Toggle SGML Header (+)


Section 1: 10-Q (10-Q)

iii_Current_Folio_10Q-Taxonomy2016

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2017

 

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.)

 

Two Stamford Plaza
281 Tresser Boulevard
Stamford, CT 06901
(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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 July 28, 2017

Common Stock, $0.001 par value

 

43,283,630 shares

 

 

 

 

 

 

 


 

FORWARD-LOOKING STATEMENTS

 

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

1


 

PART I — FINANCIAL INFORMATION

 

ITEM 1.FINANCIAL STATEMENTS (UNAUDITED)

 

INFORMATION SERVICES GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited) 

(In thousands, except par value)

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

    

2017

    

2016

 

ASSETS

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

25,470

 

$

34,485

 

Accounts and unbilled receivables, net of allowance of $476 and $494, respectively

 

 

69,986

 

 

64,662

 

Deferred tax asset

 

 

 —

 

 

1,730

 

Prepaid expense and other current assets

 

 

4,644

 

 

5,374

 

Total current assets

 

 

100,100

 

 

106,251

 

Restricted cash

 

 

89

 

 

497

 

Furniture, fixtures and equipment, net

 

 

4,408

 

 

4,789

 

Goodwill

 

 

86,162

 

 

85,940

 

Intangible assets, net

 

 

30,334

 

 

35,113

 

Other assets

 

 

4,496

 

 

2,532

 

Total assets

 

$

225,589

 

$

235,122

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

 

$

8,055

 

$

9,724

 

Current maturities of long-term debt

 

 

7,126

 

 

5,546

 

Deferred revenue

 

 

9,197

 

 

9,112

 

Accrued expenses

 

 

22,128

 

 

27,971

 

Total current liabilities

 

 

46,506

 

 

52,353

 

Long-term debt, net of current maturities

 

 

112,577

 

 

116,485

 

Deferred tax liability

 

 

 —

 

 

396

 

Other liabilities

 

 

6,772

 

 

7,476

 

Total liabilities

 

 

165,855

 

 

176,710

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

Redeemable non-controlling interest

 

 

 —

 

 

1,376

 

Stockholders’ equity

 

 

 

 

 

 

 

Preferred stock, $.001 par value; 10,000 shares authorized; none issued

 

 

 —

 

 

 

Common stock, $.001 par value, 100,000 shares authorized; 44,467 shares issued and 43,177 outstanding at June 30, 2017 and 44,203 shares issued and 42,140 outstanding at December 31, 2016

 

 

44

 

 

44

 

Additional paid-in capital

 

 

227,309

 

 

228,692

 

Treasury stock (1,290 and 2,063 common shares, respectively, at cost)

 

 

(4,577)

 

 

(8,216)

 

Accumulated other comprehensive loss

 

 

(6,451)

 

 

(7,800)

 

Accumulated deficit

 

 

(156,591)

 

 

(155,684)

 

Total stockholders’ equity

 

 

59,734

 

 

57,036

 

Total liabilities, redeemable non-controlling interest and stockholders’ equity

 

$

225,589

 

$

235,122

 

 

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

2


 

INFORMATION SERVICES GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 

(Unaudited)

(In thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

    

2017

    

2016

 

2017

    

2016

 

Revenues

 

$

68,038

 

$

60,354

 

$

134,593

 

$

110,283

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct costs and expenses for advisors

 

 

40,253

 

 

36,106

 

 

80,939

 

 

67,474

 

Selling, general and administrative

 

 

23,380

 

 

19,104

 

 

45,105

 

 

35,815

 

Depreciation and amortization

 

 

3,859

 

 

1,927

 

 

6,822

 

 

3,645

 

Operating income

 

 

546

 

 

3,217

 

 

1,727

 

 

3,349

 

Interest income

 

 

34

 

 

 2

 

 

79

 

 

24

 

Interest expense

 

 

(1,707)

 

 

(566)

 

 

(3,416)

 

 

(994)

 

Foreign currency transaction (loss) gain

 

 

(101)

 

 

244

 

 

(181)

 

 

(262)

 

(Loss) income before taxes

 

 

(1,228)

 

 

2,897

 

 

(1,791)

 

 

2,117

 

Income tax (benefit) provision

 

 

(923)

 

 

1,234

 

 

(915)

 

 

1,105

 

Net (loss) income

 

$

(305)

 

$

1,663

 

$

(876)

 

$

1,012

 

