Annual Statements Open main menu

Information Services Group Inc. - Quarter Report: 2020 June (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 June 30, 2020

OR

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

For the transition period from               to              

Commission File Number 001-33287

INFORMATION SERVICES GROUP, INC.

(Exact name of Registrant as specified in its charter)

Delaware

20-5261587

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

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

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

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

Title of each class

Trading symbol

Name of each exchange on which registered

Shares of Common Stock, $0.001 par value

III

The Nasdaq Stock Market LLC

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

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

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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 August 5, 2020

Common Stock, $0.001 par value

48,080,466 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)

June 30,

December 31,

    

2020

    

2019

ASSETS

Current assets

Cash and cash equivalents

$

31,552

$

18,153

Accounts receivable and contract assets, net of allowance of $847 and $343, respectively

 

67,352

 

77,076

Prepaid expenses and other current assets

 

3,911

 

4,572

Total current assets

 

102,815

 

99,801

Restricted cash

 

88

 

88

Furniture, fixtures and equipment, net

 

5,359

 

6,014

Right-of-use lease assets

 

5,528

 

6,572

Goodwill

 

85,323

 

85,349

Intangible assets, net

 

14,894

 

16,605

Deferred tax assets

 

2,721

 

3,589

Other assets

 

1,117

 

737

Total assets

$

217,845

$

218,755

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities

Accounts payable

$

10,571

$

8,862

Current maturities of long-term debt

 

4,300

 

11,000

Contract liabilities

 

3,188

 

4,935

Accrued expenses and other current liabilities

 

23,017

 

16,454

Total current liabilities

 

41,076

 

41,251

Long-term debt, net of current maturities

 

75,573

 

74,823

Deferred tax liabilities

 

3,641

 

3,472

Operating lease liabilities

 

4,100

 

5,013

Other liabilities

 

5,160

 

4,522

Total liabilities

 

129,550

 

129,081

Commitments and contingencies (Note 7)

Stockholders’ equity

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

 

 

Common stock, $0.001 par value, 100,000 shares authorized; 48,112 shares issued and 47,675 outstanding at June 30, 2020 and 48,112 shares issued and 47,478 outstanding at December 31, 2019

 

48

 

48

Additional paid-in capital

 

244,257

 

245,572

Treasury stock (437 and 634 common shares, respectively, at cost)

 

(847)

 

(2,051)

Accumulated other comprehensive loss

 

(7,659)

 

(7,138)

Accumulated deficit

 

(147,504)

 

(146,757)

Total stockholders’ equity

 

88,295

 

89,674

Total liabilities and stockholders’ equity

$

217,845

$

218,755

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

Six Months Ended

June 30,

June 30,

    

2020

    

2019

2020

    

2019

Revenues

$

57,394

$

67,328

$

121,104

$

132,119

Operating expenses

Direct costs and expenses for advisors

 

33,759

 

38,146

 

74,776

 

78,911

Selling, general and administrative

 

18,593

 

24,223

 

40,474

 

47,235

Depreciation and amortization

 

1,529

 

1,675

 

3,060

 

3,359

Operating income

 

3,513

 

3,284

 

2,794

 

2,614

Interest income

 

54

 

89

 

127

 

92

Interest expense

 

(819)

 

(1,602)

 

(2,203)

 

(3,165)

Foreign currency transaction (loss) gain

 

(82)

 

(18)

 

80

 

(35)

Income (loss) before taxes

 

2,666

 

1,753

 

798

 

(494)

Income tax provision (benefit)

 

2,054

 

1,339

 

1,545

 

(10)

Net income (loss)

$

612

$

414

$

(747)

$

(484)

Weighted average shares outstanding:

Basic

 

47,601

 

46,880

 

47,458

 

46,344

Diluted

 

48,962

 

47,401

 

47,458

 

46,344

Earnings (loss) per share:

Basic

$

0.01

$

0.01

$

(0.02)

$

(0.01)

Diluted

$

0.01

$

0.01

$

(0.02)

$

(0.01)

Comprehensive income (loss):

Net income (loss)

$

612

$

414

$

(747)

$

(484)

Foreign currency translation, net of tax (expense) benefit of ($287), ($36), $192 and $14, respectively.

 

929

 

104

 

(521)

 

(55)

Comprehensive income (loss):

$

1,541

$

518

$

(1,268)

$

(539)

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

3

INFORMATION SERVICES GROUP, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited)

(In thousands)

Accumulated

Additional

Other

Total

Common Stock

Paid-in-

Treasury

Comprehensive

Accumulated

Stockholders’

Shares

Amount

Capital

Stock

Loss

Deficit

Equity

Balance December 31, 2019

48,112

$

48

$

245,572

$

(2,051)

$

(7,138)

$

(146,757)

$

89,674

Net loss

(747)

(747)

Other comprehensive loss

(521)

(521)

Treasury shares repurchased

(4,775)

(4,775)

Proceeds from issuance of ESPP shares

(59)

338

279

Issuance of treasury shares

(5,641)

5,641

-

Stock based compensation

4,385

4,385

Balance June 30, 2020

 

48,112

$

48

$

244,257

$

(847)

$

(7,659)

$

(147,504)

$

88,295

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 loss

 

 

 

 

 

 

(484)

 

(484)

Other comprehensive loss

 

 

 

 

 

(55)

 

 

(55)

Treasury shares repurchased

 

 

 

 

(2,976)

 

 

 

(2,976)

Proceeds from issuance of ESPP shares

 

122

 

 

429

 

 

 

 

429

Issuance of common stock for contingent earn-out

243

 

1

 

