What changed in this filing

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Item 1. Financial Statements

2020-08-10 compared with 2020-05-11 · 95 added, 338 removed, 215 unchanged (67% of the section changed)

13 unchanged sentences

Deferred tax assets

LIABILITIES AND STOCKHOLDERS’

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities

10 unchanged sentences

Commitments and contingencies (Note 7)

Stockholders’

Stockholders’ equity

Preferred stock, $ 0.001 par value;

1 unchanged sentence

Common stock, $ 0.001 par value, 100,000 shares authorized;

48,112 shares issued and 46,948 outstanding at March 31, 2020 and 48,112 shares issued and 47,478 outstanding at December 31, 2019

48,112 shares issued and 47,675 outstanding at June 30, 2020 and 48,112 shares issued and 47,478 outstanding at December 31, 2019

Additional paid-in capital

2 unchanged sentences

Accumulated deficit

Total stockholders’

Total liabilities and stockholders’

Total stockholders’ equity

Total liabilities and stockholders’ equity

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

3 unchanged sentences

Three Months Ended

Six Months Ended

Operating expenses

2 unchanged sentences

Depreciation and amortization

Operating loss

Operating income

Interest income

Interest expense

Foreign currency transaction gain (loss)

Loss before taxes

Income tax benefit

Foreign currency transaction (loss) gain

Income (loss) before taxes

Income tax provision (benefit)

Net income (loss)

Weighted average shares outstanding:

Earnings per share:

Comprehensive income:

Earnings (loss) per share:

Comprehensive income (loss):

Net income (loss)

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

Comprehensive loss:

Comprehensive income (loss):

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

INFORMATION SERVICES GROUP, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands)

Comprehensive

Stockholders’

Balance December 31, 2019

4 unchanged sentences

Stock based compensation

Balance March 31, 2020

Balance June 30, 2020

Comprehensive

Stockholders’

Balance December 31, 2018

1 unchanged sentence

Treasury shares repurchased

Proceeds from issuance of ESPP

Proceeds from issuance of ESPP shares

Issuance of common stock for contingent earn-out

Issuance of common stock for RSUs vested

Stock based compensation

Balance March 31, 2019

Balance June 30, 2019

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

2 unchanged sentences

(In thousands)

Six Months Ended

Cash flows from operating activities

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

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

Depreciation expense

Amortization of intangible assets

Deferred tax expense (benefit) from stock issuances

Deferred tax expense from stock issuances

Write-off of deferred financing costs

2 unchanged sentences

Provisions for accounts receivable

Deferred tax provision (benefit)

Deferred tax provision

Loss on disposal of fixed assets

10 unchanged sentences

Cash flows from financing activities

Principal payments on borrowings

Principal payments on borrowings, net

Payment of contingent consideration

Proceeds from issuance of employee stock purchase plan shares

4 unchanged sentences

Effect of exchange rate changes on cash

Net decrease in cash, cash equivalents, and restricted cash

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

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

6 unchanged sentences

(tabular amounts in thousands, except per share data)

NOTE 1—DESCRIPTION OF ORGANIZATION AND BUSINESS OPERATIONS

Information Services Group, Inc.

(the “Company”

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

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

The Company specializes in digital transformation services, including automation, cloud and data analytics;

5 unchanged sentences

market intelligence and technology research and analysis.

NOTE 2—BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements as of March 31, 2020 and for the three months ended March 31, 2020 and 2019, have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements and pursuant to Form 10-Q and Article 10 of Regulation S-X.

In the opinion of management, all adjustments (consisting of normal recurring accruals) have been made that are considered necessary for a fair statement of the financial position of the Company as of March 31, 2020, the results of operations for the three months ended March 31, 2020 and 2019.

The condensed consolidated balance sheet as of December 31, 2019 has been derived from the Company’s audited consolidated financial statements.

Operating results for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

Certain information and disclosures normally included in the notes to annual financial statements prepared in accordance with GAAP have been omitted from these interim financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).

Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the financial statements for the fiscal year ended December 31, 2019, which are included in the Company’s 2019 Annual Report on Form 10-K filed with the SEC.