Net (loss) income attributable to non-controlling interest

 

 

(3)

 

 

51

 

 

32

 

 

99

 

Net (loss) income attributable to ISG

 

$

(302)

 

$

1,612

 

$

(908)

 

$

913

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

43,058

 

 

35,609

 

 

42,687

 

 

36,475

 

Diluted

 

 

43,058

 

 

36,719

 

 

42,687

 

 

37,029

 

(Loss) earnings per share attributable to ISG:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.01)

 

$

0.05

 

$

(0.02)

 

$

0.03

 

Diluted

 

$

(0.01)

 

$

0.04

 

$

(0.02)

 

$

0.03

 

Comprehensive income:

 

 

   

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(305)

 

$

1,663

 

$

(876)

 

$

1,012

 

Foreign currency translation, net of tax (expense) benefit of $(563),  $456,  $(929) and $66, respectively.

 

 

678

 

 

(745)

 

 

1,349

 

 

(109)

 

Comprehensive income

 

$

373

 

$

918

 

$

473

 

$

903

 

Comprehensive (loss) income attributable to non-controlling interest

 

 

(3)

 

 

51

 

 

32

 

 

99

 

Comprehensive income attributable to ISG

 

$

376

 

$

867

 

$

441

 

$

804

 

 

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)

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

    

2017

    

2016

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net (loss) income

 

$

(876)

 

$

1,012

 

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

 

 

 

 

 

 

 

Depreciation expense

 

 

2,071

 

 

988

 

Amortization of intangible assets

 

 

4,751

 

 

2,657

 

Tax expense from stock issuances

 

 

289

 

 

14

 

Amortization of deferred financing costs

 

 

510

 

 

84

 

Loss on sublease

 

 

578

 

 

 —

 

Stock-based compensation

 

 

3,510

 

 

3,315

 

Change in fair value of contingent consideration

 

 

 —

 

 

(19)

 

Changes in accounts receivable allowance

 

 

251

 

 

186

 

Deferred tax benefit

 

 

(1,860)

 

 

(965)

 

Loss on disposal of fixed assets

 

 

14

 

 

 1

 

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

Accounts receivable

 

 

(5,526)

 

 

(874)

 

Prepaid expense and other assets

 

 

995

 

 

(1,046)

 

Accounts payable

 

 

(1,670)

 

 

913

 

Deferred revenue

 

 

21

 

 

(1,483)

 

Debt issuance costs

 

 

(38)

 

 

198

 

Accrued expenses

 

 

(1,345)

 

 

1,552

 

Net cash provided by operating activities

 

 

1,675

 

 

6,533

 

Cash flows from investing activities

 

 

 

 

 

 

 

Acquisitions, net of cash acquired

 

 

(889)

 

 

(1,862)

 

Restricted cash

 

 

408

 

 

61

 

Purchase of furniture, fixtures and equipment

 

 

(1,479)

 

 

(1,216)

 

Net cash used in investing activities

 

 

(1,960)

 

 

(3,017)

 

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from debt

 

 

 —

 

 

13,500

 

Principal payments on borrowings

 

 

(2,768)

 

 

(4,288)

 

Proceeds from issuance of ESPP shares

 

 

306

 

 

295

 

Payment of contingent consideration

 

 

(2,594)

 

 

(2,483)

 

Payment for acquisition of Experton

 

 

(542)

 

 

 —

 

Payments related to tax withholding for stock-based compensation

 

 

(1,963)

 

 

(1,182)

 

Debt issuance costs

 

 

 —

 

 

 9

 

Tax expense from stock issuances

 

 

 —

 

 

(14)

 

Equity securities repurchased

 

 

(2,729)

 

 

(11,047)

 

Net cash used in financing activities

 

 

(10,290)

 

 

(5,210)

 

Effect of exchange rate changes on cash

 

 

1,560

 

 

(60)

 

Net decrease in cash and cash equivalents

 

 

(9,015)

 

 

(1,754)

 

Cash and cash equivalents, beginning of period

 

 

34,485

 

 

17,835

 

Cash and cash equivalents, end of period

 

$

25,470

 

$

16,081

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncash financing activities:

 

 

 

 

 

 

 

Issuance of treasury stock for vested restricted stock awards

 

$

5,960

 

$

3,839

 

 

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 2016, we consummated our transformational acquisition of Alsbridge Holdings, Inc. (“Alsbridge”).

