iii_Current_Folio_10Q

 

 

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, 2018

 

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

 

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 26, 2018

Common Stock, $0.001 par value

 

45,186,419 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,

 

 

    

2018

    

2017

 

ASSETS

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

13,510

 

$

28,420

 

Accounts receivable and contract assets, net of allowance of $770 and $503, respectively

 

 

76,403

 

 

70,824

 

Prepaid expenses and other current assets

 

 

4,277

 

 

4,467

 

Total current assets

 

 

94,190

 

 

103,711

 

Restricted cash

 

 

91

 

 

94

 

Furniture, fixtures and equipment, net

 

 

6,896

 

 

5,229

 

Goodwill

 

 

85,446

 

 

85,619

 

Intangible assets, net

 

 

21,868

 

 

25,684

 

Deferred tax assets

 

 

2,997

 

 

2,521

 

Other assets

 

 

1,069

 

 

1,902

 

Total assets

 

$

212,557

 

$

224,760

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

 

$

8,016

 

$

7,192

 

Current maturities of long-term debt

 

 

8,250

 

 

15,499

 

Contract liabilities

 

 

4,794

 

 

8,898

 

Accrued expenses

 

 

17,621

 

 

21,486

 

Total current liabilities

 

 

38,681

 

 

53,075

 

Long-term debt, net of current maturities

 

 

91,113

 

 

98,838

 

Deferred tax liabilities

 

 

1,891

 

 

1,569

 

Other liabilities

 

 

4,362

 

 

7,741

 

Total liabilities

 

 

136,047

 

 

161,223

 

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; 45,193 shares issued and 45,138 outstanding at September 30, 2018 and 44,490 shares issued and 43,560 outstanding at December 31, 2017

 

 

45

 

 

44

 

Additional paid-in capital

 

 

233,394

 

 

230,134

 

Treasury stock (55 and 930 common shares, respectively, at cost)

 

 

(228)

 

 

(3,161)

 

Accumulated other comprehensive loss

 

 

(7,456)

 

 

(5,666)

 

Accumulated deficit

 

 

(149,245)

 

 

(157,814)

 

Total stockholders’ equity

 

 

76,510

 

 

63,537

 

Total liabilities and stockholders’ equity

 

$

212,557

 

$

224,760

 

 

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,

 

 

    

2018

    

2017

 

2018

    

2017

 

Revenues

 

$

67,965

 

$

68,349

 

$

207,868

 

$

202,942

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct costs and expenses for advisors

 

 

38,624

 

 

38,214

 

 

121,761

 

 

119,153

 

Selling, general and administrative

 

 

23,990

 

 

23,710

 

 

70,898

 

 

68,815

 

Depreciation and amortization

 

 

1,977

 

 

2,951

 

 

5,872

 

 

9,773

 

Operating income

 

 

3,374

 

 

3,474

 

 

9,337

 

 

5,201

 

Interest income

 

 

 3

 

 

15

 

 

113

 

 

94

 

Interest expense

 

 

(1,675)

 

 

(1,716)

 

 

(5,140)

 

 

(5,132)

 

Foreign currency transaction (loss) gain

 

 

(6)

 

 

(111)

 

 

19

 

 

(292)

 

Income (loss) before taxes

 

 

1,696

 

 

1,662

 

 

4,329

 

 

(129)

 

Income tax (benefit) provision

 

 

(2,307)

 

 

234

 

 

(2,200)

 

 

(681)

 

Net income

 

$

4,003

 

$

1,428

 

$

6,529

 

$

552

 

Net income attributable to non-controlling interest

 

 

 —

 

 

 —

 

 

 —

 

 

32

 

Net income attributable to ISG

 

$

4,003

 

$

1,428

 

$

6,529

 

$

520

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

45,115

 

 

43,305

 

 

44,491

 

 

42,893

 

Diluted

 

 

47,100

 

 

44,658

 

 

46,349

 

 

43,344

 

Earnings per share attributable to ISG:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.09

 

$

0.03

 

$

0.15

 

$

0.01

 

Diluted

 

$

0.08

 

$

0.03

 

$

0.14

 

$

0.01

 

Comprehensive income:

 

 

   

 

 

 

 

 

 

 

 

 

 

Net income

 

$

4,003

 

$

1,428

 

$

6,529

 

$

552

 

Foreign currency translation, net of tax benefit (expense) of $110, $(232), $421 and $(1,161), respectively.

 

 

(786)

 

 

601

 

 

(1,790)

 

 

1,950

 

Comprehensive income

 

$

3,217

 

$

2,029

 

$

4,739

 

$

2,502

 

Comprehensive income attributable to non-controlling interest

 

 

 —

 

 

 —

 

 

 —

 

 

32

 

Comprehensive income attributable to ISG

 

$

3,217

 

$

2,029

 

$

4,739

 

$

2,470

 

 

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

3


 

INFORMATION SERVICES GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

    

2018

    

2017

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net income

 

$

6,529

 

$

552

 

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

 

 

 

 

 

 

 

Depreciation expense

 

 

2,075

 

 

2,640

 

Amortization of intangible assets

 

 

3,797

 

 

7,133

 

Deferred tax (benefit) expense from stock issuances

 

 

(152)

 

 

315

 

Amortization of deferred financing costs

 

 

600

 

 

739

 

Loss on sublease

 

 

 —

 

 

578

 

Stock-based compensation

 

 

7,230

 

 

5,383

 

Changes in fair value of contingent consideration

 

 

362

 

 

145

 

Changes in accounts receivable allowance

 

 

501

 

 

398

 

Deferred tax provision (benefit)

 

 

(245)

 

 

(2,338)

 

Loss on disposal of fixed assets

 

 

32

 

 

23

 

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

Accounts receivable

 

 

(5,778)

 

 

(10,424)

 

Prepaid expense and other assets

 

 

(26)

 

 

1,628

 

Accounts payable

 

 

509

 

 

(1,458)

 

Deferred revenue

 

 

