 

Foreign currency transaction (gain) loss

 

 

(7)

 

 

 6

 

 

 

28

 

 

(19)

 

 

Tax effect (1)

 

 

(1,268)

 

 

(1,214)

 

 

 

(3,727)

 

 

(3,874)

 

 

Adjusted net income

 

$

4,425

 

$

6,583

 

 

$

9,166

 

$

14,760

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2019

 

2018

 

 

2019

 

2018

 

Net income per diluted share

    

$

0.04

    

$

0.08

 

 

$

0.03

    

$

0.14

 

Non-cash stock compensation

 

 

0.05

 

 

0.05

 

 

 

0.15

 

 

0.16

 

Intangible amortization

 

 

0.02

 

 

0.03

 

 

 

0.06

 

 

0.08

 

Change in contingent consideration

 

 

 —

 

 

(0.01)

 

 

 

0.00

 

 

0.01

 

Acquisition-related costs

 

 

0.00

 

 

0.01

 

 

 

0.00

 

 

0.01

 

Severance and integration expense

 

 

0.01

 

 

0.01

 

 

 

0.03

 

 

0.01

 

Foreign currency transaction (gain) loss

 

 

(0.00)

 

 

0.00

 

 

 

0.00

 

 

0.00

 

Tax effect(1)

 

 

(0.03)

 

 

(0.03)

 

 

 

(0.08)

 

 

(0.09)

 

Adjusted net income per diluted share

 

$

0.09

 

$

0.14

 

 

$

0.19

 

$

0.32

 

_________________________________

(1)

Marginal tax rate of 32% applied.

 

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, 2019, our cash, cash equivalents and restricted cash were $14.3 million, a net decrease of $4.4 million from December 31, 2018, which was primarily attributable to the following:

 

·

net cash provided by operating activities of $5.8 million;

 

·

payments of principal amounts under our Credit Agreement of $7.7 million;

 

·

proceeds from debt of $5.0 million;

 

·

payments of contingent consideration of $0.9 million;

 

·

capital expenditures for furniture, fixtures and equipment of $1.1 million;

 

22

 

 

·

equity repurchases of $3.0 million; and

 

·

payments of $2.7 million related to tax withholding for stock-based compensation.

 

Capital Resources

 

On December 1, 2016, the Company amended and restated its senior secured credit facility to include a $110.0 million term facility and a $30.0 million revolving facility (the “2016 Credit Agreement”).  The material terms under the 2016 Credit Agreement are as follows:

Each of the term loan facility and revolving credit facility has a maturity date of December 1, 2021 (the “Maturity Date”).

The credit facility is secured by all of the equity interests owned by the Company, and its direct and indirect domestic subsidiaries and, subject to agreed exceptions, the Company’s direct and indirect “first-tier” foreign subsidiaries and a perfected first priority security interest in all of the Company’s and its direct and indirect domestic subsidiaries’ tangible and intangible assets.

The Company’s direct and indirect existing and future wholly-owned domestic subsidiaries serve as guarantors to the Company’s obligations under the senior secured facility.

At the Company’s option, the credit facility bears interest at a rate per annum equal to either (i) the “Base Rate” (which is the highest of (a) the rate publicly announced from time to time by the administrative agent as its “prime rate”, (b) the Federal Funds Rate plus 0.5% per annum and (c) the Eurodollar Rate, plus 1.0%), plus the applicable margin (as defined below) or (ii) Eurodollar Rate (adjusted for maximum reserves) as determined by the Administrative Agent, plus the applicable margin.  The applicable margin is adjusted quarterly based upon the Company’s quarterly leverage ratio. 

The Term Loan is repayable in four consecutive quarterly installments of $1,375,000 each, that commenced March 31, 2017, followed by eight consecutive quarterly installments in the amount of $2,062,500 each, that commenced March 31, 2018, followed by seven consecutive quarterly installments of $2,750,000 each, commencing March 31, 2020 and a final payment of the outstanding principal amount of the Term Loan on the Maturity Date.

Mandatory repayments of term loans shall be required from (subject to agreed exceptions) (i) 100% of the proceeds from asset sales by the Company and its subsidiaries, (ii) 100% of the net proceeds from issuances of debt and equity by the Company and its subsidiaries and (iii) 100% of the net proceeds from insurance recovery and condemnation events of the Company and its subsidiaries.