NOTE 3—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE 2—BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements as of June 30, 2020 and for the three and six months ended June 30, 2020 and 2019, have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements and pursuant to Form 10-Q and Article 10 of Regulation S-X.

In the opinion of management, all adjustments (consisting of normal recurring accruals) have been made that are considered necessary for a fair statement of the financial position of the Company as of June 30, 2020, the results of operations for the three and six months ended June 30, 2020 and 2019.

The condensed consolidated balance sheet as of December 31, 2019 has been derived from the Company’s audited consolidated financial statements.

Operating results for the three and six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

NOTE 3—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

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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.

8 unchanged sentences

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

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 March 31, 2020 and December 31, 2019 due to the short-term nature of these accounts.

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

INFORMATION SERVICES GROUP, INC.

9 unchanged sentences

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

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

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

Basis of Fair Value Measurements

March 31, 2020

June 30, 2020

Cash equivalents

2 unchanged sentences

Cash equivalents

The Company’s financial instruments include outstanding borrowings of $86.9 million at March 31, 2020 and $86.9 million at December 31, 2019, which are carried at amortized cost.

The Company’s financial instruments include outstanding borrowings of $ 80.9 million at June 30, 2020 and $ 86.9 million at December 31, 2019, which are carried at amortized cost.

The fair value of debt is classified within Level 3 of the fair value hierarchy.

The fair value of the Company's outstanding borrowings is approximately $87.3 million and $86.7 million at March 31, 2020 and December 31, 2019, respectively.

The fair value of the Company's outstanding borrowings is approximately $ 79.9 million and $ 86.7 million at June 30, 2020 and December 31, 2019, respectively.

The fair values of debt have been estimated using a discounted cash flow analysis based on the Company's incremental borrowing rate for similar borrowing arrangements.

10 unchanged sentences

The Company is currently evaluating the potential impact of adopting this guidance on its financial statements.

NOTE 4—REVENUE

The majority of our revenue is derived from contracts that can span from a few months to several years.

2 unchanged sentences

A performance obligation is a promise in a contract to transfer a distinct good or service to the client and is the unit of account.

A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied.

The majority of our contracts have a single performance obligation as the promise to transfer the individual services is not separately identifiable from other promises in the contracts and, therefore, not distinct.

15 unchanged sentences

Contract liabilities

Revenue recognized for the three months ended March 31, 2020 that was included in the contract liability balance at December 31, 2019 was $6.1 million and represented primarily revenue from our fixed fee and subscription contracts.

Disaggregation of Revenue

The following table presents our revenue disaggregated by geographic area for the three months ended March 31, 2020 and 2019.

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

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

INFORMATION SERVICES GROUP, INC.

1 unchanged sentence

(tabular amounts in thousands, except per share data)

Disaggregation of Revenue

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

Three Months Ended

Six Months Ended

Geographic area

Remaining Performance Obligations

As of March 31, 2020, the Company had $88.4 million of remaining performance obligations, the majority of which are expected to be satisfied within the next year.

NOTE 5—NET INCOME PER COMMON SHARE

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

NOTE 5—NET INCOME PER COMMON SHARE

Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period.

Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that would share in the net income of the Company.

For the three months ended March 31, 2020 and 2019, 6.0 million and 4.7 million restricted stock units, respectively, have not been considered in the diluted earnings per share calculation, as the effect would be anti-dilutive.

For the three and six months ended June 30, 2020, 1.2 million and 5.8 million restricted stock units, respectively, have not been considered in the diluted earnings per share calculation, as the effect would be anti-dilutive.

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

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Net income (loss)

Weighted average common shares

Earnings per share

Earnings (loss) per share

Net income (loss)

Basic weighted average common shares

1 unchanged sentence

Diluted weighted average common shares

Diluted earnings per share

NOTE 6—INCOME TAXES

The Company’s effective tax rate for the quarters ended March 31, 2020 and March 31, 2019 was 27.2% and 60.0% based on pretax loss of $1.9 million and $2.2 million, respectively.

The Company’s effective tax rate for the quarter ended March 31, 2020 was impacted by the earnings and losses in certain foreign jurisdictions and the impact of restricted stock units vesting.