 

NOTE 2—BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements as of June 30, 2017 and for the three and six months ended June 30, 2017 and 2016, 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, 2017, the results of operations for the three and six months ended June 30, 2017 and 2016 and the cash flows for the six months ended June 30, 2017 and 2016.  The condensed consolidated balance sheet as of December 31, 2016 has been derived from the Company’s audited consolidated financial statements.  Operating results for the three and six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.

 

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, 2016, which are included in the Company’s 2016 Annual Report on Form 10-K filed with the SEC.

 

Reclassification

 

Certain prior years’ amounts have been reclassified to conform to the current year’s presentation, including reclassification to the Condensed Consolidated Statements of Cash Flows due to the adoption of the share-based payment accounting standard in the first quarter of 2017 as further described below under Note 3—Summary of Significant Accounting Policies: Recently Issued Accounting Pronouncements. This reclassification had no impact on our results of operations, financial position, or changes in shareholders’ equity.

 

NOTE 3—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. The complexity of the estimation process and issues related to the assumptions, risks and uncertainties inherent in the application of the proportional performance method of accounting affect the amounts of revenues, expenses, unbilled receivables and deferred revenue. 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, depreciation expense, contingent consideration, fair value assumptions in analyzing goodwill and intangible asset impairments, income taxes and deferred tax asset valuation, and the valuation of stock based compensation.

 

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 June 30, 2017 and December 31, 2016 due to the short-term nature of these instruments.

 

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

 

 

 

June 30, 2017

 

 

     

Level 1

     

Level 2

     

Level 3

     

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

5,533

 

$

 —

 

$

 —

 

$

5,533

 

Total

 

$

5,533

 

$

 —

 

$

 —

 

$

5,533

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration (1)

 

$

 —

 

$

 —

 

$

3,665

 

$

3,665

 

Total

 

$

 —

 

$

 —

 

$

3,665

 

$

3,665

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basis of Fair Value Measurements

 

 

 

December 31, 2016

 

 

     

Level 1

     

Level 2

     

Level 3

     

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

22

 

$

 —

 

$

 —

 

$

22

 

Total

 

$

22

 

$

 —

 

$

 —

 

$

22

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration (1)

 

$

 —

 

$

 —

 

$

6,073

 

$

6,073

 

Total

 

$

 —

 

$

 —

 

$

6,073

 

$

6,073

 


(1)

The short-term portion is included in “Accrued expenses.”  The long-term portion is included in “Other liabilities.”

 

6


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

The Company’s contingent consideration liability was $3.7 million and $6.1 million at June 30, 2017 and December 31, 2016, respectively.  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 13.5% to 19.8%.

 

The Company’s financial instruments include outstanding borrowings of $122.5 million at June 30, 2017 and $125.3 million at December 31, 2016, 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 $122.4 million and $124.9 million at June 30, 2017 and December 31, 2016, respectively.  The fair values of debt have been estimated using a discounted cash flow analysis based on the Company's incremental borrowing rate for similar borrowing arrangements.  The incremental borrowing rate used to discount future cash flows ranged from 2.00% to 4.80%. 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.

 

The following table represents the change in the contingent consideration liability during the six months ended June 30, 2017 and 2016:

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

     

2017

     

2016

  

Beginning Balance

 

$

6,073

 

$

4,019

 

Payment of contingent consideration

 

 

(3,245)

 

 

(2,483)

 

Acquisitions 

 

 

 —

 

 

4,634

 

Change in fair value of contingent consideration

 

 

 —

 

 

(19)

 

Accretion of contingent consideration

 

 

739

 

 

152

 

Unrealized gain (loss) related to currency translation

 

 

98

 

 

(40)

 

Ending Balance

 

$

3,665

 

$

6,263

 

 

Recently Issued Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance that outlines a single comprehensive model for entities to use in accounting for revenue. Under the guidance, revenue is recognized when a company transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The standard is effective for public entities with annual and interim reporting periods beginning after December 15, 2016.  On July 9, 2015, the FASB approved the deferral of the effective date of the new revenue guidance by one year to annual reporting periods beginning after December 15, 2017, with early adoption being permitted for annual periods beginning after December 15, 2016. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective transition method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method).  The guidance also requires significantly expanded disclosures around the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, which we are currently compiling.  We have completed an initial assessment of the impact of the guidance on our existing revenue recognition policies.  We currently anticipate that we will see the most impact in contracts which include variable consideration,  Network Contingency, subscription services around Robotic Process Automation, and will be adopting the standard using the cumulative catch-up transition method of adoption on January 1, 2018.  The Company is currently evaluating the impact of adoption of this guidance, including required disclosures, and based upon our current analysis, does not expect a significant impact on processes, systems or controls.  We will continue to evaluate the impact of our

7


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

pending adoption of this guidance to our consolidated financial statements and our preliminary assessments are subject to change.