(1,865)

 

 

(980)

 

Debt issuance costs

 

 

 —

 

 

(38)

 

Accrued expenses

 

 

(2,415)

 

 

(1,023)

 

Net cash provided by operating activities

 

 

11,154

 

 

3,273

 

Cash flows from investing activities

 

 

 

 

 

 

 

Acquisitions, net of cash acquired

 

 

 —

 

 

(889)

 

Purchase of furniture, fixtures and equipment

 

 

(3,603)

 

 

(2,270)

 

Net cash used in investing activities

 

 

(3,603)

 

 

(3,159)

 

Cash flows from financing activities

 

 

 

 

 

 

 

Principal payments on borrowings

 

 

(8,574)

 

 

(7,151)

 

Payment of the Alsbridge Notes

 

 

(7,000)

 

 

 —

 

Proceeds from issuance of employee stock purchase plan shares

 

 

642

 

 

494

 

Installment payment for acquisitions

 

 

 —

 

 

(543)

 

Payment of contingent consideration

 

 

(1,200)

 

 

(2,665)

 

Payments related to tax withholding for stock-based compensation

 

 

(2,743)

 

 

(2,174)

 

Equity securities repurchased

 

 

(2,879)

 

 

(2,853)

 

Net cash used in financing activities

 

 

(21,754)

 

 

(14,892)

 

Effect of exchange rate changes on cash

 

 

(710)

 

 

2,115

 

Net decrease in cash, cash equivalents, and restricted cash

 

 

(14,913)

 

 

(12,663)

 

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

 

 

28,514

 

 

34,982

 

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

 

$

13,601

 

$

22,319

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

Issuance of treasury stock for vested restricted stock awards

 

$

5,151

 

$

6,437

 

 

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

 

4


 

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.  In 2007, we consummated our initial public offering and completed the acquisition of TPI Advisory Services Americas, Inc. (“TPI”).  In December 2017, we consummated our transformational acquisition of Alsbridge Holdings, Inc. (“Alsbridge”), a U.S.-based sourcing, automation and transformation advisory firm.

 

NOTE 2—BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements as of September 30, 2018 and for the three and nine months ended September 30, 2018 and 2017, 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, 2018, the results of operations for the three and nine months ended September 30, 2018 and 2017 and the cash flows for the nine months ended September 30, 2018 and 2017.  The condensed consolidated balance sheet as of December 31, 2017 has been derived from the Company’s audited consolidated financial statements.  Operating results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.

 

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, 2017, which are included in the Company’s 2017 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.

 

5


 

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, 2018 and December 31, 2017 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, 2018

 

 

     

Level 1

     

Level 2

     

Level 3

     

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

315

 

$

 —

 

$

 —

 

$

315

 

Total

 

$

315

 

$

 —

 

$

 —

 

$

315

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration (1)

 

$

 —

 

$

 —

 

$

1,704

 

$

1,704

 

Total

 

$

 —

 

$

 —

 

$

1,704

 

$

1,704

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basis of Fair Value Measurements

 

 

 

December 31, 2017

 

 

     

Level 1

     

Level 2

     

Level 3

     

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

303

 

$

 —

 

$

 —

 

$

303

 

Total

 

$

303

 

$

 —

 

$

 —

 

$

303

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration (1)

 

$

 —

 

$

 —

 

$

3,698

 

$

3,698

 

Total

 

$

 —

 

$

 —

 

$

3,698

 

$

3,698

 

6


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 


(1)  The short-term portion is included in “Accrued expenses.”  The long-term portion is included in “Other 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, 2018 and 2017:

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

     

2018

     

2017

  

Beginning Balance

 

$

3,698

 

$

6,073

 

Payments of contingent consideration

 

 

(2,401)

 

 

(3,386)

 

Change in value of contingent consideration

 

 

362

 

 

145

 

Accretion of contingent consideration

 

 

44

 

 

1,030

 

Unrealized gain related to currency translation

 

 

 1

 

 

28

 

Ending Balance

 

$

1,704

 

$

3,890

 

 

The Company’s financial instruments include outstanding borrowings of $101.2 million at September 30, 2018 and $116.7 million at December 31, 2017, 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 $100.9 million and $116.5 million at September 30, 2018 and December 31, 2017, 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 5.01% to 5.15%. 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 February 2016, the Financial Accounting Standards Board (“FASB”) issued guidance on accounting for leases which requires lessees to recognize most leases on their balance sheets for the rights and obligations created by those leases. The guidance requires enhanced disclosures regarding the amount, timing, and uncertainty of cash flows arising from leases and will be effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The guidance requires the use of a modified retrospective approach. The Company has less than fifty leases for which a corresponding asset and liability will be recorded on the balance sheet as of January 1, 2019. The adoption of this guidance will not have a material impact on our results of operations and will have no impact on our cash flows.

 

In August 2016, the FASB issued new guidance intended to reduce diversity in practice in how certain cash receipts and payments are classified in the statement of cash flows, including debt prepayment or extinguishment costs, the settlement of contingent liabilities arising from a business combination, proceeds from insurance settlements, and distributions from certain equity method investees. The guidance became effective for interim and annual periods beginning after December 15, 2017, and we adopted the guidance as of January 1, 2018. The guidance requires application using a retrospective transition method. The adoption of this guidance by the Company did not have a material impact on our results of operations.

7


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

In August 2018, the 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.

 

 

NOTE 4—REVENUE

 

In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (“ASC Topic 606”), “Revenue from Contracts with Customers”.  ASC Topic 606 supersedes the revenue recognition requirements in ASC Topic 605, “Revenue Recognition” (“ASC Topic 605”), and requires the recognition of revenue upon transfer of control of promised services and products to clients in an amount that reflects the consideration we expect to receive in exchange for those services and products.  We adopted ASC Topic 606 as of January 1, 2018 using the cumulative catch-up transition method.  The most significant changes resulting from the adoption of ASC Topic 606, as previously disclosed in our 2017 Form 10-K, are as follows:

 

·

For software and implementation contracts, revenue recognition on the software component will be accelerated to the point at which the software is installed, while revenue on the implementation component will be recognized over the software implementation period as a percentage of hours incurred to date as compared to the total expected hours.