864

865

Issuance of common stock for RSUs vested

 

2,221

 

2

 

(2)

 

 

 

-

Stock based compensation

 

 

 

4,694

 

 

 

4,694

Balance June 30, 2019

 

48,063

 

$

48

 

$

241,983

$

(3,179)

$

(7,210)

$

(150,582)

$

81,060

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)

Six Months Ended

June 30,

2020

    

2019

Cash flows from operating activities

Net loss

$

(747)

$

(484)

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

Depreciation expense

 

1,355

 

1,352

Amortization of intangible assets

 

1,705

 

2,007

Deferred tax expense from stock issuances

 

884

 

115

Write-off of deferred financing costs

167

Amortization of deferred financing costs

 

218

 

312

Stock-based compensation

 

4,385

 

4,694

Provisions for accounts receivable

676

313

Deferred tax provision

 

315

 

675

Loss on disposal of fixed assets

 

 

4

Changes in operating assets and liabilities:

Accounts receivable and contract assets

 

8,708

 

(6,970)

Prepaid expense and other assets

 

1,699

 

1,067

Accounts payable

 

1,433

 

(617)

Contract liabilities

 

(1,747)

 

(2,611)

Accrued expenses

 

7,920

 

725

Net cash provided by operating activities

 

26,971

 

582

Cash flows from investing activities

Purchase of furniture, fixtures and equipment

 

(427)

 

(674)

Net cash used in investing activities

 

(427)

 

(674)

Cash flows from financing activities

Principal payments on borrowings, net

 

(5,938)

 

(2,125)

Payment of contingent consideration

(865)

Proceeds from issuance of employee stock purchase plan shares

 

279

429

Debt financing costs

 

(934)

Payments related to tax withholding for stock-based compensation

 

(1,631)

 

(2,571)

Equity securities repurchased

 

(4,775)

 

(2,976)

Net cash used in financing activities

 

(12,999)

 

(8,108)

Effect of exchange rate changes on cash

 

(146)

 

(26)

Net increase (decrease) in cash, cash equivalents, and restricted cash

 

13,399

 

(8,226)

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

 

18,241

 

18,725

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

$

31,640

$

10,499

Non-cash investing and financing activities:

Issuance of treasury stock for vested restricted stock awards

$

5,641

$

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 June 30, 2020 and for the three and six months ended June 30, 2020 and 2019, have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements and pursuant to Form 10-Q and Article 10 of Regulation S-X.  In the opinion of management, all adjustments (consisting of normal recurring accruals) have been made that are considered necessary for a fair statement of the financial position of the Company as of June 30, 2020, the results of operations for the three and six months ended June 30, 2020 and 2019.  The condensed consolidated balance sheet as of December 31, 2019 has been derived from the Company’s audited consolidated financial statements.  Operating results for the three and six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

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, 2019, which are included in the Company’s 2019 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.

Fair Value

The carrying value of the Company’s cash and cash equivalents, receivables, accounts payable, other current liabilities, and accrued interest approximated their fair values at June 30, 2020 and December 31, 2019 due to the short-term nature of these accounts.

6

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

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

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

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

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

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

Basis of Fair Value Measurements

June 30, 2020

     

Level 1

     

Level 2

     

Level 3

     

Total

 

Assets:

Cash equivalents

 

$

17

 

$

 

$

 

$

17

Total

 

$

17

 

$

 

$

 

$

17

Basis of Fair Value Measurements

December 31, 2019

     

Level 1

     

Level 2

     

Level 3

     

Total

 

Assets:

Cash equivalents

 

$

17

 

$

 

$

 

$

17

Total

 

$

17

 

$

 

$

 

$

17

The Company’s financial instruments include outstanding borrowings of $80.9 million at June 30, 2020 and $86.9 million at December 31, 2019, 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 $79.9 million and $86.7 million at June 30, 2020 and December 31, 2019, 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 2.41 to 2.55%. 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 June 2016, the FASB issued new guidance on the measurement of credit losses for financial assets measured at amortized cost, which includes accounts receivable, and available-for-sale debt securities. The new guidance replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses and additional disclosures. As a smaller reporting company, this guidance is effective for fiscal years

7

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

beginning after December 15, 2022.  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, 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.  

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

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.

    

June 30,

    

December 31,

    

2020

    

2019

Contract assets

$

28,324

$

28,529

Contract liabilities

$

3,188

$

4,935

Revenue recognized for the three months ended June 30, 2020 that was included in the contract liability balance at April 1, 2020 was $2.0 million and represented primarily revenue from our fixed fee and subscription contracts.

Revenue recognized for the six months ended June 30, 2020 that was included in the contract liability balance at January 1, 2020 was $4.5 million and represented primarily revenue from our fixed fee and subscription contracts.

8

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

Disaggregation of Revenue

The following table presents our revenue disaggregated by geographic area for the three and six months ended June 30, 2020 and 2019.

Three Months Ended

Six Months Ended

June 30,

June 30,

Geographic area

    

2020

    

2019

    

2020

    

2019

Americas

$

31,620

$

40,256

68,453

$

78,485

Europe

20,958

22,800

 

43,117

45,004

Asia Pacific

4,816

4,272

9,534

8,630

$

57,394

$

67,328

$

121,104

$

132,119

Remaining Performance Obligations

As of June 30, 2020, the Company had $86.0 million of remaining performance obligations, the majority of which are expected to be satisfied within the next year.

NOTE 5—NET INCOME PER COMMON SHARE

Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that would share in the net income of the Company.  For the three and six months ended June 30, 2020, 1.2 million and 5.8 million restricted stock units, respectively, have not been considered in the diluted earnings per share calculation, as the effect would be anti-dilutive.      