 

In November 2015, the FASB issued an accounting standards update to simplify the presentation of deferred income taxes on the balance sheet. The update requires that all deferred tax assets and liabilities be classified as noncurrent. The current guidance that deferred tax assets and liabilities of a tax-paying component of an entity be offset and presented as a single amount is not impacted by this update. The provisions of the new standard are effective beginning January 1, 2017, for annual and interim periods and early adoption is permitted.  The Company adopted this guidance on a prospective method; therefore, prior periods were not retrospectively adjusted.  As a result of this adoption, $1.5 million of net current deferred tax assets are included in the net noncurrent deferred tax assets as of June 30, 2017.  The adoption of this guidance in the first quarter of 2017 by the Company did not have a material impact on its results of operations.

 

In February 2016, the 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 is evaluating the impact of the guidance on its consolidated financial statements and related disclosures.

 

In March 2016, the FASB issued ASU 2016-09, amended guidance related to employee share-based payment accounting. The new guidance requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled, allows an employer to repurchase more of an employee’s shares than previously allowed for tax withholding purposes without triggering liability accounting, allows a company to make a policy election to account for forfeitures as they occur, and eliminates the requirement that excess tax benefits be realized before companies can recognize them. The new guidance also requires excess tax benefits and tax shortfalls to be presented on the cash flow statement as an operating activity rather than as a financing activity, and clarifies that cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation are to be presented as a financing activity. This guidance is effective prospectively for annual reporting periods, and interim periods therein, beginning after December 15, 2016.

 

We have adopted ASU 2016-09 effective January 1, 2017 on a prospective basis as permitted by the new standard.  As a result of this adoption:

 

·

Tax expenses of $0.3 million were recognized on stock-based compensation expense were reflected as a component of the provision for income taxes for the six months ended June 30, 2017.

 

·

We elected to adopt the cash flow presentation of the excess tax benefits prospectively where these benefits are classified along with other income tax cash flows as operating cash flows.

 

·

We have elected to continue to estimate the number of stock-based awards expected to vest, rather than electing to account for forfeitures as they occur to determine the amount of compensation cost to be recognized in each period.

 

·

We presented employee taxes paid as a financing activity on the Condensed Consolidated Statements of Cash Flows retrospectively, as such the comparable period within the Condensed Consolidated Statements of Cash Flows has been recast to reflect the adoption.

 

The adoption of this guidance in the first quarter of 2017 by the Company did not have a material impact on its results of operations.

8


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

 

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 is effective for interim and annual periods beginning after December 15, 2017, and early adoption is permitted. The guidance requires application using a retrospective transition method. The Company is evaluating the impact of the guidance on its consolidated financial statements and related disclosures.

 

In November 2016, the FASB issued an accounting standard to requires that amounts generally described as restricted cash and restricted cash equivalents be presented with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. If different, a reconciliation of the cash balances reported in the cash flow statement and the balance sheet would need to be provided along with explanatory information. The guidance is effective on January 1, 2018.  We have started an initial assessment of the impact of the guidance, and we do not expect it will have a material impact on our consolidated financial statements.

 

In January 2017, the FASB issued an accounting standard that changes the GAAP definition of a business which can impact the accounting for asset purchases, acquisitions, goodwill impairment, and other assessments.  The guidance is effective on January 1, 2018.  We are currently evaluating the impact of this guidance on the Company's consolidated financial statements.

 

In January 2017, the FASB issued an accounting standard that eliminates Step 2 of the goodwill impairment test, which required us to determine the implied fair value of goodwill by allocating the reporting unit's fair value to each of its assets and liabilities as if the reporting unit was acquired in a business acquisition.  Instead, the updated guidance requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of the reporting unit to its carrying value, and recognizing a non-cash impairment charge for the amount by which the carrying value exceeds the reporting unit's fair value with the loss not exceeding the total amount of goodwill allocated to that reporting unit.  The updated guidance is effective beginning January 1, 2020, with early adoption permitted, and will be applied on a prospective basis.  We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements. 