 

·

For network contingency contracts with termination for convenience clauses, revenue will be recognized over time due to the existence of provisions for payment for progress incurred to date plus a reasonable profit margin.

 

·

For managed service implementation contracts, revenue will be recognized over time as a percentage of hours incurred to date as compared to the total expected hours of the implementation.

 

We recognized the cumulative effect of applying the new revenue standard as an adjustment to the opening balance of retained earnings at the beginning of 2018.  The comparative information has not been adjusted for the effect of ASC Topic 606 and continues to be reported under the accounting standards in effect for the periods presented.  Upon the adoption of ASC Topic 606 on January 1, 2018, we recorded a net increase to opening retained earnings of $2.0 million.  The cumulative effect of the changes made to our Condensed Consolidated Balance Sheet as of January 1, 2018 for the adoption of ASC Topic 606 was as follows:

 

 

 

 

 

 

8


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of January 1, 2018

 

    

    

As Previously

    

 

    

 

 

 

 

Reported

 

 

 

 

As Adjusted

 

    

    

Under ASC 605

    

Adjustments

    

for ASC 606

Assets

 

 

 

 

 

 

 

 

 

 

Accounts receivables and contract assets, net of allowance of $503

 

 

$

70,824

 

$

1,468

 

$

72,292

Prepaid expenses and other current assets

 

 

$

4,467

 

$

(1,071)

 

$

3,396

Deferred tax assets

 

 

$

2,521

 

$

(549)

 

$

1,972

Liabilities

 

 

 

 

 

 

 

 

 

 

Contract liabilities

 

 

$

8,898

 

$

(2,418)

 

$

6,480

Accrued expenses

 

 

$

21,486

 

$

133

 

$

21,619

Deferred tax liabilities

 

 

$

1,569

 

$

95

 

$

1,664

Stockholders' equity

 

 

 

 

 

 

 

 

 

 

Accumulated deficit

 

 

$

(157,814)

 

$

2,038

 

$

(155,776)

 

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 in ASC Topic 606.  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, 2018, the Company had $89.4 million of remaining performance obligations, the majority of which are expected to be satisfied within the next year. 

 

As part of our adoption of ASC Topic 606, 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 and software and implementation contracts.  Further details of our approach to determining the SSP for each contract type is described below.

 

·

For our software and implementation contracts, we had to determine the SSP for both the software license and implementation service performance obligations.  For the software license performance obligation, we utilized

9


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

the adjusted market assessment approach and determined that our listed price of the software licenses generally approximated the SSP.  For the implementation service performance obligation, we utilized the residual approach, which resulted in the difference between the total contract value and the software license price in the arrangement being allocated to the implementation service.

 

·

For our managed service implementation contracts, we had to determine the SSP for both the managed services and implementation performance obligations.  For each performance obligation, we estimated the SSP using the expected cost plus a reasonable profit margin approach, under which we forecasted our expected costs of satisfying a performance obligation and then added an appropriate margin for the distinct service.

 

Adjustments to Financial Statements from the Adoption of Accounting Pronouncements 

 

The following table presents the effect of the adoption of ASC Topic 606 on our condensed consolidated balance sheet as of September 30, 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

    

    

As Reported

    

 

    

 

 

    

    

Under ASC 606

    

Adjustments

    

ASC 605

Assets

 

 

 

 

 

 

 

 

 

 

Accounts receivable and contract assets, net of allowance of $770

 

 

$

76,403

 

$

(4,305)

 

$

72,098

Prepaid expenses and other current assets

 

 

$

4,277

 

$

2,285

 

$

6,562

Deferred tax assets

 

 

$

2,997

 

$

549

 

$

3,546

Liabilities

 

 

 

 

 

 

 

 

 

 

Contract liabilities

 

 

$

4,794

 

$

6,166

 

$

10,960

Accrued expenses

 

 

$

17,621

 

$

(150)

 

$

17,471

Deferred tax liabilities

 

 

$

1,891

 

$

(1,380)

 

$

511

Stockholders' equity

 

 

 

 

 

 

 

 

 

 

Accumulated deficit

 

 

$

(149,245)

 

$

(6,107)

 

$

(155,352)

 

The following table presents the effect of the adoption of ASC Topic 606 on our condensed consolidated statement of comprehensive income for the three months ended September 30, 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2018

 

    

    

As Reported

    

 

    

 

 

    

    

Under ASC 606

    

Adjustments

    

ASC 605

Revenues

 

 

$

67,965

 

$

(2,620)

 

$

65,345

Operating expenses

 

 

 

 

 

 

 

 

 

 

Direct costs and expenses for advisors

 

 

 

38,624

 

 

(211)

 

 

38,413

Selling, general and administrative

 

 

 

23,990

 

 

 —

 

 

23,990

Depreciation and amortization

 

 

 

1,977

 

 

 —

 

 

1,977

Operating income

 

 

 

3,374

 

 

(2,409)

 

 

965

Interest income

 

 

 

 3

 

 

 —

 

 

 3

Interest expense

 

 

 

(1,675)

 

 

 —

 

 

(1,675)

Foreign currency transaction loss

 

 

 

(6)

 

 

 —

 

 

(6)

Income (loss) before taxes

 

 

 

1,696

 

 

(2,409)

 

 

(713)

Income tax benefit

 

 

 

(2,307)

 

 

(578)

 

 

(2,885)

Net income

 

 

$

4,003

 

$

(1,831)

 

$

2,172

 

 

10


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

The following table presents the effect of the adoption of ASC Topic 606 on our condensed consolidated statement of comprehensive income for the nine months ended September 30, 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2018

 

    

    

As Reported

    

 

    

 

 

    

    

Under ASC 606

    

Adjustments

    

ASC 605

Revenues

 