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

Three Months Ended June 30,

Six Months Ended June 30,

    

2020

    

2019

    

2020

    

2019

Basic:

Net income (loss)

$

612

$

414

$

(747)

$

(484)

Weighted average common shares

 

47,601

 

46,880

 

47,458

 

46,344

Earnings (loss) per share

$

0.01

$

0.01

$

(0.02)

$

(0.01)

Diluted:

Net income (loss)

$

612

$

414

$

(747)

$

(484)

Basic weighted average common shares

 

47,601

 

46,880

 

47,458

 

46,344

Potential common shares

 

1,361

 

521

 

 

Diluted weighted average common shares

 

48,962

 

47,401

 

47,458

 

46,344

Diluted earnings (loss) per share

$

0.01

$

0.01

$

(0.02)

$

(0.01)

9

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

NOTE 6—INCOME TAXES

The Company’s effective tax rate for the three and six months ended June 30, 2020 was 77.0% and 193.6% based on pretax income of $2.7 million and $0.8 million, respectively.   The Company’s effective tax rate for the quarter ended June 30, 2020 was impacted by the earnings and losses in certain foreign jurisdictions and the impact of restricted stock units vesting.  The Company’s effective tax rate for the three and six months ended June 30, 2019 was 76.4% and 2.0%. The difference was primarily due to the impact of earnings and losses in certain foreign jurisdiction.

During the quarter ended June 30, 2020, the Company has recorded the impact of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) signed into law on March 27, 2020.  The CARES Act implemented changes to raise the limitation on interest expense current deductibility and leasehold improvement asset classification for bonus depreciation eligibility, which allowed the Company to reduce prior accruals made for its 2019 income tax provision.  The tax effect of these changes total $0.8 million and are included in Prepaid expenses and other current assets and Deferred tax assets; there is no impact on the Company’s effective tax rate for the quarter ended June 30, 2020 as a result of the CARES Act.

NOTE 7—COMMITMENTS AND CONTINGENCIES

The Company is subject to contingencies which arise through the ordinary course of business. All material liabilities of which management is aware are properly reflected in the financial statements at June 30, 2020 and December 31, 2019.

NOTE 8—SEGMENT AND GEOGRAPHICAL INFORMATION

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

Geographical revenue information for the segment is as follows:

Three Months Ended

Six Months Ended

June 30,

June 30,

    

2020

    

2019

    

2020

    

2019

Revenues

Americas

$

31,620

$

40,256

$

68,453

$

78,485

Europe

 

20,958

 

22,800

 

43,117

 

45,004

Asia Pacific

 

4,816

 

4,272

 

9,534

 

8,630

$

57,394

$

67,328

$

121,104

$

132,119

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 9—FINANCING ARRANGEMENTS AND LONG-TERM DEBT

On March 10, 2020, the Company amended and restated its senior secured credit facility to include a $86.0 million term facility and to increase the revolving commitments per the revolving facility (the “2020 Credit Agreement”) from $30.0 million to $54.0 million. The material terms under the 2020 Credit Agreement are as follows:

Each of the term loan facility and revolving credit facility has a maturity date of March 10, 2025 (the “Maturity Date”).

10

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

The credit facility is secured by all of the equity interests owned by the Company, and its direct and indirect domestic subsidiaries and, subject to agreed exceptions, the Company’s direct and indirect “first-tier” foreign subsidiaries and a perfected first priority security interest in all of the Company’s and its direct and indirect domestic subsidiaries’ tangible and intangible assets.
The Company’s direct and indirect existing and future wholly owned domestic subsidiaries serve as guarantors to the Company’s obligations under the senior secured facility.
At the Company’s option, the credit facility bears interest at a rate per annum equal to either (i) the “Base Rate” (which is the highest of (a) the rate publicly announced from time to time by the administrative agent as its “prime rate”, (b) the Federal Funds Rate plus 0.5% per annum and (c) the Eurodollar Rate, plus 1.0%), plus the applicable margin (as defined below) or (ii) Eurodollar Rate (adjusted for maximum reserves) as determined by the Administrative Agent, plus the applicable margin.  The applicable margin is adjusted quarterly based upon the Company’s quarterly leverage ratio.  
The term loan is repayable in nineteen consecutive quarterly installments of $1,075,000 each that commenced on June 30, 2020 and a final payment of the outstanding principal amount of the term loan on the Maturity Date.
Mandatory repayments of term loans shall be required from (subject to agreed exceptions) (i) 100% of the 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.

The Company’s financial statements include outstanding borrowings of $80.9 and $86.9 million at June 30, 2020 and December 31, 2019, respectively, 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 $79.9 million and $86.7 million at June 30, 2020 and December 31, 2019, 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 2.41% to 2.55%. 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.

As of June 30, 2020, the total principal outstanding under the term loan facility and revolving credit facility was $80.9 million and $0.0 million, respectively. The effective interest rate for the term loan facility and revolving credit facility as of June 30, 2020 was 2.55% and 2.41%, respectively.

11

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

NOTE 10 - RISKS AND UNCERTAINTIES

On March 11, 2020, the World Health Organization declared the coronavirus (COVID-19) a pandemic, following the rapid spread of the disease from where it was first diagnosed, in China, to nations worldwide. The outbreak sparked responses across countries, states and cities worldwide to enforce various measures of social distancing and shelter-in-place orders and temporary closure of non-essential businesses to reduce further transmission of the virus. As a result of these measures, the US and global markets have seen significant disruption, the extent and duration of which remains highly uncertain.