 

NOTE 4—NET INCOME PER COMMON SHARE

 

Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that would share in the net income of the Company. For the three and six months ended June 30, 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, 1.2 million and 2.5 million restricted shares have not been considered in the diluted earnings per share calculation for the three and six months ended June 30, 2017, respectively, as the effect would be anti-dilutive.  

 

9


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

    

2017

    

2016

    

2017

    

2016

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income attributable to ISG

 

$

(302)

 

$

1,612

 

$

(908)

 

$

913

 

 

Weighted average common shares

 

 

43,058

 

 

35,609

 

 

42,687

 

 

36,475

 

 

(Loss) earnings per share attributable to ISG

 

$

(0.01)

 

$

0.05

 

$

(0.02)

 

$

0.03

 

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income attributable to ISG

 

$

(302)

 

$

1,612

 

$

(908)

 

$

913

 

 

Interest expense of convertible debt, net of tax

 

 

 —

 

 

 9

 

 

 —

 

 

23

 

 

Net (loss) income attributable to ISG, as adjusted

 

$

(302)

 

$

1,621

 

$

(908)

 

$

936

 

 

Basic weighted average common shares

 

 

43,058

 

 

35,609

 

 

42,687

 

 

36,475

 

 

Potential common shares

 

 

 —

 

 

1,110

 

 

 —

 

 

554

 

 

Diluted weighted average common shares

 

 

43,058

 

 

36,719

 

 

42,687

 

 

37,029

 

 

Diluted (loss) earnings per share attributable to ISG

 

$

(0.01)

 

$

0.04

 

$

(0.02)

 

$

0.03

 

 

 

 

 

 

NOTE 5—INCOME TAXES

 

The Company’s effective tax rate for the three and six months ended June 30, 2017 was (75.2)% and (51.1)% based on pretax losses of $1.2 million and $1.8 million, respectively.  The Company’s effective tax rate for the quarter was greater than the statutory rate primarily due to the impact of current year overall losses on the effective tax rate computation, and the impact of current quarter losses in jurisdictions where the Company is currently precluded from recording tax benefits. The effective tax rate was 42.6% and 52.2% for the three and six months ended June 30, 2016.  The difference is primarily due to the impact of current quarter losses in jurisdictions where the Company is currently precluded from recording tax benefits for the three months ended June 30, 2017.

 

As of June 30, 2017, the Company had total unrecognized tax benefits of approximately $3.1 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 June 30, 2017, the Company’s accrual of interest and penalties amounted to $1.1 million.  The Company recorded no material year-to-date change in accrual of unrecognized tax benefits and associated interest and penalties.

 

NOTE 6—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 June 30, 2017 and December 31, 2016.

 

Saugatuck Contingent Consideration

 

As of June 30, 2017, the Company has recorded a liability of $0.6 million representing the estimated fair value of contingent consideration related to the acquisition of Saugatuck, of which $0.3 million is classified as current and included in accrued expenses on the consolidated balance sheet.  The Company paid $0.5 million in April 2017 related to 2016 performance. 

 

10


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

Experton Contingent Consideration 

 

As of June 30, 2017, the Company has recorded a liability of $0.9 million representing the estimated fair value of contingent consideration related to the acquisition of Experton, of which $0.6 million is classified as current and included in accrued expenses on the consolidated balance sheet. The Company paid $0.1 million in July 2017 related to 2016 performance.

 

TracePoint Contingent Consideration

 

As of June 30, 2017, the Company has recorded a liability of $2.1 million representing the estimated fair value of contingent consideration related to the acquisition of TracePoint, of which $1.1 million is classified as current and included in accrued expenses on the consolidated balance sheet. The Company paid $2.1 million in April 2017 related to 2016 performance.

 

Alsbridge Contingent Consideration

 

As of June 30, 2017, the Company has recorded a liability of $0.1 million representing the estimated fair value of contingent consideration related to the acquisition of Alsbridge, that is classified as current and included in accrued expenses on the consolidated balance sheet.

 

Severance Accrual

 

The Company recorded $1.0 million of severance expense during the three months ended June 30, 2017.  The charge was primarily related to contractual termination benefits, and was recorded in selling, general and administrative expenses.  As of June 30, 2017,  the remaining balance in accrued severance is $0.3 million.    