 

$

207,868

 

$

(6,587)

 

$

201,281

Operating expenses

 

 

 

 

 

 

 

 

 

 

Direct costs and expenses for advisors

 

 

 

121,761

 

 

(1,230)

 

 

120,531

Selling, general and administrative

 

 

 

70,898

 

 

 —

 

 

70,898

Depreciation and amortization

 

 

 

5,872

 

 

 —

 

 

5,872

Operating income

 

 

 

9,337

 

 

(5,357)

 

 

3,980

Interest income

 

 

 

113

 

 

 —

 

 

113

Interest expense

 

 

 

(5,140)

 

 

 —

 

 

(5,140)

Foreign currency transaction gain

 

 

 

19

 

 

 —

 

 

19

Income (loss) before taxes

 

 

 

4,329

 

 

(5,357)

 

 

(1,028)

Income tax benefit

 

 

 

(2,200)

 

 

(1,286)

 

 

(3,486)

Net income

 

 

$

6,529

 

$

(4,071)

 

$

2,458

 

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, particularly on our software and implementation contracts, before revenue is recognized, resulting in contract liabilities.  These assets and liabilities are reported on the consolidated balance sheet at the end of each reporting period.  See the table below for a breakdown of contract assets and contract liabilities.

 

 

 

 

 

 

 

 

 

 

    

    

 

 

January 1, 2018

 

    

    

September 30, 2018

 

(as adjusted)

Contract assets (i.e., unbilled receivables)

 

 

$

30,680

 

$

18,838

Contract liabilities (i.e., deferred revenue)

 

 

$

4,794

 

$

6,480

 

Revenue recognized for the three months ended September 30, 2018 that was included in the contract liability balance at July 1, 2018 was $4.2 million and represented primarily revenue from our software and implementation contracts and managed services contracts.

 

Revenue recognized for the nine months ended September 30, 2018 that was included in the contract liability balance at January 1, 2018 was $6.2 million and represented primarily revenue from our software and implementation contracts and managed services contracts.

 

 

 

 

 

 

11


 

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 nine months ended September 30, 2018.

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

Geographic area

    

    

September 30, 2018

    

September 30, 2018

Americas

 

 

$

38,502

 

$

121,009

Europe

 

 

 

24,033

 

 

69,834

Asia Pacific

 

 

 

5,430

 

 

17,025

 

 

 

$

67,965

 

$

207,868

 

 

 

 

 

 

 

 

 

 

 

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 nine months ended September 30, 2017, the effect of 34,374 stock appreciation rights (“SARs”) have not been considered in the diluted earnings per share, because the market price of the stock was less than the exercise price during the period in the computation, respectively. In addition, 2.5 million restricted shares have not been considered in the diluted earnings per share calculation for the nine months ended September 30, 2017, as the effect would be anti-dilutive.     

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

    

2018

    

2017

    

2018

    

2017

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to ISG

 

$

4,003

 

$

1,428

 

$

6,529

 

$

520

 

 

Weighted average common shares

 

 

45,115

 

 

43,305

 

 

44,491

 

 

42,893

 

 

Earnings per share attributable to ISG

 

$

0.09

 

$

0.03

 

$

0.15

 

$

0.01

 

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to ISG

 

$

4,003

 

$

1,428

 

$

6,529

 

$

520

 

 

Interest expense of convertible debt, net of tax

 

 

 —

 

 

 2

 

 

 —

 

 

 6

 

 

Net income attributable to ISG, as adjusted

 

$

4,003

 

$

1,430

 

$

6,529

 

$

526

 

 

Basic weighted average common shares

 

 

45,115

 

 

43,305

 

 

44,491

 

 

42,893

 

 

Potential common shares

 

 

1,985

 

 

1,353

 

 

1,858

 

 

451

 

 

Diluted weighted average common shares

 

 

47,100

 

 

44,658

 

 

46,349

 

 

43,344

 

 

Diluted earnings per share attributable to ISG

 

$

0.08

 

$

0.03

 

$

0.14

 

$

0.01

 

 

 

 

 

 

NOTE 6—INCOME TAXES

 

The Company’s effective tax rate for the three and nine months ended September 30, 2018 was (136.0)% and (50.8)% based on pretax income of $1.7 million and $4.3 million, respectively.   The Company’s effective tax rate for the quarter was less than the statutory rate primarily due to discrete tax benefits related to the release of a valuation allowance and the reversal of an uncertain tax position reserve.  The effective tax rate was 14.1% and 527.9% for the three and nine months

12


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

ended September 30, 2017.  The difference for the nine months ended September 30, 2018 was primarily due to the impact of current quarter earnings in jurisdictions where the Company is currently precluded from recording a tax provision,  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 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, 2018 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.

 

As of September 30, 2018, the Company had total unrecognized tax benefits of approximately $1.4 million all of which would impact the Company’s effective tax rate if recognized.  The Company recognizes interest and penalties related to unrecognized tax benefits within the income tax provision in its condensed consolidated statement of operations.  As of September 30, 2018, the Company’s accrual of interest and penalties amounted to $0.7 million.  The Company recorded no material year-to-date change in the accrual of unrecognized tax benefits and associated interest and penalties.

 

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 were aware are properly reflected in the financial statements at September 30, 2018 and December 31, 2017.

 

Saugatuck Contingent Consideration

 

During the quarter ended September 30, 2018, the Company reversed the remaining $0.3 million contingent consideration liability related to the acquisition of Saugatuck as the related earn-out payment is no longer expected.  The Company paid $0.3 million in April 2018 related to 2017 performance, of which 50% was paid with shares of ISG common stock. 

 

Experton Contingent Consideration 

 

As of September 30, 2018, the Company has recorded a liability of $0.3 million representing the estimated fair value of contingent consideration related to the acquisition of Experton which is classified as current and included in accrued expenses on the consolidated balance sheet. The Company paid $0.5 million in April 2018 related to 2017 performance, of which 50% was paid with shares of ISG common stock.