The Company’s effective tax rate for the quarter ended March 31, 2019 was greater than the statutory rate primarily due to the impact of projected earnings in foreign jurisdictions and non-deductible expenses.

Diluted earnings (loss) per share

INFORMATION SERVICES GROUP, INC.

1 unchanged sentence

(tabular amounts in thousands, except per share data)

During the quarter ended March 31, 2020, the Company has recorded the impact of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) signed into law on March 27, 2020.

NOTE 6—INCOME TAXES

The Company’s effective tax rate for the three and six months ended June 30, 2020 was 77.0 % and 193.6 % based on pretax income of $ 2.7 million and $ 0.8 million, respectively.

The Company’s effective tax rate for the quarter ended June 30, 2020 was impacted by the earnings and losses in certain foreign jurisdictions and the impact of restricted stock units vesting.

The Company’s effective tax rate for the three and six months ended June 30, 2019 was 76.4 % and 2.0 %.

The difference was primarily due to the impact of earnings and losses in certain foreign jurisdiction.

During the quarter ended June 30, 2020, the Company has recorded the impact of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) signed into law on March 27, 2020.

The CARES Act implemented changes to raise the limitation on interest expense current deductibility and leasehold improvement asset classification for bonus depreciation eligibility, which allowed the Company to reduce prior accruals made for its 2019 income tax provision.

The tax effect of these changes total $ 0.8 million and are included in Prepaid expenses and other current assets and Deferred tax assets;

there is no impact on the Company’s effective tax rate for the quarter ended March 31, 2020 as a result of the CARES Act.

NOTE 7—COMMITMENTS AND CONTINGENCIES

there is no impact on the Company’s effective tax rate for the quarter ended June 30, 2020 as a result of the CARES Act.

NOTE 7—COMMITMENTS AND CONTINGENCIES

The Company is subject to contingencies which arise through the ordinary course of business.

All material liabilities of which management is aware are properly reflected in the financial statements at March 31, 2020 and December 31, 2019.

NOTE 8—SEGMENT AND GEOGRAPHICAL INFORMATION

All material liabilities of which management is aware are properly reflected in the financial statements at June 30, 2020 and December 31, 2019.

NOTE 8—SEGMENT AND GEOGRAPHICAL INFORMATION

The Company operates as one reportable segment consisting primarily of fact-based sourcing advisory services.

1 unchanged sentence

Geographical revenue information for the segment is as follows:

Three Months Ended

Six Months Ended

The segregation of revenues by geographic region is based upon the location of the legal entity performing the services.

The Company does not measure or monitor gross profit or operating income by geography or by service line for the purposes of making operating decisions or allocating resources.

NOTE 9—FINANCING ARRANGEMENTS AND LONG-TERM DEBT

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

NOTE 9—FINANCING ARRANGEMENTS AND LONG-TERM DEBT

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

The material terms under the 2020 Credit Agreement are as follows:

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

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.

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

INFORMATION SERVICES GROUP, INC.

1 unchanged sentence

(tabular amounts in thousands, except per share data)

At the Company’s option, the credit facility bears interest at a rate per annum equal to either (i) the “Base Rate”

(which is the highest of (a) the rate publicly announced from time to time by the administrative agent as its “prime rate”, (b) the Federal Funds Rate plus 0.5% per annum and (c) the Eurodollar Rate, plus 1.0%), plus the applicable margin (as defined below) or (ii) Eurodollar Rate (adjusted for maximum reserves) as determined by the Administrative Agent, plus the applicable margin.

The applicable margin is adjusted quarterly based upon the Company’s quarterly leverage ratio.

The Term Loan is repayable in nineteen consecutive quarterly installments of $1,075,000 each that will commence on June 30, 2020 and a final payment of the outstanding principal amount of the Term Loan on the Maturity Date.

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

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

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

The applicable margin is adjusted quarterly based upon the Company’s quarterly leverage ratio.

● The term loan is repayable in nineteen consecutive quarterly installments of $ 1,075,000 each that commenced on June 30, 2020 and a final payment of the outstanding principal amount of the term loan on the Maturity Date.