The impact of COVID-19 pandemic is rapidly developing and, therefore, the Company cannot predict with certainty the extent to which the pandemic will negatively impact our results of operations, cash flows and financial position, liquidity and ability to remain in compliance with our financial covenants. In the second quarter of 2020, the Company experienced a year-over-year revenue decline and this impact is expected to continue through at least the fourth quarter of 2020.  Given the uncertainty of the marketplace, the Company has implemented business continuity plans to ensure that the Company is able to remain fully operational with a remote workforce, conducted financial modeling scenarios in order to ensure prudent cost containment, and has proactively implemented a series of cash conservation measures.  These measures include actions taken in the second and third quarter of 2020  to reduce personnel costs and other operating expenses, including reductions in staffing and contractor levels, vendor spending, travel, and other measures.

The Company has financial covenants underlying its debt which require an adjusted EBITDA to Debt ratio of 3.25.  In light of the pandemic, there is uncertainty regarding the marketplace demand for the Company’s services and thus the Company’s future revenue generation.  Accordingly, in light of this uncertainty, the Company has developed plans to further reduce operating expenses to the extent more prolonged revenue shortfalls are experienced which would prevent the Company from complying with its financial covenants.  

Management's plans would allow the Company to generate sufficient cash flows to reduce the Company's outstanding net debt and enable the Company to comply with the terms of its debt arrangements.  Accordingly, the Company believes that based upon current facts and circumstances, its existing cash coupled with the cash flows generated from operations will be sufficient to meet its cash needs for 12 months from the date of issuance of these financial statements.

NOTE 11 – SUBSEQUENT EVENT

On July 8, 2020, a subsidiary of the Company executed an Asset Purchase Agreement with Neuralify, LLC (“the Agreement”) and consummated the acquisition of substantially all of the assets and assumed certain liabilities of Neuralify, LLC.  The purchase price was comprised of $2 million of cash consideration paid at closing and Neuralify, LLC will also have the right to receive additional consideration paid via earn-out payments during the next 18 months, if certain financial targets are met.

12

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 2020 revenue growth rates and capital expenditures. Forward-looking statements are based on our beliefs as well as assumptions based on information currently available to us, including financial and operational information, the volatility of our stock price, current competitive conditions and the impact of COVID-19. As a result, these statements are subject to various risks and uncertainties. For a discussion of material risks and uncertainties that the Company faces, see the discussion in our 2019 Annual Report on Form 10-K titled “Risk Factors” and in this Quarterly Report on Form 10-Q under Item 1A. “Risk Factors.”

BUSINESS OVERVIEW

ISG (Information Services Group) (Nasdaq: III) is a leading global technology research and advisory firm. A trusted business partner to approximately 700 clients, including more than 75 of the top 100 enterprises in our markets, ISG is committed to helping corporations, public sector organizations, and service and technology providers achieve operational excellence and faster growth. The firm specializes in digital transformation services, including automation, cloud and data analytics; sourcing advisory; managed governance and risk services; network carrier services; technology strategy and operations design; change management; market intelligence and technology research and analysis. Founded in 2006, and based in Stamford, Conn., ISG employs approximately 1,300 digital-ready professionals operating in more than 20 countries—a global team known for its innovative thinking, market influence, deep industry and technology expertise, and world-class research and analytical capabilities based on the industry’s most comprehensive marketplace data. For more information, visit www.isg-one.com.

Our strategy is to strengthen our existing market position and develop new services and products to support future growth plans. As a result, we are focused on growing our existing service model, expanding geographically, developing new industry sectors, productizing market data assets, expanding our managed services offerings and growing via acquisitions. Although we do not expect any adverse conditions that will impact our ability to execute against our strategy over the next twelve months, the more significant factors that could limit our ability to grow in these areas include global macro‑economic conditions and the impact on the overall sourcing market, competition, our ability to retain advisors and reductions in discretionary spending with our top client accounts or other significant client events. Other areas that could impact the business would also include natural disasters, pandemics, such as COVID-19, legislative and regulatory changes and capital market disruptions.

We principally derive revenues from fees for services generated on a project by project basis. Prior to the commencement of a project, we reach agreement with the client on rates for services based upon the scope of the project, staffing requirements and the level of client involvement. Revenues for services rendered are recognized on a time and materials basis or on a fixed fee or capped fee basis in accordance with accounting and disclosure requirements for revenue recognition.

Revenues for time and materials contracts are recognized based on the number of hours worked by our advisors at an agreed upon rate per hour and are recognized in the period in which services are performed. Revenues for time and materials contracts are billed monthly, semimonthly or in accordance with the specific contractual terms of each project.

We also derive our revenues from certain recurring revenue streams.  These include such annuity-based ISG offerings as ISG GovernX®, Research, Software as a Subscription (Automation licenses), ISG Inform™ and the multi-year Public Sector contracts.  These offerings are characterized by subscriptions (i.e., renewal centric as opposed to project centric revenue streams) or, in some instances, multi-year contracts.  Our digital services now span a volume of offerings and have

13

become embedded as part of even our traditional transaction services.  Digital enablement provides capabilities, digital insights and better engagement with clients and partners.

Our results are impacted principally by our full‑time consultants’ utilization rate, the number of business days in each quarter and the number of our revenue-generating professionals who are available to work. Our utilization rate can be negatively affected by increased hiring because there is generally a transition period for new professionals that 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.