 

TracePoint Contingent Consideration

 

As of September 30, 2018, the Company has recorded a liability of $1.4 million representing the estimated fair value of contingent consideration related to the acquisition of TracePoint which is classified as current and included in accrued expenses on the consolidated balance sheet. The Company paid $1.6 million in April 2018 related to 2017 performance, of which 50% was paid with shares of ISG common stock.

 

 

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.

 

13


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

Geographical revenue information for the segment is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

    

2018

    

2017

    

2018

    

2017

    

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas

 

$

38,502

 

$

41,524

 

$

121,009

 

$

122,581

 

Europe

 

 

24,033

 

 

19,732

 

 

69,834

 

 

61,443

 

Asia Pacific

 

 

5,430

 

 

7,093

 

 

17,025

 

 

18,918

 

 

 

$

67,965

 

$

68,349

 

$

207,868

 

$

202,942

 

 

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 December 1, 2016, the Company entered into an amended and restated senior secured credit facility (as amended from time to time, the “2016 Credit Agreement”) comprised of a $110.0 million term facility and a $30.0 million revolving facility, amending and restating its senior secured credit facility originally entered into on May 3, 2013.  The material terms of 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 described 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 and ranges from 3.5% to 1.75% for the Eurodollar Rate and 2.5% to 0.75% for the Base Rate. 

 

·

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

 

·

Mandatory repayments of term loans shall be required from (subject to certain 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

14


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

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), transaction 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 a 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.

 

As of September 30, 2018, the total principal outstanding under the term loan facility and revolving credit facility was $97.2 million and $4.0 million, respectively.  The Company paid $7.3 million related to the term loan facility and $1.0 million related to the revolving credit facility during the nine months ended September 30, 2018.  As of September 30, 2018, the debt issuance cost was $1.8 million.  The effective interest rate for the term loan facility and revolving credit facility as of September 30, 2018 was 5.1% and 5.0%, respectively.

 

Compass Convertible Notes

 

On January 4, 2011, as part of the consideration for the acquisition of Compass, we issued an aggregate of $6.3 million in convertible notes to Compass (the “Compass Notes”).  The Compass Notes matured on January 4, 2018 and interest was payable on the outstanding principal amount, computed daily, at the rate of 3.875% per annum on January 31 of each calendar year and on the seventh anniversary of the date of the Compass Notes. The Compass Notes were subject to transfer restrictions until January 31, 2013. If the price of our common stock on the Nasdaq Global Market exceeded $4 per share for 60 consecutive trading days (the “Trigger Event”), the holder of the Compass Notes could convert all (but not less than all) of the outstanding principal amount of the Compass Notes into shares of our common stock at the rate of 1 share for every $4 in principal amount outstanding.  After the Trigger Event, we could prepay all or any portion of the outstanding principal amount of the Compass Notes by giving the holder 30 days written notice.  On March 21, 2014, the Trigger Event occurred.  As a result, a holder of the Compass Notes could convert all (but not less than all) of the outstanding principal amount of the Compass Notes into shares of our common stock at the rate of 1 share for every $4 in principal amount outstanding.  In addition, ISG could elect to prepay all or any portion of the outstanding principal amount of the Compass Notes by giving a holder 30 days written notice; however, such holder had to be given the opportunity to convert the outstanding principal amount into shares as described above.  No holder of the Compass Notes had the option to require cash payment as a result of the Trigger Event.

 

In 2013 and 2016, we prepaid substantial portions of the outstanding principal amount of the Compass Notes.  On January 4, 2018, we paid off the $0.2 million remaining on the Compass Notes.

 

 

 

 

15


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

 

Alsbridge Notes

 

On December 1, 2016, as part of the merger consideration for the acquisition of Alsbridge, we issued an aggregate of $7.0 million in unsecured subordinated promissory notes (the “Alsbridge Notes”). The Alsbridge Notes accrued interest on the principal amount daily at a rate of 2.0%. At maturity, on September 4, 2018, we paid off the full $7.0 million of principal and $0.2 million of interest outstanding under the Alsbridge Notes

 

 

 

16


 

 

 

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 2018 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 2017 Annual Report on Form 10-K titled “Risk Factors.”

 

BUSINESS OVERVIEW

 

ISG (Information Services Group) (“ISG”) (Nasdaq: III) is a leading global technology research and advisory firm. A trusted business partner to more than 700 clients, including 75 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 approximately 1,300 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 our comprehensive marketplace data.

 

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 derive our revenues from fees and reimbursable expenses for professional services. A portion of our revenues are generated under hourly or daily rates billed on a time and expense basis. Clients are typically invoiced on a monthly basis, with revenue recognized as the services are provided. There are also client engagements in which we are paid a fixed amount for our services, often referred to as fixed fee billings. This may be one single amount covering the whole engagement or several amounts for various phases or functions. 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 or objectives.  Such revenues may cause unusual variations in quarterly revenues and operating results.  We also derive our revenues from recurring revenue streams.  This includes Managed Services, Research, the U.S. Public Sector, subscription services around Robotic Process Automation (“RPA”) 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 more traditional transaction services.  Digital enablement provides capabilities, digital insights and better engagement with clients and partners.

 

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

17


 

 

 

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, 2018 AND SEPTEMBER 30, 2017

 

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

    

2018

    

2017

    

Change

    

Change

  

 

    

 

 

(in thousands)

 

 

 

Americas

    

$

38,502

    

$

41,524

    

$

(3,022)

    

(7)

%

 

 

Europe

 

 

24,033

 

 

19,732

 

 

4,301

 

22

%

 

 

Asia Pacific

 

 

5,430

 

 

7,093

 

 

(1,663)

 

(23)

%

 

 

Total revenues

 

$

67,965

 

$

68,349

 

$

(384)

 

(1)

%

 

 

 

Revenues decreased $0.4 million or approximately 1% in the third quarter of 2018.  The decrease in revenues in the Americas was primarily attributable to decline in our Advisory service lines.  The increase in revenues in Europe was primarily attributable to growth in our Advisory service line.  The decrease in revenues in Asia Pacific was primarily attributable to a decline in our Managed Services service line.  The translation of foreign currency revenues into U.S. dollars negatively impacted performance compared to the prior year in Europe and Asia Pacific.     