The senior secured credit facility contains a number of covenants that, among other things, place restrictions on matters customarily restricted in senior secured credit facilities, including restrictions on indebtedness (including guarantee obligations), liens, fundamental changes, sales or disposition of property or assets, investments (including loans, advances, guarantees and acquisitions), transactions with affiliates, dividends and other payments in respect of capital stock, optional payments and modifications of other material debt instruments, negative pledges and agreements restricting subsidiary distributions and changes in line of business. In addition, the Company is required to comply with a total leverage ratio and fixed charge coverage ratio.

·

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

On February 10, 2017, as required by the 2016 Credit Agreement, the Company entered into an agreement to cap the interest rate at 4% on the LIBOR component of its borrowings under the term loan facility until December 31, 2019. This interest rate cap was not designated for hedging or speculative purposes. The expense related to this interest rate cap was not material.

23

 

 

During the nine months ended September 30, 2019, the Company received $5.0 million in proceeds from a draw on the revolving credit facility for general corporate purposes.  Such amount is not due until the Maturity Date of the revolving credit facility and is, therefore, included within Long-term debt, net of current maturities, on the condensed consolidated balance sheet as of September 30, 2019.  As of September 30, 2019, the total principal outstanding under the term loan facility and revolving credit facility was $88.9 million and $7.5 million, respectively. The effective interest rate for the term loan facility and revolving credit facility as of September 30, 2019 was 5.3% and 5.3%, respectively.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet financing arrangements or liabilities, guarantee contracts, retained or contingent interests in transferred assets or any obligation arising out of a material variable interest in an unconsolidated entity.

 

Recently Issued Accounting Pronouncements

 

See Note 3 to our condensed consolidated financial statements included elsewhere in this report.

 

Critical Accounting Policies and Accounting Estimates

 

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements. We prepare these financial statements in conformity with U.S. generally accepted accounting principles. As such, we are required to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. We base our estimates on historical experience, available information and various other assumptions we believe to be reasonable under the circumstances. On an on-going basis, we evaluate our estimates; however, actual results may differ from these estimates under different assumptions or conditions. There have been no material changes or developments in our evaluation of the accounting estimates and the underlying assumptions or methodologies that we believe to be Critical Accounting Policies and Estimates as disclosed in our Annual Report on Form 10-K, for the year ended December 31, 2018.

 

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

As a smaller reporting company, we are not required to provide the information required by this item.

 

ITEM 4.CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934  as amended (the “Exchange Act”) is recorded, processed, 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, 2019, as required by the Rule 13a-15(b) under the Exchange Act. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2019.

 

Internal Control Over Financial Reporting

 

There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

24

 

 

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, 2018 have not materially changed.

 

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

 

Issuer Purchases of Equity Securities

 

The following table details the repurchases that were made during the three months ended September 30, 2019.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

Total Numbers of

    

Approximate Dollar

 

 

 

 

 

 

 

 

Securities

 

Value of Securities

 

 

 

Total Number of

 

Average

 

Purchased

 

That May Yet Be

 

 

 

Securities

 

Price per

 

as Part of Publicly

 

Purchased Under

 

Period

 

Purchased

 

Securities

 

Announced Plan

 

The Plan

 

 

 

(In thousands)

 

 

 

 

(In thousands)

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

July 1 – July 31

 

 —

 

$

 —

 

 —

 

$

9,193

 

Aug 1 - Aug 31

 

 —

 

$

 —

 

 —

 

$

9,193

 

Sept 1 - Sept 30

 

 —

 

$

 —

 

 —

 

$

9,193

 

On November 1, 2019, the Company’s Board of Directors approved a new share repurchase authorization of up to $10.8 million.  The new share repurchase program will take effect upon completion of the Company’s current program, which has approximately $9.2 million remaining.  Therefore, the Company has approximately $20 million in the aggregate available under its share repurchase program. The shares may be repurchased from time to time in open market transactions at prevailing market prices, in privately negotiated transactions, pursuant to a Rule 10b5-1 repurchase plan or by other means in accordance with federal securities laws. The timing and the amount of any repurchases will be determined by the Company’s management based on its evaluation of market conditions, capital allocation alternatives, and other factors. There is no guarantee as to the number of shares that will be repurchased, and the repurchase program may be extended, suspended or discontinued at any time without notice at the Company’s discretion. 

 

 

 

 

 

 

 

25

 

 

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, 2019 formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheet, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Cash Flows and (iv) the Notes to Consolidated Financial Statements.

 


*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 7, 2019

/s/ Michael P. Connors

 

Michael P. Connors, Chairman of the

 

Board and Chief Executive Officer

 

 

 

 

Date:  November 7, 2019

/s/ David E. Berger

 

David E. Berger, Executive Vice

 

President and Chief Financial Officer

 

26