CURRENT ENVIRONMENT

On March 11, 2020, the World Health Organization categorized the novel coronavirus (COVID-19) as a pandemic, and COVID-19 has spread throughout the United States and the rest of the world with different geographical locations impacted more than others. The outbreak of COVID-19 and public and private sector measures to reduce its transmission, such as the imposition of social distancing and orders to work-from-home, stay-at-home and shelter-in-place, have, to some degree, adversely impacted our business and demand for our services. Businesses have adjusted, reduced or suspended operating activities, which has negatively impacted the markets and some of the clients we serve. We continue to believe our focus on our strategic strengths, including technology expertise, digital transformation, data management capabilities, and the relevance of our service offerings will continue to serve our Firm well as we navigate a rapidly changing marketplace. Notwithstanding our market position, the effects of the COVID-19 pandemic will negatively impact our results of operations, cash flows and financial position; however, the extent of the impact will vary depending on the duration and severity of the economic and operational impacts of COVID-19.

We have taken steps to protect the safety of our employees, with a large majority of our worldwide workforce now working from home, while developing creative ideas to protect the health and well-being of our communities and setting up our people to help them do their best work for our clients while working remotely. With respect to managing costs, we have multiple initiatives underway to align our expenses with changes in revenue. In addition, we remain committed to and have intensified our efforts around cash flow discipline, including the identification of significant capital expenditures that can be deferred and working capital management. We began to see the effects of COVID-19 on client spending towards the end of the first quarter, and we experienced a greater impact on our second quarter results as clients responded to the current economic conditions by reducing or deferring their consultant spending, which will affect the demand or timing of our services.  There are also expected to be impacts of COVID-19 on client spending in the third and fourth quarters of 2020.

Even prior to the COVID-19 pandemic, we have taken steps to strengthen our financial position, which will serve us well during this period of heightened uncertainty. As discussed in more detail below under “Liquidity and Capital Resources,” on March 10, 2020, we refinanced our credit facility and expanded our borrowing capacity under our revolving credit agreement, and extended the maturity date, lowered the interest rate, and secured less restrictive debt covenants.  We believe these steps will enhance our financial resources as we navigate this uncertain period ahead, including minimizing the risk of debt covenant violations, and maintaining our ability to continue as a going concern.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2020 AND JUNE 30, 2019

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, we also earn revenues 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

14

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 June 30,

 

Percent

 

Geographic Area

    

2020

    

2019

    

Change

    

Change

  

    

(in thousands)

 

Americas

    

$

31,620

    

$

40,256

    

$

(8,636)

    

(21)

%

Europe

 

20,958

 

22,800

 

(1,842)

 

(8)

%

Asia Pacific

 

4,816

 

4,272

 

544

 

13

%

Total revenues

$

57,394

$

67,328

$

(9,934)

 

(15)

%

Revenues decreased $9.9 million, or approximately 15%, for the three months ended in the second quarter.  The decrease in revenues in the Americas and Europe was primarily attributable to a decline in our Advisory service line, primarily related to the COVID-19 pandemic.  The increase in revenues in Asia Pacific was primarily attributable to the increase 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.      

Operating Expenses

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

Three Months Ended June 30,

 

Percent

 

Operating Expenses

    

2020

    

2019

    

Change

    

Change

  

    

(in thousands)

 

Direct costs and expenses for advisors

    

$

33,759

    

$

38,146

    

$

(4,387)

    

(12)

%

Selling, general and administrative

 

18,593

 

24,223

 

(5,630)

 

(23)

%

Depreciation and amortization

 

1,529

 

1,675

 

(146)

 

(9)

%

Total operating expenses

$

53,881

$

64,044

$

(10,163)

 

(16)

%

Total operating expenses decreased $10.2 million, or approximately 16%, for the three months ended in the second quarter with a decrease in direct costs and expenses for advisors, selling, general and administrative (“SG&A”) expenses, and depreciation and amortization.  The decrease in operating expenses were primarily due to lower:  travel and entertainment of $5.9 million, compensation costs of $1.1 million, and contract labor of $0.8 million.  These cost decreases were partially offset by higher bad debt expense of $0.6 million, primarily as a result of the impact of the COVID-19 pandemic on certain of our clients.

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

15

of sales opportunities, expenses for hosting periodic client conferences, public relations activities, participation in industry conferences, industry relations, website maintenance and business intelligence activities. The Company maintains a dedicated global marketing function responsible for developing and managing sales campaigns, brand promotion, the ISG Index and assembling proposals.

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

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

Depreciation and amortization expense in the second quarter of 2020 and 2019 was $1.5 million and $1.7 million, respectively.  The decrease of $0.2 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.

We amortize our intangible assets (e.g. client relationships and databases) over their estimated useful lives. Goodwill related to acquisitions is not amortized, but is subject to annual impairment testing and interim impairment tests, if triggering events are identified. No interim impairment testing triggering events were identified during the first or second quarter of 2020 or 2019, inclusive of our consideration of the impact of COVID-19 on our business.

Other Income (Expense), Net

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

Three Months Ended June 30,

 

Percent

 

    

2020

    

2019

    

Change

    

Change

 

(in thousands)

 

Interest income

    

$

54

    

$

89

    

$

(35)

    

(39)

%

Interest expense

 

(819)

 

(1,602)

 

783

 

49

%

Foreign currency loss

 

(82)

 

(18)

 

(64)

 

(356)

%

Total other expense, net

$

(847)

$

(1,531)

$

684

 

45

%

The total decrease of $0.7 million was primarily the result of lower interest expense attributable to our lower debt balance and lower interest rates.