 

18


 

 

 

Operating Expenses

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent

 

 

 

Operating Expenses

    

2018

    

2017

    

Change

    

Change

  

 

    

 

 

(in thousands)

 

 

 

Direct costs and expenses for advisors

    

$

38,624

    

$

38,214

    

$

410

    

 1

%

 

 

Selling, general and administrative

 

 

23,990

 

 

23,710

 

 

280

 

 1

%

 

 

Depreciation and amortization

 

 

1,977

 

 

2,951

 

 

(974)

 

(33)

%

 

 

Total operating expenses

 

$

64,591

 

$

64,875

 

$

(284)

 

 —

%

 

 

 

Total operating expenses decreased $0.3 million for the quarter with decreases in depreciation and amortization offset by increases in direct costs and expenses for advisors and selling, general and administrative (“SG&A”) expenses.  The increases in direct costs and SG&A were primarily due to higher: license expense of $0.9 million, stock compensation of $0.7 million, travel expenses of $0.6 million, tax indemnity receivable of $0.5 million, professional fees of $0.4 million, acquisition-related costs of $0.3 million and contract labor expenses of $0.2 million.  These cost increases were primarily offset by lower: compensation and benefits of $2.0 million and contingent consideration liability of $1.1 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 2018 and 2017 was $2.0 million and $2.9 million, respectively.  The decrease of $0.9 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.

19


 

 

 

 

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

 

 

 

    

2018

    

2017

    

Change

    

Change

 

 

 

 

(in thousands)

 

 

Interest income

    

$

 3

    

$

15

    

$

(12)

    

(80)

%

 

Interest expense

 

 

(1,675)

 

 

(1,716)

 

 

41

 

 2

%

 

Foreign currency loss

 

 

(6)

 

 

(111)

 

 

105

 

95

%

 

Total other income (expense), net

 

$

(1,678)

 

$

(1,812)

 

$

134

 

 7

%

 

 

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, 2018 was (136.0)% compared to 14.1% for the three months ended September 30, 2017.  The difference was primarily due to the impact of current quarter earnings in jurisdictions where the Company is currently precluded from booking a tax provision for the three months ended September 30, 2018, the release of $2.3 million of accruals for uncertain tax positions due to the expiration of statute limitations in a foreign jurisdiction, and reversal of $1.3 million of valuation allowance established against U.S. foreign tax credit positions during the three months ended September 30, 2018.

 

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND SEPTEMBER 30, 2017

 

Revenues

 

Geographical revenue information for the segment is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

Geographic Area

 

 

 

 

 

 

 

 

 

 

Percent

 

 

 

    

2018

    

2017

    

Change

    

Change

  

    

 

 

(in thousands)

 

 

Americas

    

$

121,009

    

$

122,581

    

$

(1,572)

    

(1)

%

 

Europe

 

 

69,834

 

 

61,443

 

 

8,391

 

14

%

 

Asia Pacific

 

 

17,025

 

 

18,918

 

 

(1,893)

 

(10)

%

 

Total revenues

 

$

207,868

 

$

202,942

 

$

4,926

 

 2

%

 

 

Revenues increased $4.9 million or approximately 2% for the nine months ended September 30, 2018.  The increase in revenues in Europe was primarily attributable to growth in our Advisory service line.  The decrease in revenues in the Americas was primarily attributable to a decline in our Advisory service line partially offset by growth attributable to our Managed Services service line.  The decrease in revenues in Asia Pacific was primarily attributable to a decline in our Managed Services service line.  The translation of foreign currency revenues into U.S. dollars favorably impacted performance compared to the prior year in Europe and Asia Pacific.

20


 

 

 

Operating Expenses

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

Percent

 

 

 

    

2018

    

2017

    

Change

    

Change

  

    

 

 

(in thousands)

 

 

Direct costs and expenses for advisors

    

$

121,761

    

$

119,153

    

$

2,608

    

 2

%

 

Selling, general and administrative

 

 

70,898

 

 

68,815

 

 

2,083

 

 3

%

 

Depreciation and amortization

 

 

5,872

 

 

9,773

 

 

(3,901)

 

(40)

%

 

Total operating expenses

 

$

198,531

 

$

197,741

 

$

790

 

 —

%

 

 

Total operating expenses increased $0.8 million for 2018 with increases in direct costs and expenses for advisors and SG&A expenses partially offset by a decrease in depreciation and amortization.  The increases in SG&A and direct costs and expenses for advisors were due primarily to higher: license expense of $3.0 million, stock compensation of $1.8 million, travel expense of $1.3 million, compensation and benefits of $1.2 million, professional fees of $1.1 million, tax indemnity receivable of $0.5 million and occupancy expense of $0.4 million.    These cost increases were partially offset primarily by lower: contract labor costs of $3.0 million, severance and integration expenses of $1.1 million, acquisition-related costs of $0.9 million and contingent consideration liability of $0.7 million.

 

Depreciation and amortization expense in 2018 and 2017 were $5.9 million and $9.8 million, respectively.  The decrease of $3.9 million in depreciation and amortization expense was primarily due to prior year intangible assets that are now fully amortized.

 

Other Income (Expense), Net

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent

 

 

 

    

2018

    

2017

    

Change

    

Change

  

    

 

 

(in thousands)

 

 

Interest income

    

$

113

    

$

94

    

$

19

    

20

%

 

Interest expense

 

 

(5,140)

 

 

(5,132)

 

 

(8)

 

 —

%

 

Foreign currency gain (loss)

 

 

19

 

 

(292)

 

 

311

 

107

%

 

Total other income (expense), net

 

$

(5,008)

 

$

(5,330)

 

$

322

 

 6

%

 

 

The total decrease of $0.3 million was primarily the result of a net foreign currency gain.