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

2 unchanged sentences

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

The Company’s financial statements include outstanding borrowings of $86.9 million at March 31, 2020 and December 31, 2019, which are carried at amortized cost.

The Company’s financial statements include outstanding borrowings of $ 80.9 and $ 86.9 million at June 30, 2020 and December 31, 2019, respectively, which are carried at amortized cost.

The fair value of debt is classified within Level 3 of the fair value hierarchy.

The fair value of the Company's outstanding borrowings is approximately $87.3 million and $86.7 million at March 31, 2020 and December 31, 2019, respectively.

The fair value of the Company's outstanding borrowings is approximately $ 79.9 million and $ 86.7 million at June 30, 2020 and December 31, 2019, respectively.

The fair values of debt have been estimated using a discounted cash flow analysis based on the Company's incremental borrowing rate for similar borrowing arrangements.

1 unchanged sentence

The Company also considered recent transactions of peer group companies for similar instruments with comparable terms and maturities as well as an analysis of current market conditions.

As of March 31, 2020, the total principal outstanding under the term loan facility and revolving credit facility was $86.0 million and $0.9 million, respectively.

The effective interest rate for the term loan facility and revolving credit facility as of March 31, 2020 was 3.7% and 3.2%, respectively.

As of June 30, 2020, the total principal outstanding under the term loan facility and revolving credit facility was $ 80.9 million and $ 0.0 million, respectively.

The effective interest rate for the term loan facility and revolving credit facility as of June 30, 2020 was 2.55 % and 2.41 %, respectively.

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

NOTE 10 - RISKS AND UNCERTAINTIES

2 unchanged sentences

As a result of these measures, the US and global markets have seen significant disruption, the extent and duration of which remains highly uncertain.

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

The impact of COVID-19 pandemic is rapidly developing and, therefore, the Company cannot predict with certainty the extent to which the pandemic will negatively impact our results of operations, cash flows and financial position, liquidity and ability to remain in compliance with our financial covenants.

In Q1 2020, the Company experienced a slight year-over-year revenue decline and this impact is expected to continue throughout Q2 2020.

Given the uncertainty of the marketplace, the Company has prepared business continuity plans to ensure that the Company is able to remain fully operational with a remote workforce, conducted financial modeling scenarios in order to ensure prudent cost containment, and has proactively implemented a series of cash conservation measures.

In the second quarter of 2020, the Company experienced a year-over-year revenue decline and this impact is expected to continue through at least the fourth quarter of 2020.

Given the uncertainty of the marketplace, the Company has implemented business continuity plans to ensure that the Company is able to remain fully operational with a remote workforce, conducted financial modeling scenarios in order to ensure prudent cost containment, and has proactively implemented a series of cash conservation measures.

These measures include actions taken in the second and third quarter of 2020 to reduce personnel costs and other operating expenses, including reductions in staffing and contractor levels, vendor spending, travel, and other measures.

The Company has financial covenants underlying its debt which require an adjusted EBITDA to Debt ratio of 3.25 .

In light of the pandemic, there is uncertainty regarding the marketplace demand for the Company’s services and thus the Company’s future revenue generation.

Accordingly, in light of this uncertainty, the Company has developed plans to further reduce operating expenses to the extent more prolonged revenue shortfalls are experienced which would prevent the Company from complying with its financial covenants.

1 unchanged sentence

Accordingly, the Company believes that based upon current facts and circumstances, its existing cash coupled with the cash flows generated from operations will be sufficient to meet its cash needs for 12 months from the date of issuance of these financial statements.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis in conjunction with our financial statements and related notes included elsewhere in this report.

Except for historical information, the discussion in this report contains certain forward-looking statements that involve risks and uncertainties.

We have based these forward-looking statements on our current expectations and assumptions about future events.

In some cases, you can identify forward-looking statements by terminology, such as “may,”

“should,”

“could,”

“predict,”

“potential,”

“continue,”

“expect,”

“anticipate,”

“future,”

“intend,”

“plan,”

“believe,”

“estimate,”

“forecast”

and similar expressions (or the negative of such expressions.) Forward-looking statements include statements concerning 2020 revenue growth rates and capital expenditures.