Income Tax Expense

Our quarterly effective tax rate varies from period to period based on the mix of earnings among the various state and foreign tax jurisdictions in which business is conducted and the level of non-deductible expenses projected to be incurred during the current fiscal year.  Our effective tax rate for the quarter ended June 30, 2020 was 77.0% compared to 76.4% for the quarter ended June 30, 2019.  The difference for the quarter ended June 30, 2020 was primarily due to the impact of earnings and losses in certain foreign jurisdictions and the impact of vesting of restricted stock units.  The Company’s effective tax rate for the quarter ended June 30, 2019 was greater than the statutory rate primarily due to the impact of projected earnings in foreign jurisdictions and non-deductible expenses. There were no significant changes in uncertain tax position reserves or valuation allowances during the quarter ended June 30, 2020.

16

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2020 AND JUNE 30, 2019

Revenues

Geographical revenue information for the segment is as follows:

Six Months Ended June 30,

 

Percent

 

Geographic Area

    

2020

    

2019

    

Change

    

Change

  

    

(in thousands)

 

Americas

    

$

68,453

    

$

78,485

    

$

(10,032)

    

(13)

%

Europe

 

43,117

 

45,004

 

(1,887)

 

(4)

%

Asia Pacific

 

9,534

 

8,630

 

904

 

10

%

Total revenues

$

121,104

$

132,119

$

(11,015)

 

(8)

%

Revenues decreased $11.0 million, or approximately 8%, in 2020 to date.  The decrease in revenues in the Americas and Europe was primarily attributable to a decline in our Advisory service line, primarily related to the COVID-19 pandemic.  The increase in revenues in Asia Pacific was primarily attributable to the increase in our Advisory 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.      

Operating Expenses

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

Six Months Ended June 30,

 

Percent

 

Operating Expenses

    

2020

    

2019

    

Change

    

Change

  

    

(in thousands)

 

Direct costs and expenses for advisors

    

$

74,776

    

$

78,911

    

$

(4,135)

    

(5)

%

Selling, general and administrative

 

40,474

 

47,235

 

(6,761)

 

(14)

%

Depreciation and amortization

 

3,060

 

3,359

 

(299)

 

(9)

%

Total operating expenses

$

118,310

$

129,505

$

(11,195)

 

(9)

%

Total operating expenses decreased $11.2 million, or approximately 9%, in 2020 with a decrease in direct costs and expenses for advisors, selling, general and administrative (“SG&A”) expenses, and depreciation and amortization.  The decrease in operating expenses were primarily due to lower:  travel and entertainment of $6.6 million, compensation costs of $1.1 million, conference expense of $0.7 million, marketing expense of $0.6 million, and contract labor of $0.5 million.  These cost decreases were partially offset by higher bad debt expenses of $0.4 million, primarily as a result of the impact of the COVID-19 pandemic on certain of our clients.

Depreciation and amortization expense in the second quarter of 2020 and 2019 was $3.1 million and $3.4 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.  

17

Other Income (Expense), Net

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

Six Months Ended June 30,

 

Percent

 

Other income (expense), Net

    

2020

    

2019

    

Change

    

Change

  

    

(in thousands)

 

Interest income

    

$

127

    

$

92

    

$

35

    

38

%

Interest expense

 

(2,203)

 

(3,165)

 

962

 

30

%

Foreign currency (loss) gain

 

80

 

(35)

 

115

 

329

%

Total other income (expense), net

$

(1,996)

$

(3,108)

$

1,112

 

36

%

The total decrease of $1.1 million was primarily the result of lower interest expense of $1.0 million attributable to our lower debt balance and lower interest rates, partially offset by an increase in interest expense associated with the write-off of deferred financing costs, and an increase of $0.1 million of foreign currency gain.

Income Tax Expense

Our effective tax rate for the six months ended June 30, 2020 was 193.6% compared to 2.0% for the six months ended June 30, 2019.  The difference was primarily due to the impact of vesting of restricted stock units for the six months ended June 30, 2020 and due to the impact of earnings and losses in certain foreign jurisdictions and the release of $0.7 million of accruals for uncertain tax positions due to the expiration of statute limitations in a foreign jurisdiction for the six months ended June 30, 2019.

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, integration and other expense, and financing-related costs), 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, integration and other expense, financing-related costs, and write-off of deferred financing costs 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

18

believe may obscure the user’s overall understanding of the Company’s current financial performance and the Company’s prospects for the future. We believe that these non-GAAP measures provide useful information to investors because they improve the comparability of the financial results between periods and provide for greater transparency of key measures used to evaluate the Company’s performance.

Three Months Ended June 30,

Six Months Ended June 30,

    

2020

    

2019

 

    

2020

    

2019

 

(in thousands)

Net income (loss)

    

$

612

    

$

414

    

$

(747)

    

$

(484)

Interest expense (net of interest income)

 

765

 

1,513

 

2,076

 

3,073

Income taxes

 

2,054

 

1,339

 

1,545

 

(10)

Depreciation and amortization

 

1,529

 

1,675

 

3,060

 

3,359

Change in contingent consideration

 

 

 

 

30

Acquisition-related costs

 

201

 

(21)

 

250

 

7

Severance, integration and other expense

 

196

 

731

 

367

 

909

Financing-related costs

92

Foreign currency transaction (gain) loss

 

82

 

18

 

(80)

 

35

Non-cash stock compensation

 

1,966

 

2,384

 

4,385

 

4,694

Adjusted EBITDA

$

7,405

$

8,053

$

10,948

$

11,613

Three Months Ended June 30,

Six Months Ended June 30,

2020

2019

2020

2019

(in thousands)

Net income (loss)

    

$

612

    

$

414

    

$

(747)

    

$

(484)

 

Non-cash stock compensation

 

1,966

 

2,384

 