 

Income Tax Expense

 

Our effective tax rate for the nine months ended September 30, 2018 was (50.8)% compared to 527.9% for the nine months ended September 30, 2017.  The difference for the nine months ended September 30, 2018 was primarily due to the impact of current quarter earnings in jurisdictions where the Company is currently precluded from recording a tax provision, 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 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.

 

 

 

21


 

 

 

 

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 before net income attributable to non-controlling interest, plus interest, taxes, depreciation and amortization, foreign currency transaction gains/losses, non-cash stock compensation, change in contingent consideration, acquisition-related costs, tax indemnity receivable, 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, which 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,

 

 

 

    

2018

    

2017

 

    

2018

    

2017

 

    

 

 

(in thousands)

 

Net income attributable to ISG

    

$

4,003

    

$

1,428

 

    

$

6,529

    

$

520

 

 

Net income attributable to non-controlling interest

 

 

 —

 

 

 —

 

 

 

 —

 

 

32

 

 

Interest expense (net of interest income)

 

 

1,672

 

 

1,701

 

 

 

5,027

 

 

5,038

 

 

Income taxes

 

 

(2,307)

 

 

234

 

 

 

(2,200)

 

 

(681)

 

 

Depreciation and amortization

 

 

1,977

 

 

2,951

 

 

 

5,872

 

 

9,773

 

 

Change in contingent consideration liabilities

 

 

(668)

 

 

415

 

 

 

378

 

 

1,108

 

 

Acquisition-related costs(1)

 

 

280

 

 

89

 

 

 

280

 

 

1,186

 

 

Severance and integration expense

 

 

332

 

 

356

 

 

 

439

 

 

1,514

 

 

Tax indemnity receivable

 

 

931

 

 

454

 

 

 

931

 

 

454

 

 

Foreign currency transaction loss (gain)

 

 

 6

 

 

111

 

 

 

(19)

 

 

292

 

 

Non-cash stock compensation

 

 

2,585

 

 

1,873

 

 

 

7,230

 

 

5,383

 

 

Adjusted EBITDA

 

$

8,811

 

$

9,612

 

 

$

24,467

 

$

24,619

 

 

 

 

 

 

 

 

 

22


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

 

September 30,

 

 

September 30,

 

    

 

 

2018

    

2017

 

 

2018

    

2017

 

 

 

 

(in thousands)

 

Net income attributable to ISG

    

$

4,003

    

$

1,428

 

 

$

6,529

    

$

520

 

 

Non-cash stock compensation

 

 

2,585

 

 

1,873

 

 

 

7,230

 

 

5,383

 

 

Intangible amortization

 

 

1,259

 

 

2,382

 

 

 

3,797

 

 

7,133

 

 

Change in contingent consideration liabilities

 

 

(668)

 

 

415

 

 

 

378

 

 

1,108

 

 

Acquisition-related costs(1)

 

 

280

 

 

89

 

 

 

280

 

 

1,186

 

 

Severance and integration expense

 

 

332

 

 

356

 

 

 

439

 

 

1,514

 

 

Foreign currency transaction loss (gain)

 

 

 6

 

 

111

 

 

 

(19)

 

 

292

 

 

Tax effect (2)

 

 

(1,214)

 

 

(1,986)

 

 

 

(3,874)

 

 

(6,314)

 

 

Adjusted net income

 

$

6,583

 

$

4,668

 

 

$

14,760

 

$

10,822

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

 

September 30,

 

 

September 30,

 

   

 

   

2018

   

2017

 

 

2018

   

2017

 

 

Net income (loss) per diluted share attributable to ISG

    

$

0.08

    

$

0.03

 

 

$

0.14

    

$

0.01

 

 

Non-cash stock compensation

 

 

0.05

 

 

0.04

 

 

 

0.16

 

 

0.12

 

 

Intangible amortization

 

 

0.03

 

 

0.05

 

 

 

0.08

 

 

0.16

 

 

Change in contingent consideration liabilities

 

 

(0.01)

 

 

0.01

 

 

 

0.01

 

 

0.03

 

 

Acquisition-related costs(1)

 

 

0.01

 

 

0.00

 

 

 

0.01

 

 

0.03

 

 

Severance and integration expense

 

 

0.01

 

 

0.01

 

 

 

0.01

 

 

0.03

 

 

Foreign currency transaction loss (gain)

 

 

0.00

 

 

0.00

 

 

 

0.00

 

 

0.01

 

 

Tax effect(2)

 

 

(0.03)

 

 

(0.04)

 

 

 

(0.09)

 

 

(0.14)

 

 

Adjusted net income per diluted share

 

$

0.14

 

$

0.10

 

 

$

0.32

 

$

0.25

 

 

_________________________________

(1)

Consists of expenses from acquisition-related costs and non-cash fair value adjustments on pre-acquisition deferred revenues.

 

(2)

Marginal tax rate of 32% and 38% applied, respectively.

 

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, 2018, our cash, cash equivalents and restricted cash were $13.6 million, a net decrease of $14.9 million from December 31, 2017, which was primarily attributable to the following:

 

·

net cash provided by operating activities of $11.2 million;

 

·

payments of principal amounts under our Credit Agreement of $8.3 million;

 

·

full payment of the Alsbridge Notes of $7.0 million;

23


 

 

 

 

·

payments of contingent consideration of $1.2 million;

 

·

capital expenditures for furniture, fixtures and equipment of $3.6 million;

 

·

equity repurchases of $2.9 million; and

 

·

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

 

 

Capital Resources

 

On December 1, 2016, the Company entered into an amended and restated senior secured credit facility (as amended from time to time, the “2016 Credit Agreement”) comprised of a $110.0 million term facility and a $30.0 million revolving facility, amending and restating its senior secured credit facility originally entered into on May 3, 2013.  The material terms of 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 certain 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 described 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 and ranges from 3.5% to 1.75% for the Eurodollar Rate and 2.5% to 0.75% for the Base Rate. 