Forward-looking statements are based on our beliefs as well as assumptions based on information currently available to us, including financial and operational information, the volatility of our stock price, current competitive conditions and the impact of COVID-19.

As a result, these statements are subject to various risks and uncertainties.

For a discussion of material risks and uncertainties that the Company faces, see the discussion in our 2019 Annual Report on Form 10-K titled “Risk Factors”

and in this Quarterly Report on Form 10-Q under Item 1A.

“Risk Factors.”

BUSINESS OVERVIEW

ISG (Information Services Group) (Nasdaq:

III) is a leading global technology research and advisory firm.

A trusted business partner to approximately 700 clients, including more than 75 of the top 100 enterprises in our markets, ISG is committed to helping corporations, public sector organizations, and service and technology providers achieve operational excellence and faster growth.

The firm specializes in digital transformation services, including automation, cloud and data analytics;

sourcing advisory;

managed governance and risk services;

network carrier services;

technology strategy and operations design;

change management;

market intelligence and technology research and analysis.

Founded in 2006, and based in Stamford, Conn., ISG employs approximately 1,300 digital-ready professionals operating in more than 20 countries—a global team known for its innovative thinking, market influence, deep industry and technology expertise, and world-class research and analytical capabilities based on the industry’s most comprehensive marketplace data.

For more information, visit www.isg-one.com.

Our strategy is to strengthen our existing market position and develop new services and products to support future growth plans.

As a result, we are focused on growing our existing service model, expanding geographically, developing new industry sectors, productizing market data assets, expanding our managed services offerings and growing via acquisitions.

Although we do not expect any adverse conditions that will impact our ability to execute against our strategy over the next twelve months, the more significant factors that could limit our ability to grow in these areas include global macro‑economic conditions and the impact on the overall sourcing market, competition, our ability to retain advisors and reductions in discretionary spending with our top client accounts or other significant client events.

Other areas that could impact the business would also include natural disasters, pandemics, such as COVID-19, legislative and regulatory changes and capital market disruptions.

We principally derive revenues from fees for services generated on a project by project basis.

Prior to the commencement of a project, we reach agreement with the client on rates for services based upon the scope of the project, staffing requirements and the level of client involvement.

Revenues for services rendered are recognized on a time and materials basis or on a fixed fee or capped fee basis in accordance with accounting and disclosure requirements for revenue recognition.

Revenues for time and materials contracts are recognized based on the number of hours worked by our advisors at an agreed upon rate per hour and are recognized in the period in which services are performed.

Revenues for time and materials contracts are billed monthly, semimonthly or in accordance with the specific contractual terms of each project.

We also derive our revenues from certain recurring revenue streams.

These include such annuity-based ISG offerings as ISG GovernX®, Research, Software as a Subscription (Automation licenses), ISG Inform™

and the multi-year Public Sector contracts.

These offerings are characterized by subscriptions (i.e., renewal centric as opposed to project centric

revenue streams) or, in some instances, multi-year contracts.

Our digital services now span a volume of offerings and have become embedded as part of even our traditional transaction services.

Digital enablement provides capabilities, digital insights and better engagement with clients and partners.

Our results are impacted principally by our full‑time consultants’

utilization rate, the number of business days in each quarter and the number of our revenue-generating professionals who are available to work.

Our utilization rate can be negatively affected by increased hiring because there is generally a transition period for new professionals that result in a temporary drop in our utilization rate.

Our utilization rate can also be affected by seasonal variations in the demand for our services from our clients.

The number of business work days is also affected by the number of vacation days taken by our consultants and holidays in each quarter.

We typically have fewer business work days available in the fourth quarter of the year, which can impact revenues during that period.

Time‑and‑expense engagements do not provide us with a high degree of predictability as to performance in future periods.

Unexpected changes in the demand for our services can result in significant variations in utilization and revenues and present a challenge to optimal hiring and staffing.

The volume of work performed for any particular client can vary widely from period to period.