4,385

 

4,694

Intangible amortization

 

860

 

1,003

 

1,705

 

2,007

Change in contingent consideration

 

 

 

 

30

Acquisition-related costs

 

201

 

(21)

 

250

 

7

Severance, integration and other expense

 

196

 

731

 

367

 

909

Financing-related costs

92

Write-off of deferred financing costs

167

Foreign currency transaction (gain) loss

 

82

 

18

 

(80)

 

35

Tax effect (1)

 

(1,058)

 

(1,317)

 

(2,204)

 

(2,458)

Adjusted net income

$

2,859

$

3,212

$

3,935

$

4,740

Three Months Ended June 30,

Six Months Ended June 30,

2020

2019

2020

2019

 

Net income (loss) per diluted share

    

$

0.01

    

$

0.01

    

$

(0.02)

    

$

(0.01)

Non-cash stock compensation

 

0.04

 

0.05

 

0.09

 

0.10

Intangible amortization

 

0.02

 

0.02

 

0.04

 

0.04

Change in contingent consideration

 

 

 

 

Acquisition-related costs

 

0.01

 

0.00

 

0.01

 

Severance, integration and other expense

 

0.00

 

0.02

 

0.01

 

0.02

Financing-related costs

0.00

Write-off of deferred financing costs

0.00

Foreign currency transaction (gain) loss

 

0.00

 

0.00

 

0.00

 

0.00

Tax effect (1)

 

(0.02)

 

(0.03)

 

(0.05)

 

(0.05)

Adjusted net income per diluted share

$

0.06

$

0.07

$

0.08

$

0.10

_________________________________

(1)Marginal tax rate of 32% applied.

19

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

Our primary sources of liquidity are cash flows from operations, existing cash and cash equivalents and our revolving credit facility. Operating assets and liabilities consist primarily of receivables from billed and unbilled services, accounts payable, accrued expenses, and accrued payroll and related benefits. The volume of billings and timing of collections and payments affect these account balances.

As of June 30, 2020, our cash, cash equivalents and restricted cash were $31.6 million, a net increase of $13.4 million from December 31, 2019, which was primarily attributable to the following:

net cash provided by operating activities of $27.0 million;

principal payments on borrowings of $5.9 million;

equity repurchases of $4.8 million;

debt financing costs of $0.9 million; and

negative effects of exchange rate changes of $0.1 million.

Capital Resources

On March 10, 2020, the Company amended and restated its senior secured credit facility to include an $86.0 million term facility and a $54.0 million revolving facility (the “2020 Credit Agreement”).  The material terms under the 2020 Credit Agreement are as follows:

Each of the term loan facility and revolving credit facility has a maturity date of March 10, 2025 (the “Maturity Date”).
The credit facility is secured by all of the equity interests owned by the Company, and its direct and indirect domestic subsidiaries and, subject to agreed exceptions, the Company’s direct and indirect “first-tier” foreign subsidiaries and a perfected first priority security interest in all of the Company’s and its direct and indirect domestic subsidiaries’ tangible and intangible assets.
The Company’s direct and indirect existing and future wholly owned domestic subsidiaries serve as guarantors to the Company’s obligations under the senior secured facility.
At the Company’s option, the credit facility bears interest at a rate per annum equal to either (i) the “Base Rate” (which is the highest of (a) the rate publicly announced from time to time by the administrative agent as its “prime rate”, (b) the Federal Funds Rate plus 0.5% per annum and (c) the Eurodollar Rate, plus 1.0%), plus the applicable margin (as defined below) or (ii) Eurodollar Rate (adjusted for maximum reserves) as determined by the Administrative Agent, plus the applicable margin.  The applicable margin is adjusted quarterly based upon the Company’s quarterly leverage ratio.  
The term loan is repayable in nineteen consecutive quarterly installments of $1,075,000 each that commenced on June 30, 2020 and a final payment of the outstanding principal amount of the term loan on the Maturity Date.
Mandatory repayments of term loans shall be required from (subject to agreed exceptions) (i) 100% of the 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

20

(including guarantee obligations), liens, fundamental changes, sales or disposition of property or assets, investments (including loans, advances, guarantees and acquisitions), transactions with affiliates, dividends and other payments in respect of capital stock, optional payments and modifications of other material debt instruments, negative pledges and agreements restricting subsidiary distributions and changes in line of business. In addition, the Company is required to comply with a total leverage ratio and fixed charge coverage ratio.
The senior secured credit facility contains customary events of default, including cross-default to other material agreements, judgment default and change of control.

The Company’s financial statements include outstanding borrowings of $80.9 million at June 30, 2020 and $86.9 million at December 31, 2019, 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 $79.9 million and $86.7 million at June 30, 2020 and December 31, 2019, 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 2.41% to 2.55%. 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.

As of June 30, 2020, the total principal outstanding under the term loan facility and revolving credit facility was $80.9 million and $0.0 million, respectively. The effective interest rate for the term loan facility and revolving credit facility as of June 30, 2020 was 2.55% and 2.41%, respectively.

We anticipate that our current cash and the ongoing cash flows from our operations will be adequate to meet our working capital, capital expenditure, and debt financing needs for at least the next twelve months. The anticipated cash needs of our business could change significantly if we pursue and complete additional business acquisitions, if our business plans change, if economic conditions change from those currently prevailing or from those now anticipated, or if other unexpected circumstances arise that may have a material effect on the cash flow or profitability of our business, including the potential impacts of the COVID-19 pandemic and the severity of the related economic downturn and length of time of an economic recovery. If we require additional capital resources to grow our business, either internally or through acquisition, or maintain liquidity, we may seek to sell additional equity securities or to secure additional debt financing. The sale of additional equity securities or certain forms of debt financing could result in additional dilution to our stockholders. We may not be able to obtain financing arrangements in amounts or on terms acceptable to us in the future.