 

·

The Term Loan is repayable in four consecutive quarterly installments of $1,375,000 each, commencing March 31, 2017, followed by eight consecutive quarterly installments in the amount of $2,062,500 each, commencing March 31, 2018, followed by seven consecutive quarterly installments of $2,750,000 each, commencing March 31, 2020 and a final payment of the remaining 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), transaction with affiliates, dividends and other payments in respect of capital stock, optional payments and modifications of other material debt instruments, negative

24


 

 

 

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 a 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.

 

As of September 30, 2018, the total principal outstanding under the term loan facility and revolving credit facility was $97.2 million and $4.0 million, respectively.  The Company paid $7.3 million related to the term loan facility and $1.0 million related to the revolving credit facility during the nine months ended September 30, 2018.  As of September 30, 2018, the debt issuance cost was $1.8 million.  The effective interest rate for the term loan facility and revolving credit facility as of September 30, 2018 was 5.1% and 5.0%, respectively.

 

Compass Convertible Notes

 

On January 4, 2011, as part of the consideration for the acquisition of Compass, we issued an aggregate of $6.3 million in convertible notes to Compass (the “Compass Notes”).  The Compass Notes matured on January 4, 2018 and interest was payable on the outstanding principal amount, computed daily, at the rate of 3.875% per annum on January 31 of each calendar year and on the seventh anniversary of the date of the Compass Notes. The Compass Notes were subject to transfer restrictions until January 31, 2013. If the price of our common stock on the Nasdaq Global Market exceeded $4 per share for 60 consecutive trading days (the “Trigger Event”), the holder of the Compass Notes could convert all (but not less than all) of the outstanding principal amount of the Compass Notes into shares of our common stock at the rate of 1 share for every $4 in principal amount outstanding.  After the Trigger Event, we could prepay all or any portion of the outstanding principal amount of the Compass Notes by giving the holder 30 days written notice.  On March 21, 2014, the Trigger Event occurred.  As a result, a holder of the Compass Notes could convert all (but not less than all) of the outstanding principal amount of the Compass Notes into shares of our common stock at the rate of 1 share for every $4 in principal amount outstanding. In addition, ISG could elect to prepay all or any portion of the outstanding principal amount of the Compass Notes by giving a holder 30 days written notice; however, such holder had to be given the opportunity to convert the outstanding principal amount into shares as described above.  No holder of the Compass Notes had the option to require cash payment as a result of the Trigger Event.

 

 In 2013 and 2016, we prepaid substantial portions of the outstanding principal amount of the Compass Notes.  On January 4, 2018, we paid off the $0.2 million remaining on the Compass Notes.

 

Alsbridge Notes

 

On December 1, 2016, as part of the merger consideration for the acquisition of Alsbridge, we issued an aggregate of $7.0 million in unsecured subordinated promissory notes (the “Alsbridge Notes”). The Alsbridge Notes accrued interest on the principal amount daily at a rate of 2.0%. At maturity, on September 4, 2018, we paid off the full $7.0 million of principal and $0.2 million of interest outstanding under the Alsbridge Notes.

 

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.

 

25


 

 

 

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, 2017.

 

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

Interest Rate Risk

 

We are exposed to financial market risks primarily related to changes in interest rates associated with our borrowing and investing activities.  A 100 basis point change in interest rates would result in an annual change in the results of operations of $1.0 million pre-tax.

 

Foreign Currency Risk

 

We operate in a number of international areas which exposes us to foreign currency exchange rate risk. We have significant international revenue, which is predominantly collected in local currency.  It is expected that our international revenues will continue to grow as European, Asian and other markets adopt sourcing solutions. The translation of our revenues into U.S. dollars, as well as our costs of operating internationally, may adversely affect our business, results of operations and financial condition. A measure of the potential impact of foreign currency translation can be determined through a sensitivity analysis of our cash and cash equivalents. At September 30, 2018, we had $13.5 million of cash and cash equivalents, with a substantial portion denominated in foreign currencies. If the exchange rates of the foreign currencies we hold all increased or decreased in comparison to the U.S. dollar by 10%, the amount of cash and cash equivalents we would have reported on September 30, 2018 would have correspondingly increased or decreased by approximately $0.9 million. The translation of our foreign currency revenues and expenses historically has not had a material impact on our consolidated earnings since movements in and among the major currencies in which we operate tend to impact our revenues and expenses equally.

 

We have not invested in foreign operations in highly inflationary economies; however, we may do so in future periods.

 

Credit Risk

 

Concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. All cash and cash equivalents are on deposit in fully liquid form in high quality financial institutions. We extend credit to our clients based on an evaluation of each client’s financial condition.

 

Our 25 largest clients accounted for approximately 39% of revenue in 2017 and 38% in 2016.  If one or more of our large clients terminate or significantly reduce their engagements or fail to remain a viable business, then our revenues could be materially and adversely affected.  In addition, our large clients generally maintain sizable receivable balances at

26


 

 

 

any given time and our ability to collect such receivables could be jeopardized if such client fails to remain a viable business.

 

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, 2018, 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, 2018.

 

Internal Control Over Financial Reporting

 

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

 

PART II - OTHER INFORMATION

 

ITEM 1.LEGAL PROCEEDINGS

 

None.

 

ITEM 1A.           RISK FACTORS

 

The risk factors included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 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, 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

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

 

69

 

$

4.10

 

69

 

$

12,417

 

August 1 – August 31

 

12

 

$

4.07

 

12

 

$

12,369

 

September 1 – September 30

 

 3

 

$

4.95

 

 3

 

$

12,354

 

 

 

 

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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, 2018 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.

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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 9, 2018

/s/ Michael P. Connors

 

Michael P. Connors, Chairman of the

 

Board and Chief Executive Officer

 

 

 

 

Date:  November 9, 2018

/s/ David E. Berger

 

David E. Berger, Executive Vice

 

President and Chief Financial Officer

 

29