CURRENT ENVIRONMENT

On March 11, 2020, the World Health Organization categorized the novel coronavirus (COVID-19) as a pandemic, and COVID-19 has spread throughout the United States and the rest of the world with different geographical locations impacted more than others.

The outbreak of COVID-19 and public and private sector measures to reduce its transmission, such as the imposition of social distancing and orders to work-from-home, stay-at-home and shelter-in-place, have, to some degree, adversely impacted our business and demand for our services.

Businesses have adjusted, reduced or suspended operating activities, which has negatively impacted the markets and some of the clients we serve.

We continue to believe our focus on our strategic strengths, including technology expertise, digital transformation, data management capabilities, and the relevance of our service offerings will continue to serve our Firm well as we navigate a rapidly changing marketplace.

Notwithstanding our market position, the effects of the COVID-19 pandemic will negatively impact our results of operations, cash flows and financial position;

however, the extent of the impact will vary depending on the duration and severity of the economic and operational impacts of COVID-19.

We have taken steps to protect the safety of our employees, with a large majority of our worldwide workforce now working from home, while developing creative ideas to protect the health and well-being of our communities and setting up our people to help them do their best work for our clients while working remotely.

With respect to managing costs, we have multiple initiatives underway to align our expenses with changes in revenue.

In addition, we remain committed to and have intensified our efforts around cash flow discipline, including the identification of significant capital expenditures that can be deferred and working capital management.

We began to see the effects of COVID-19 on client spending towards the end of the first quarter, and we expect a greater impact on our second and third quarter results as clients respond to the current economic conditions by reducing or deferring their consultant spending, which will affect the demand or timing of our services.

Even prior to the COVID-19 pandemic, we have taken steps to strengthen our financial position, which will serve us well during this period of heightened uncertainty.

As discussed in more detail below under “Liquidity and Capital Resources,”

on March 10, 2020, we refinanced our credit facility and expanded our borrowing capacity under our revolving credit agreement, and extended the maturity date, lowered the interest rate, and secured less restrictive debt covenants.

We believe these steps will enhance our financial resources as we navigate the uncertain period ahead, including minimizing the risk of debt covenant violations, and maintaining our ability to continue as a going concern.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND MARCH 31, 2019

Revenues are generally derived from fixed fee contracts as well as engagements priced on a time and materials basis, which are recorded based on actual time worked as the services are performed.

In addition, we also earn revenues which

are contingent on the attainment of certain contractual milestones.

Revenues related to materials (mainly out‑of‑pocket expenses such as airfare, lodging and meals) required during an engagement generally do not include a profit mark up and 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 March 31,

Geographic Area

(in thousands)

Total revenues

Revenues decreased $1.1 million, or approximately 2%, in the first quarter of 2020.

The decrease in revenues in the Americas and Europe was primarily attributable to a decline in our Advisory service line, partially related to the COVID-19 pandemic.

The increase in revenues in Asia Pacific was primarily attributable to the increase in our Advisory and Research service lines.

The translation of foreign currency revenues into U.S.

dollars negatively impacted performance in Europe and Asia Pacific compared to the prior year.

Operating Expenses

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

Three Months Ended March 31,

Operating Expenses

(in thousands)

Direct costs and expenses for advisors

Selling, general and administrative

Depreciation and amortization

Total operating expenses

Total operating expenses decreased $1.0 million for the quarter with a decrease in selling, general and administrative (“SG&A”) expenses and depreciation and amortization offset by an increase in direct costs and expenses for advisors.

The decrease in operating expenses were primarily due to lower:

travel and entertainment of $1.0 million, marketing expense of $0.3 million, and event expense of $0.2 million.

These cost decreases were partially offset by higher:

compensation costs of $0.4 million and contract labor of $0.3 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 first quarter of 2020 and 2019 was $1.5 million and $1.7 million, respectively.

The decrease of $0.2 million in depreciation and amortization expense was primarily due to prior year intangible assets that are now fully amortized.

Our fixed assets consist of furniture, fixtures, equipment (mainly personal computers) and leasehold improvements.

Depreciation expense is generally computed by applying the straight-line method over the estimated useful lives of assets.

We also capitalize certain costs associated with the purchase and development of internal-use software, system conversions and website development costs.