The Company has financial covenants underlying its debt which require an adjusted EBITDA to Debt ratio of 3.25.  In light of the pandemic, there is uncertainty regarding the marketplace demand for the Company’s services and thus the Company’s future revenue generation.  Accordingly, in light of this uncertainty, the Company has developed plans to further reduce operating expenses to the extent more prolonged revenue shortfalls are experienced which would prevent the Company from complying with its financial covenants.  

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

21

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, 2019.

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 June 30, 2020, as required by the Rule 13a-15(b) under the Exchange Act. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2020.

Internal Control Over Financial Reporting

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

PART II - OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

None.

ITEM 1A.           RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Item 1A, Risk Factors, in our 2019 Annual Report, which could materially affect our business, financial condition or future results. The risks described in our 2019 Annual Report are not the only risks facing the Company. For example, these risks now include the impacts from the novel coronavirus (“COVID-19”) outbreak on the Company’s business, financial condition and results of operations. Additional risks and uncertainties not currently known to the Company or that it currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results. The Risk Factors included in our 2019 Annual Report should be read in conjunction with the updated risks described below.

22

The extent to which the COVID-19 outbreak will adversely impact our business, financial condition and results of operations is highly uncertain and cannot be predicted.

The global spread of COVID-19 has created significant worldwide operational volatility, uncertainty and disruption. The extent to which COVID-19 will adversely impact our business, financial condition and results of operations will depend on numerous evolving factors, which are highly uncertain, rapidly changing and cannot be predicted, including:

the duration and scope of the outbreak;
governmental, business and individual actions that have been, and continue to be, taken in response to the outbreak, including travel restrictions, quarantines, social distancing, work-at-home, stay-at-home and shelter-in-place orders and shut-downs;
the impact of the outbreak on the financial markets and economic activity generally;
the effect of the outbreak on our clients and other business partners;
our ability to access the capital markets and our usual sources of liquidity on reasonable terms;
our ability to comply with the financial covenants in our Credit Agreement if a material economic downturn results in increased indebtedness or substantially lower EBITDA;
potential goodwill or other impairment charges;
increased cybersecurity risks as a result of remote working conditions;
our ability during the outbreak to provide our services, including the health and well-being of our employees; and
the ability of our clients to pay for our services during and following the outbreak.

The COVID-19 outbreak has significantly increased financial and economic volatility and uncertainty. A continued slowdown or downturn in the economy has begun to have, and we expect will continue to have, a negative impact on many of our clients. Some clients have begun responding to weak economic and financial conditions by reducing their advisory budgets, thereby decreasing the market and demand for our services. All of the foregoing has and will continue to impact our business, financial condition, results of operations and forward-looking expectations.

Furthermore, modified processes, procedures and controls have and could further be required to respond to changes in our business environment, as the vast majority of our employees are required to work from home and many onsite locations remain closed. The significant increase in remote working of our employees may exacerbate certain risks to our business, including an increased demand for information technology resources, increased risk of malicious technology-related events, such as cyberattacks and phishing attacks, and increased risk of improper dissemination of personal, proprietary or confidential information.

Our client-facing professionals provide unique and highly specialized skills and knowledge to our clients. We rely heavily on our client-facing professionals, including the leaders of our regional operations, to secure and perform client engagements. If the health and welfare of client-facing professionals or employees providing critical corporate functions, including our executive officers, deteriorates, the number of employees so afflicted becomes significant, or an employee with skills and knowledge that cannot be readily replicated in our organization is impaired due to the COVID-19 pandemic, our ability to win business and provide services, as well as utilization, employee morale, client relationships, business prospects, and results of operations of one or more of our service lines, or the Company as a whole, could be materially adversely affected.

The potential effects of COVID-19 could also heighten the risks disclosed in many of our risk factors that are included in Part I, Item 1A, Risk Factors, in our 2019 Annual Report, including as a result of, but not limited to, the factors described above. Because the COVID-19 situation is unprecedented and continuously evolving, the other potential impacts to our risk factors that are further described in our 2019 Annual Report are uncertain. See Item 1A, Risk Factors, in our 2019 Annual Report.

23

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

Issuer Purchases of Equity Securities

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

The following table details the repurchases that were made during the three months ended June 30, 2020.

    

    

    

Total Numbers of

    

Approximate Dollar

 

Securities

Value of Securities

 

Total Number of

Average

Purchased

That May Yet Be

 

Securities

Price per

as Part of Publicly

Purchased Under

 

Period

Purchased

Securities

Announced Plan

The Plan

 

 

(In thousands)

 

(In thousands)

 

(In thousands)

April 1 - April 30

 

369

$

2.18

 

369

$

15,379

May 1 - May 31

 

165

$

1.90

 

165

$

15,065

June 1 - June 30

 

162

$

1.79

 

162

$

14,775

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 June 30, 2020 formatted in Inline XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheet, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Statements of Cash Flows and (iv) the Notes to Consolidated Financial Statements.

104

*

Cover Page Interactive Data File - The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

*

Filed herewith

24

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

INFORMATION SERVICES GROUP, INC.

Date:  August 10, 2020

/s/ Michael P. Connors

Michael P. Connors, Chairman of the

Board and Chief Executive Officer

Date:  August 10, 2020

/s/ David E. Berger

David E. Berger, Executive Vice

President and Chief Financial Officer

25