 

 

 

NOTE 7—REDEEMABLE NON-CONTROLLING INTEREST

 

On May 2, 2017, the minority owner of ISG Italia S.p.A. exercised his put right to sell his 49% ownership interest to a subsidiary of ISG for approximately $0.9 million, and the transaction was consummated on the same day, such that as of May 2, 2017, ISG Italia S.p.A. is a wholly-owned indirect subsidiary of ISG.

 

The following provides a summary of activity in the non-controlling interest account for the periods ended June 30, 2017 and 2016 relating to the acquisition of Convergent Technologies Partners:

 

 

 

 

 

 

 

 

 

 

     

June 30,

 

 

 

2017

 

2016

 

Beginning balance

     

$

1,376

 

$

939

 

Net income attributable to non-controlling interest

 

 

32

 

 

99

 

Accretion attributable to non-controlling interest

 

 

(30)

 

 

38

 

Purchase of remaining non-controlling interest

 

 

(1,377)

 

 

 —

 

Impact of currency translation

 

 

(1)

 

 

 —

 

Ending balance

 

$

 —

 

$

1,076

 

 

 

 

11


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

NOTE 8—SEGMENT AND GEOGRAPHICAL INFORMATION

 

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

 

Geographical revenue information for the segment is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

    

2017

    

2016

    

2017

    

2016

    

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas

 

$

39,952

 

$

31,671

 

$

81,057

 

$

57,593

 

Europe

 

 

21,504

 

 

21,221

 

 

41,711

 

 

40,274

 

Asia Pacific

 

 

6,582

 

 

7,462

 

 

11,825

 

 

12,416

 

 

 

$

68,038

 

$

60,354

 

$

134,593

 

$

110,283

 

 

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 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 (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 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.  Prior to the end of the first full quarter following the closing of the credit facility, the applicable margin shall be a percentage per annum equal to 2.5% for the term loans and the revolving loans maintained as Base Rate loans or 3.5% for the term loans and revolving loans maintained as Eurodollar loans.

 

12


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

·

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 pledges and agreements restricting subsidiary distributions and changes in line of business. In addition, the Company is required to comply with a total leverage ratio and fixed charge coverage ratio.

 

·

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

 

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

 

As of June 30, 2017, the total principal outstanding under the term loan facility and revolving credit facility was $107.3 million and $8.0 million, 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 mature on January 4, 2018 and interest is 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 exceeds $4 per share for 60 consecutive trading days (the “Trigger Event”), the holder of the Compass Notes may 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 may 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 may 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 may 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 shall be given the opportunity to convert the outstanding principal amount into shares as described above.  No holder of the Compass Notes has the option to require cash payment as a result of the Trigger Event, hence the Compass Notes are classified as non-current.

 

13


 

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

 

 In 2013 and 2016, we prepaid substantial portions of the outstanding principal amount of the Compass Notes.  As of June 30, 2017, the total principal outstanding under the remaining Compass Notes was $0.2 million.

 

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 mature on September 1, 2018 and interest accrues on the principal amount daily at a rate of 2.0% and is payable upon maturity.  At any time, the Company may at its option prepay all or any portion of Alsbridge Notes.  As of June 30, 2017, the total principal outstanding under the Alsbridge Notes was $7.0 million.

 

 

 

 

 

 

14


 

 

 

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 2017 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 2016 Annual Report on Form 10-K titled “Risk Factors.”

 

BUSINESS OVERVIEW

 

Information Services Group, Inc. (“ISG”) (NASDAQ: III) is a leading technology insights, market intelligence and advisory services company serving more than 700 clients around the world to help them achieve operational excellence and faster growth.  ISG 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.  ISG supports both private and public sector organizations to transform and optimize their operational environments.  Clients look to ISG for unique insights and innovative solutions for leveraging technology, our deep data source, and more than five decades of experience of global leadership in information and advisory services. Based in Stamford, Connecticut, the Company has approximately 1,300 employees and operates in over 20 countries.

 

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 strategic 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, milestones or functions. 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 traditional transaction services.  Digital enablement provides capabilities, digital insights and better engagement with clients and partners. Our digital offerings expanded in 2017 to include RPA.

 

15


 

 

 

Our results are impacted principally by our full time consultants’ utilization rate, the number of business days in each quarter and the number of our revenue generating professionals who are available to work. Our utilization rate can be negatively affected by increased hiring because there is generally a transition period for new professionals that results in a temporary drop in our utilization rate. Our utilization rate can also be affected by seasonal variations in the demand for our services from our clients. The number of business work days is also affected by the number of vacation days taken by our consultants and holidays in each quarter. We typically have fewer business work days available in the fourth quarter of the year, which can impact revenues during that period. Time and expense engagements do not provide us with a high degree of predictability as to performance in future periods. Unexpected changes in the demand for our services can result in significant variations in utilization and revenues and present a challenge to optimal hiring and staffing. The volume of work performed for any particular client can vary widely from period to period.

 

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.

 

RESULTS OF OPERATIONS

 

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, impairment charges for goodwill and intangible assets, interest on contingent consideration, acquisition-related costs, severance and integration expense, tax indemnity receivable, and bargain purchase gain), adjusted net income (defined as net income plus amortization of intangible assets, non-cash stock compensation, foreign currency transaction gains/losses, non-cash impairment charges for goodwill and intangible assets, interest on contingent consideration, acquisition-related costs, severance and integration expense and bargain purchase gain, 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

16


 

 

 

because they improve the comparability of the financial results between periods and provide for greater transparency of key measures used to evaluate the Company’s performance.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

    

2017

    

2016

 

    

2017

    

2016

 

    

 

 

(in thousands)

 

Net (loss) income attributable to ISG

    

$

(302)

    

$

1,612

 

    

$

(908)

    

$

913

 

 

Net (loss) income attributable to non-controlling interest

 

 

(3)

 

 

51

 

 

 

32

 

 

99

 

 

Interest expense (net of interest income)

 

 

1,673

 

 

564

 

 

 

3,337

 

 

970

 

 

Income taxes

 

 

(923)

 

 

1,234

 

 

 

(915)

 

 

1,105

 

 

Depreciation and amortization

 

 

3,859

 

 

1,927

 

 

 

6,822

 

 

3,645

 

 

Interest on contingent consideration

 

 

270

 

 

30

 

 

 

693

 

 

60

 

 

Acquisition-related costs(1)

 

 

796

 

 

 —

 

 

 

1,097

 

 

 —

 

 

Severance and integration expense

 

 

1,016

 

 

 —

 

 

 

1,158

 

 

 —

 

 

Foreign currency transaction

 

 

101

 

 

(244)

 

 

 

181

 

 

262

 

 

Non-cash stock compensation

 

 

1,534

 

 

1,851

 

 

 

3,510

 

 

3,315

 

 

Adjusted EBITDA

 

$

8,021

 

$

7,025

 

 

$

15,007

 

$

10,369

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

 

June 30,

 

 

June 30,

 

    

 

 

2017

    

2016

 

 

2017

    

2016

 

 

 

 

(in thousands)

 

Net (loss) income attributable to ISG

    

$

(302)

    

$

1,612

 

 

$

(908)

    

$

913

 

 

Non-cash stock compensation

 

 

1,534

 

 

1,851

 

 

 

3,510

 

 

3,315

 

 

Intangible amortization

 

 

2,382

 

 

1,382

 

 

 

4,751

 

 

2,657

 

 

Interest on contingent consideration

 

 

270

 

 

 —

 

 

 

693

 

 

 —

 

 

Acquisition-related costs(1)

 

 

796

 

 

 —

 

 

 

1,097

 

 

 —

 

 

Severance and integration expense

 

 

1,016

 

 

 —

 

 

 

1,158

 

 

 —

 

 

Foreign currency transaction

 

 

101

 

 

(244)

 

 

 

181

 

 

262

 

 

Tax effect (2)

 

 

(2,318)

 

 

(1,136)

 

 

 

(4,328)

 

 

(2,369)

 

 

Adjusted net income

 

$

3,479

 

$

3,465

 

 

$

6,154

 

$

4,778

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

 

June 30,

 

 

June 30,

 

   

 

   

2017

   

2016

 

 

2017

   

2016

 

 

Net loss (income) per diluted share attributable to ISG

    

$

(0.01)

    

$

0.04

 

 

$

(0.02)

    

$

0.03

 

 

Non-cash stock compensation

 

 

0.04

 

 

0.05

 

 

 

0.08

 

 

0.09

 

 

Intangible amortization

 

 

0.05

 

 

0.04

 

 

 

0.11

 

 

0.07

 

 

Interest on contingent consideration

 

 

0.01

 

 

 —

 

 

 

0.02

 

 

 —

 

 

Acquisition-related costs(1)

 

 

0.02

 

 

 —

 

 

 

0.02

 

 

 —

 

 

Severance and integration expense

 

 

0.02