These costs are amortized over the estimated useful life of the software or system.

We amortize our intangible assets (e.g.

client relationships and databases) over their estimated useful lives.

Goodwill related to acquisitions is not amortized, but is subject to annual impairment testing and interim impairment tests, if triggering events are identified.

No interim impairment testing triggering events were identified during the first quarter of 2020 or 2019, inclusive of our consideration of the impact of COVID-19 on our business.

Other Income (Expense), Net

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

Three Months Ended March 31,

(in thousands)

Interest income

Interest expense

Foreign currency gain (loss)

Total other expense, net

The total decrease of $0.4 million was primarily the result of lower interest expense attributable to our lower debt balance and an increase of $0.2 million of foreign currency gain, partially offset by an increase in interest expense of $0.2 million associated with the write-off of deferred financing costs.

Income Tax Expense

Our quarterly effective tax rate varies from period to period based on the mix of earnings among the various state and foreign tax jurisdictions in which business is conducted and the level of non-deductible expenses projected to be incurred during the current fiscal year.

Our effective tax rate for the quarter ended March 31, 2020 was 27.2% compared to 60.0%

for the quarter ended March 31, 2019.

The difference for the quarter ended March 31, 2020 was primarily due to the impact of earnings and losses in certain foreign jurisdictions and the impact of vesting of restricted stock units.

There were no significant changes in uncertain tax position reserves or valuation allowances during the quarter ended March 31, 2020 or March 31, 2019.

NON-GAAP FINANCIAL PRESENTATION

This management’s discussion and analysis presents supplemental measures of our performance that are derived from our consolidated financial information but are not presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

We refer to these financial measures, which are considered “non-GAAP financial measures”

under SEC rules, as adjusted EBITDA, adjusted net income, and adjusted earnings per diluted share, each as defined below.

See “Non-GAAP Financial Measures”

below for information about our use of these non-GAAP financial measures, including our reasons for including these measures and reconciliations of each non-GAAP financial measure to the most directly comparable GAAP financial measure.

NON-GAAP FINANCIAL MEASURES

We use non-GAAP financial measures to supplement the financial information presented on a GAAP basis.

We provide adjusted EBITDA (defined as net income, plus interest, taxes, depreciation and amortization, foreign currency transaction gains/losses, non-cash stock compensation, change in contingent consideration, acquisition-related costs, severance, integration and other expense, and financing-related costs), adjusted net income (defined as net income, plus amortization of intangible assets, non-cash stock compensation, foreign currency transaction gains/losses, change in contingent consideration, acquisition-related costs, severance, integration and other expense, financing-related costs, and write-off of deferred financing costs on a tax-adjusted basis) and adjusted net income as earnings per diluted share, excluding the net of tax effect of the items set forth in the table below.

These are non-GAAP measures that the Company believes provide useful information to both management and investors by excluding certain expenses and financial implications of foreign currency translations that management believes are not indicative of ISG’s core operations.

These non-GAAP measures are used by the Company to evaluate the Company’s business strategies and management’s performance.

These non-GAAP financial measures exclude non-cash and certain other special charges that many investors 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 March 31,

(in thousands)

Interest expense (net of interest income)

Depreciation and amortization

Change in contingent consideration

Acquisition-related costs

Severance, integration and other expense

Financing-related costs

Foreign currency transaction (gain) loss

Non-cash stock compensation

Adjusted EBITDA

Three Months Ended March 31,

Non-cash stock compensation

Intangible amortization

Change in contingent consideration

Acquisition-related costs

Severance, integration and other expense

Financing-related costs

Write-off of deferred financing costs

Foreign currency transaction (gain) loss

Tax effect (1)

Adjusted net income

Three Months Ended March 31,

Net loss per diluted share

Non-cash stock compensation

Intangible amortization

Change in contingent consideration

Acquisition-related costs

Severance, integration and other expense

Financing-related costs

Write-off of deferred financing costs

Foreign currency transaction (gain) loss

Tax effect (1)

Adjusted net income per diluted share

_________________________________

Marginal tax rate of 32% applied.

LIQUIDITY AND CAPITAL RESOURCES

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 March 31, 2020, our cash, cash equivalents and restricted cash were $17.5 million, a net decrease of $0.8 million from December 31, 2019, which was primarily attributable to the following:

net cash provided by operating activities of $4.6 million;

equity repurchases of $3.4 million;

debt financing costs of $0.9 million;

payments related to tax withholding for stock-based compensation of $0.6 million;

effects of exchange rate changes of $0.4 million.

Capital Resources

On March 10, 2020, the Company amended and restated its senior secured credit facility to include a $86.0 million term facility and a $54.0 million revolving facility (the “2020 Credit Agreement”).

The material terms under the 2020 Credit Agreement are as follows:

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

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”

The applicable margin is adjusted quarterly based upon the Company’s quarterly leverage ratio.

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

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

In addition, the Company is required to comply with a total leverage ratio and fixed charge coverage ratio.

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

The Company’s financial statements include outstanding borrowings of $86.9 million at March 31, 2020 and December 31, 2019, which are carried at amortized cost.

The fair value of debt is classified within Level 3 of the fair value hierarchy.

The fair value of the Company's outstanding borrowings is approximately $87.3 million and $86.7 million at March 31, 2020 and December 31, 2019, respectively.

The fair values of debt have been estimated using a discounted cash flow analysis based on the Company's incremental borrowing rate for similar borrowing arrangements.

The incremental borrowing rate used to discount future cash flows ranged from 3.24% to 3.70%.

The Company also considered

recent transactions of peer group companies for similar instruments with comparable terms and maturities as well as an analysis of current market conditions.

As of March 31, 2020, the total principal outstanding under the term loan facility and revolving credit facility was $86.0 million and $0.9 million, respectively.

The effective interest rate for the term loan facility and revolving credit facility as of March 31, 2020 was 3.7% and 3.2%, respectively.

We anticipate that our current cash and the ongoing cash flows from our operations will be adequate to meet our working capital, capital expenditure, and debt financing needs for at least the next twelve months.

The anticipated cash needs of our business could change significantly if we pursue and complete additional business acquisitions, if our business plans change, if economic conditions change from those currently prevailing or from those now anticipated, or if other unexpected circumstances arise that may have a material effect on the cash flow or profitability of our business, including the potential impacts of the COVID-19 pandemic and the severity of the related economic downturn and length of time of an economic recovery.

If we require additional capital resources to grow our business, either internally or through acquisition, or maintain liquidity, we may seek to sell additional equity securities or to secure additional debt financing.

The sale of additional equity securities or certain forms of debt financing could result in additional dilution to our stockholders.

We may not be able to obtain financing arrangements in amounts or on terms acceptable to us in the future.

The Company has financial covenants underlying its debt which require an adjusted EBITDA to Debt ratio of 3.25.

In light of the pandemic, there is uncertainty regarding the marketplace demand for the Company’s services and thus the Company’s future revenue generation.

Off-Balance Sheet Arrangements

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

Recently Issued Accounting Pronouncements

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

Critical Accounting Policies and Accounting Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements.

We prepare these financial statements in conformity with U.S.

generally accepted accounting principles.

As such, we are required to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented.

We base our estimates on historical experience, available information and various other assumptions we believe to be reasonable under the circumstances.

On an on-going basis, we evaluate our estimates;

however, actual results may differ from these estimates under different assumptions or conditions.

There have been no material changes or developments in our evaluation of the accounting estimates and the underlying assumptions or methodologies that we believe to be Critical Accounting Policies and Estimates as disclosed in our Annual Report on Form 10-K, for the year ended December 31, 2019.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

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

NOTE 11 – SUBSEQUENT EVENT

On July 8, 2020, a subsidiary of the Company executed an Asset Purchase Agreement with Neuralify, LLC (“the Agreement”) and consummated the acquisition of substantially all of the assets and assumed certain liabilities of Neuralify, LLC.

The purchase price was comprised of $ 2 million of cash consideration paid at closing and Neuralify, LLC will also have the right to receive additional consideration paid via earn-out payments during the next 18 months , if certain financial targets are met.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements