Information Services Group(III) - 2019 Q4 - Annual Report

SAFE HARBOR STATEMENT This section outlines ISG's forward-looking statements, cautioning investors about inherent risks and uncertainties that could materially alter actual results from expectations Safe Harbor Statement Summary This section outlines ISG's forward-looking statements, cautioning investors about inherent risks and uncertainties that could materially alter actual results from expectations - Identifies forward-looking statements by words such as "may," "expect," "anticipate," "contemplate," "believe," "estimate," "intends," and "continue"[7] - Key forward-looking topics include the ability to retain existing clients and contracts, integrate recent acquisitions, win new clients, implement cost reductions, beliefs about future trends in the sourcing industry, expected spending on sourcing services, market growth, foreign currency exchange rates, effective tax rate, and competition[9] - Highlights various risk factors that may cause actual results to differ materially, such as the amount of cash on hand, consultant utilization, business strategy, realization of cost reductions, compliance with regulations, client demand fluctuations, ability to manage growth and international operations, employee retention, exchange rate fluctuations, increased competition, telecommunications or technology disruptions, pandemics (e.g., COVID-19), intellectual property protection, political/economic instability, and ability to consummate/integrate strategic acquisitions[9][13] - Cautions against undue reliance on these forward-looking statements, which speak only as of the report date, and states no obligation to update them unless required by applicable laws and regulations[11] PART I This part provides a comprehensive overview of ISG's business, services, competitive advantages, strategic initiatives, and associated risk factors Item 1. Business ISG is a leading global technology research and advisory firm specializing in digital transformation, sourcing advisory, and managed governance services, serving approximately 700 clients across over 20 countries - ISG (Information Services Group) is a leading global technology research and advisory firm, founded in 2006, employing approximately 1,300 digital-ready professionals operating in more than 20 countries[15][16] - The firm specializes in digital transformation services (automation, cloud, 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[15][20] - Clients, both private and public sector, face significant technological, business, and economic challenges, which continue to fuel demand for ISG's professional services, analytics, platforms, and advice[17][18] Our Services ISG offers a broad portfolio of subscription research, advisory, and strategy consulting services, alongside third-party management solutions and industry events - ISG provides subscription research, advisory, and strategy consulting services, leveraging extensive experience and proprietary data assets to offer objective insights into market trends and emerging technologies[20][21][22] - Consulting services include Business Advisory, Data & Analytics, Digital Solutions, Network Advisory, Organizational Change Management, Automation, HR Technology and Delivery Services, Software Advisory Services, and Sourcing Solution[24] - ISG GovernX® offers third-party management services, utilizing a proprietary software platform and cognitive technology to automate contract and project lifecycles, risk management, and provide actionable insights[24][27] - ISG Events hosts industry-leading conferences such as the ISG Sourcing Industry Conference (SIC), Executive Provider Summit, Digital Business Summit, Automation Summit, and ISG Paragon Awards[24] Our Competitive Advantages ISG maintains a strong competitive position through its independence, deep domain expertise, brand recognition, proprietary data, and global reach - Maintains independence and objectivity as a fact-based data, analytics, and advisory firm, ensuring unbiased focus and alignment with client interests[24] - Possesses deep domain expertise with strategic consulting teams averaging over 20 years of experience[24] - Benefits from strong brand recognition and offers an integrated product and service portfolio[24] - Leverages proprietary data assets and market intelligence, compiled over 30 years, providing comprehensive insights into operational alternatives[24] - Achieves global reach with resources in the Americas, Europe, and Asia Pacific, enabling consistent service to multinational clients[24] Our Strategy ISG's strategy focuses on expanding digital and cloud capabilities, modernizing sourcing services, leveraging data platforms, and pursuing growth through acquisitions and market expansion - Plans to expand resources and intellectual property around digitization and cloud to guide clients through digital transformation[26] - Modernizes traditional sourcing services with approaches like ISG FutureSource and expands the reach of ISG GovernX® 2.0, which automates third-party supplier relationship management[27] - Launched ISG Inform™ 2.0 in 2019, an enhanced data-as-a-service platform for benchmarking digital transformation and application development maturity[27] - Aims to preserve and expand market share by leveraging its operating platform to serve growing private and public enterprises, and by expanding products, services, and geographic markets[28] - Strengthens industry expertise by enhancing its market-facing organization to drive revenue across 22 global industries[28] - Aggressively expands market focus into Digital Advisory Services, Cloud Solutions, Automation, Business Advisory Services, Strategy, Data & Analytics, Transition, and Organization & Operations[28] - Focuses on expanding emerging services, including ISG Automation, HR Technology & Delivery Services, Providers as a Business (PaaB), ISG Platform (integrating ISG Inform™ and ISG GovernX®), and ISG Network Select™[31] - Seeks to expand recurring revenue streams through annuity-based offerings such as ISG GovernX®, Research, Software as a Subscription, ISG Inform™, and multi-year Public Sector contracts[31][32] - Considers acquisition and other growth opportunities to expand service offerings and domain expertise in the fragmented business services, information, and advisory market[41] - Plans to retool its resource and delivery model to achieve a more efficient global distribution of resources and a flexible staffing model, aiming to improve client value and ISG's margins[41] Our Proprietary Data Assets and Market Intelligence The company's core assets include information, data, analytics, methodologies, and other intellectual property, continuously enhanced and protected to provide comprehensive insights - The Company's core assets include information, data, analytics, methodologies, and other intellectual property that underpin its independent operational assessments and strategy development[34] - Each client engagement continuously enhances the quantity and quality of its intellectual property, providing an evolving and unique source of information[35] - Proprietary rights are protected through copyright and trademark laws, as well as nondisclosure and confidentiality arrangements, with strict policies for ownership, use, and protection[36] Clients ISG serves a diverse client base across over 20 countries, including large private sector businesses and various public sector entities - Operates in over 20 countries, serving private sector clients primarily in financial services, telecommunications, healthcare, pharmaceuticals, manufacturing, transportation, travel, energy, and utilities, including large businesses ranked in the Forbes Global 2000[37] - Public sector clients include state and local governments and authorities in the United States, and national and provincial government units in the United Kingdom, Italy, and Australia[37] Competition Competition in the sourcing, data, information, and advisory market is driven by independence, expertise, data, and reputation, where ISG believes it holds distinct advantages - Competition in the sourcing, data, information, and advisory market is driven by independence, objectivity, expertise, relevant benchmarking data, breadth of service capabilities, reputation, and price[38] - Competitors include other sourcing advisors, research firms, strategy consultants, and sourcing service providers[38] - ISG believes many competitors generally lack its benchmarking data, scale, diversity of expertise, recent transaction data, and implementation expertise[38] Employees As of December 31, 2019, ISG employed 1,287 people globally, with advisors recruited for extensive expertise, and maintains confidentiality agreements with all staff - As of December 31, 2019, ISG employed 1,287 people worldwide, including executive management, service leads, partners, directors, advisors, analysts, technical specialists, and functional support staff[39] - Advisors are recruited from service providers and consulting firms, bringing extensive practical expertise in corporate leadership, consulting, research, financial analysis, contract negotiations, and operational service delivery[40] - All employees are required to execute confidentiality, conflict of interest, and intellectual property agreements; there are no collective bargaining agreements[41] - The voluntary advisor turnover rate ranged between 15% and 22% over the last three years[41] Item 1A. Risk Factors This section details various risks that could materially and adversely affect ISG's business, financial condition, and results of operations, including debt, acquisitions, economic downturns, and operational challenges - Substantial debt outstanding ($86.9 million term loan as of December 31, 2019) may limit funding, flexibility, and increase vulnerability to adverse economic conditions[44][45][46][162] - Failure to comply with covenants in the credit agreement (e.g., debt coverage, fixed charges) could result in default, acceleration of indebtedness, and significant costs[47][49] - Risks associated with acquisitions include difficulties in integration, unanticipated delays, costs, and failure to achieve expected economies of scale or profitability[51][52] - Operating results are affected by worldwide economic conditions and client business activity; a decline could reduce or defer expenditures for consulting services[53] - Engagements may be terminated, delayed, or reduced in scope by clients at any time, potentially leading to underutilization of professionals and harm to business results[55] - Operating results may fluctuate significantly due to factors such as contract revenues, engagement timing, key advisor changes, seasonality, new services, pricing, strategic decisions, global conditions, and travel industry issues[56][61] - Dependence on project-based advisory engagements means a material decline in securing new engagements could adversely impact revenues and financial condition[59] - Profitability is highly dependent on consultant utilization, which can be affected by hiring, engagement size, completion unpredictability, and efficient transitions[60][62] - Risk of losing money on fixed-fee or capped-fee contracts if estimates for cost, scope, and duration are inaccurate[60] - Contingent-based revenue, tied to contractual milestones, may cause unusual variations in quarterly revenues and operating results[63] - Failure to maintain existing high-quality services, develop new competitive offerings, or anticipate market trends could adversely affect business and profitability[64][65][66][67] - Inability to protect important intellectual property rights (methods, data, tools) could lead to misappropriation, costly litigation, and reduced competitiveness[68] - The business information services and advisory sector is highly competitive; failure to compete successfully could result in loss of market share, diminished value, reduced pricing, and increased marketing expenditures[71][72] - The success of the business is dependent on a small group of key executives and management; unexpected loss could adversely affect business, growth, and client relationships[73][74][75] - Dependence on attracting, retaining, and training skilled advisors and other professionals with advanced expertise; competition for this talent pool is high[76][77] - Agreements with certain clients may limit the ability of particular advisors to work on other engagements or with competitors due to confidentiality concerns[78] - A significant portion of revenues (approximately 38% in 2019 and 2018) is derived from the 25 largest clients; loss or significant reduction of engagements from these clients could materially and adversely affect revenues[80] - International operations (41% of revenues in 2019) expose the company to risks such as tariffs, regulations, visa restrictions, tax issues, cultural differences, foreign exchange controls, political instability, and global events like pandemics (e.g., COVID-19) or terrorist attacks[81][83] - Uncertainty surrounding Brexit may cause increased economic volatility, affecting operations and business[84] - Data protection laws (e.g., GDPR) and self-regulatory codes may restrict activities, increase compliance costs, and lead to civil/criminal liability for non-compliance[85][88][89][90] - Exposure to cybersecurity risks, including cyberattacks and data breaches, could disrupt business operations, cause unanticipated losses, and damage reputation[91][96][97][98] - Significant international revenue exposes the company to foreign currency exchange rate risk, which can adversely affect business and financial results[92] - Risk of substantial damages claims from clients due to service disruptions or inadequate service, with insurance coverage potentially being insufficient[93][94] - Failure to maintain effective internal control over financial reporting could adversely affect business and the market price of common stock[99][101] - Impairment to goodwill and other intangible assets, which are subject to annual testing, could have a material adverse effect on financial condition and results of operations[102] - Client restrictions on the use of client data, which is crucial for populating databases and providing insights, could adversely affect activities[103][104][105] - Failure to effectively promote and maintain the ISG brand, or incurring excessive marketing expenses, could adversely impact future business and operating results[106] - Actual operating results may differ significantly from management's guidance due to inherent business, economic, and competitive uncertainties and contingencies[107] Item 1B. Unresolved Staff Comments The company reports no unresolved comments from the SEC staff regarding its public filings - There are no unresolved staff comments[108] Item 2. Properties ISG's executive offices are leased in Stamford, Connecticut, with most business activities conducted at client sites and additional leased offices globally - The Company maintains its executive offices in Stamford, Connecticut, under a lease expiring on August 31, 2025[109] - The majority of business activities are performed on client sites[109] - The Company does not own offices or properties but leases offices in various countries including the United States, Canada, Denmark, Switzerland, Netherlands, Finland, Australia, France, Germany, India, Italy, Spain, Sweden, and the United Kingdom[109] Item 3. Legal Proceedings The company is involved in various legal proceedings, none of which are expected to have a material adverse effect on its financial condition - The Company is a party to various legal proceedings in the normal course of business[110] - Management believes that no asserted or unasserted legal proceedings or claims would have a material adverse effect on the Company's financial condition, results of operations, or cash flows[110] Item 4. Mine Safety Disclosures This disclosure item is not applicable to the company's operations - This item is not applicable to the Company[111] PART II This part covers ISG's common stock market, selected financial data, management's discussion and analysis, and controls and procedures Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities This section provides information on the market for ISG's common stock, including historical trading prices, shareholder count, dividend policy, and details of the share repurchase program - ISG's common stock is traded on The Nasdaq Stock Market LLC under the symbol "III"[113] Common Stock High and Low Closing Sales Price (2019-2018) | Quarter Ending | High (2019) | Low (2019) | High (2018) | Low (2018) | | :------------- | :---------- | :--------- | :---------- | :--------- | | March 31 | $4.48 | $3.60 | $4.48 | $3.96 |\n| June 30 | $3.84 | $2.94 | $4.45 | $3.91 |\n| September 30 | $3.18 | $2.27 | $5.35 | $4.04 |\n| December 31 | $2.54 | $2.16 | $4.56 | $4.08 | - As of March 4, 2020, the last reported sale price for common stock was $2.84 per share[113] - As of December 31, 2019, there were 577 holders of record of ISG common stock[114] - The Company paid a special dividend of $0.14 per share in January 2015; future dividends are at the discretion of the Board of Directors and contingent upon revenues, earnings, capital requirements, and financial condition, and limited by the Credit Agreement[115] - On November 1, 2019, the Board approved a new share repurchase authorization of up to $10.8 million, bringing the aggregate available under its share repurchase program to approximately $20 million[116] Issuer Purchases of Equity Securities (Q4 2019) | Period | Total Number of Securities Purchased (In thousands) | Average Price per Securities | Total Numbers of Securities Purchased as Part of Publicly Announced Plan (In thousands) | Approximate Dollar Value of Securities That May Yet Be Purchased Under The Plan (In thousands) | | :--------------------- | :------------------------------------------------ | :--------------------------- | :------------------------------------------------------------------------------------ | :------------------------------------------------------------------------------------------ | | October 1 – October 31 | — | $— | — | $9,193 |\n| November 1 – November 30 | — | — | — | $20,000 |\n| December 1 – December 31 | 193 | $2.34 | 193 | $19,548 | Item 6. Selected Financial Data As a smaller reporting company, ISG is not required to provide selected financial data - As a smaller reporting company, ISG is not required to provide the information described in this item[121] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides a detailed discussion of ISG's financial condition and results of operations for the years ended December 31, 2019 and 2018, covering business overview, strategy, revenue recognition, operating expenses, non-GAAP financial measures, liquidity, capital resources, and critical accounting policies - The discussion contains forward-looking statements that reflect plans, estimates, and beliefs, subject to numerous risks and uncertainties as described in Item 1A[122] - ISG is a leading global technology research and advisory firm specializing in digital transformation services, sourcing advisory, and managed governance, serving approximately 700 clients in over 20 countries[123] - The Company's strategy focuses on strengthening its market position, developing new services and products, expanding geographically, developing new industry sectors, productizing market data assets, expanding managed services, and growing via acquisitions[124] - Revenues are primarily derived from project-based fees (time and materials, fixed fee, or capped fee) and recurring revenue streams, including ISG GovernX®, Research, Software as a Subscription, ISG Inform™, and multi-year Public Sector contracts[127][128][129] - Results are principally impacted by the utilization rate of full-time consultants, the number of business days in each quarter, and the number of revenue-generating professionals[130] - ISG is transforming into a solutions firm, combining products and services to drive efficiency and growth for clients undergoing large-scale digital transformations, pivoting beyond traditional transactions to strategy, operating model design, and digital ecosystem connections[131][132][134] - ISG Research indicates that nearly half of all managed services contracts now include a digital component, reflecting the market shift towards cloud, SaaS, automation, data analytics, and IoT[133] Results of Operations This section analyzes ISG's revenue and operating expense trends for 2019 versus 2018, highlighting changes in geographical revenue, expense components, and the effective tax rate Geographical Revenue (2019 vs 2018) | Geographic Area | 2019 (in thousands) | 2018 (in thousands) | Change (in thousands) | Percent Change | | :-------------- | :------------------ | :------------------ | :-------------------- | :------------- | | Americas | $156,075 | $159,108 | $(3,033) | (2)% |\n| Europe | $90,739 | $95,130 | $(4,391) | (5)% |\n| Asia Pacific | $18,949 | $21,531 | $(2,582) | (12)% |\n| Total revenues | $265,763 | $275,769 | $(10,006) | (4)% | - Total revenues decreased by $10.0 million (4%) in 2019, primarily due to declines in Advisory services in Europe and Managed Services in the Americas and Asia Pacific, exacerbated by negative foreign currency translation[136] Operating Expenses (2019 vs 2018) | Operating Expenses | 2019 (in thousands) | 2018 (in thousands) | Change (in thousands) | Percent Change | | :------------------------------ | :------------------ | :------------------ | :-------------------- | :------------- | | Direct costs and expenses for advisors | $153,179 | $159,921 | $(6,742) | (4)% |\n| Selling, general and administrative | $92,518 | $95,400 | $(2,882) | (3)% |\n| Depreciation and amortization | $6,708 | $7,771 | $(1,063) | (14)% |\n| Total operating expenses | $252,405 | $263,092 | $(10,687) | (4)% | - Total operating expenses decreased by $10.7 million (4%) in 2019, driven by lower compensation and benefits ($7.8 million), professional fees ($2.2 million), travel expenses ($1.2 million), and acquisition-related costs ($0.6 million), partially offset by higher license fees ($1.9 million) and contract labor ($1.4 million)[137] Other Expense, Net (2019 vs 2018) | Other Expense, Net | 2019 (in thousands) | 2018 (in thousands) | Change (in thousands) | Percent Change | | :-------------------------- | :------------------ | :------------------ | :-------------------- | :------------- | | Interest income | $194 | $116 | $78 | 67% |\n| Interest expense | $(6,267) | $(6,688) | $421 | 6% |\n| Foreign currency gain (loss) | $(146) | $7 | $(153) | (2,186)% |\n| Total other expense, net | $(6,219) | $(6,565) | $346 | 5% | - The total decrease in other expense, net, was $0.3 million, primarily due to lower interest expense from a reduced debt balance, partially offset by a net foreign currency loss[145] - The effective tax rate for 2019 was 53.2%, significantly higher than 7.1% in 2018, mainly due to higher tax rates in foreign jurisdictions and non-deductible expenses in the U.S[146] Non-GAAP Financial Presentation ISG utilizes non-GAAP financial measures like Adjusted EBITDA and Adjusted Net Income to provide enhanced comparability and transparency of its core operations - ISG uses non-GAAP financial measures, including Adjusted EBITDA, Adjusted Net Income, and Adjusted Earnings Per Diluted Share, to supplement GAAP financial information[147][148] - These non-GAAP measures exclude non-cash and certain other special charges, providing useful information to management and investors by improving comparability and transparency of core operations[148] Non-GAAP Financial Measures (2019 vs 2018) | Metric | 2019 (in thousands) | 2018 (in thousands) | | :--------------------------- | :------------------ | :------------------ | | Net income | $3,341 | $5,677 |\n| Adjusted EBITDA | $31,514 | $33,035 |\n| Adjusted net income | $13,931 | $17,020 |\n| Net income per diluted share | $0.07 | $0.12 |\n| Adjusted net income per diluted share | $0.29 | $0.37 | Liquidity and Capital Resources ISG's liquidity is primarily supported by operating cash flows, existing cash, and its revolving credit facility, with recent amendments to its credit agreement impacting debt and equity repurchases - Primary sources of liquidity are cash flows from operations, existing cash and cash equivalents, and borrowings under the revolving line of credit[151] Cash Flow Summary (2019 vs 2018) | Cash Flows From: | 2019 (in thousands) | 2018 (in thousands) | | :-------------------------------------------------- | :------------------ | :------------------ | | Operating activities | $20,437 | $19,128 |\n| Investing activities | $(1,922) | $(3,999) |\n| Financing activities | $(18,934) | $(24,003) |\n| Effect of exchange rate changes on cash | $(65) | $(915) |\n| Net decrease in cash, cash equivalents, and restricted cash | $(484) | $(9,789) | - Cash, cash equivalents, and restricted cash totaled $18.2 million as of December 31, 2019, a net decrease of $0.5 million from $18.7 million in 2018[152] - The 2016 Credit Agreement includes a $110.0 million term loan facility and a $30.0 million revolving credit facility, with a maturity date of December 1, 2021[154][155] - As of December 31, 2019, the total principal outstanding under the term loan facility was $86.9 million, with an effective interest rate of 5.2%[162] - The 2016 Credit Agreement was amended on May 9, 2019, to increase the maximum permitted leverage ratio, and on December 4, 2019, to allow for equity repurchases up to $8 million annually under specific leverage and fixed charge coverage ratios[160][161] - The $7.0 million unsecured subordinated promissory notes (Alsbridge Notes) were paid off in full by September 4, 2018[158][334] - Management anticipates that current cash and ongoing cash flows from operations will be adequate to meet working capital and capital expenditure needs for at least the next twelve months[163][164] - The Company does not have any off-balance sheet financing arrangements or liabilities[165] Critical Accounting Policies and Estimates This section outlines ISG's critical accounting policies and estimates, including revenue recognition, goodwill impairment, and the impact of recently issued accounting pronouncements - Key accounting estimates include revenue recognition, allowance for doubtful accounts, useful lives of furniture, fixtures and equipment and definite-lived intangible assets, depreciation expense, fair value assumptions for goodwill impairment, income taxes and deferred tax asset valuation, and stock-based compensation[169][238] - Revenue recognition follows a five-step model, with revenues derived from time and materials, fixed-fee, managed services, network contingency, robotics software licenses, and events/research subscriptions, recognized as control transfers to the customer[171][259][260][261][262][263][264][267][268][269] - Goodwill is not amortized but tested for impairment at least annually using a qualitative assessment, followed by a quantitative test if necessary; no impairment was identified in 2019 or 2018[182][183][184][185][251][252][253][254] - Recently issued accounting pronouncements include ASU 2018-15 (cloud computing implementation costs), FASB guidance on collaborative arrangements, and FASB guidance on credit losses (CECL), with varying effective dates and potential impacts[293][294][295] Item 7A. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, ISG is not required to provide quantitative and qualitative disclosures about market risk - As a smaller reporting company, ISG is not required to provide the information required by this item[187] Item 8. Financial Statements and Supplementary Data. This section refers to the company's financial statements and supplementary data located elsewhere in the report - Reference is made to the Company's financial statements beginning on page F-1 of this report[188] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting and financial disclosure - There are no changes in and disagreements with accountants on accounting and financial disclosure[189] Item 9A. Controls and Procedures This section describes ISG's disclosure controls and procedures and management's report on internal control over financial reporting, both concluded effective at a reasonable assurance level as of December 31, 2019 - Management, with the participation of the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures as of December 31, 2019, concluding they were effective at the reasonable assurance level[189][191] - Management concluded that the Company's internal control over financial reporting was effective as of December 31, 2019, based on criteria from the COSO framework[192][193] - PricewaterhouseCoopers LLP, an independent registered public accounting firm, audited and confirmed the effectiveness of the Company's internal control over financial reporting as of December 31, 2019[194][215] - There have been no material changes in internal control over financial reporting during the quarter ended December 31, 2019[195] - Management acknowledges the inherent limitations of control systems, which can provide only reasonable, not absolute, assurance due to factors like human error, circumvention, and management override[196][197] Item 9B. Other Information This section discloses a subsequent amendment to the senior secured credit facility, reducing principal payments and extending the maturity date to March 2025 - On March 10, 2020, the Company entered into a second amended and restated senior secured credit facility, comprising an $86.0 million term loan and a $54.0 million revolving credit facility, with a maturity date of March 10, 2025[198] - The amendment includes a reduction in annual mandatory principal payments, a lowering of borrowing costs, and an extension of the maturity date of the 2016 Credit Agreement[368] - The credit facility is secured by all equity interests and tangible/intangible assets of the Company and its direct and indirect domestic subsidiaries[198][200] - The term loan is repayable in quarterly installments of 1.25% of the original principal amount, with a final payment on the maturity date[203] - The facility contains customary covenants restricting indebtedness, liens, fundamental changes, asset sales, investments, affiliate transactions, and dividends, and requires compliance with total leverage and fixed charge coverage ratios[203] PART III This part incorporates by reference information on directors, executive compensation, security ownership, related transactions, and principal accountant fees from the proxy statement Item 10. Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the company's proxy statement - Information regarding directors, executive officers, and corporate governance is incorporated by reference from the Proxy Statement for the 2020 Annual Meeting of Stockholders under the captions "Management" and "Corporate Governance"[203] Item 11. Executive Compensation Details regarding executive compensation are incorporated by reference from the company's proxy statement - Information regarding executive compensation is incorporated by reference from the Proxy Statement for the 2020 Annual Meeting of Stockholders under the captions "Corporate Governance," "Executive Compensation," "Summary Compensation Table," and "Outstanding Equity Awards At 2019 Fiscal Year End"[204] Item 12. Security Ownership and Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership and related stockholder matters is incorporated by reference from the company's proxy statement - Information regarding security ownership and related stockholder matters is incorporated by reference from the Proxy Statement for the 2020 Annual Meeting of Stockholders under the caption "Security Ownership of Certain Beneficial Owners"[204] Item 13. Certain Relationships, Related Transactions and Director Independence Details on certain relationships, related transactions, and director independence are incorporated by reference from the company's proxy statement - Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the Proxy Statement for the 2020 Annual Meeting of Stockholders under the caption "Corporate Governance"[205] Item 14. Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's proxy statement - Information regarding principal accountant fees and services is incorporated by reference from the Proxy Statement for the 2020 Annual Meeting of Stockholders under the caption "Proposal No. 2 Ratification of Engagement of Independent Registered Public Accounting Firm"[205] PART IV This part lists the exhibits and financial statement schedules included in the Annual Report on Form 10-K Item 15. Exhibits and Financial Statement Schedule This section lists the financial statements, financial statement schedules, and exhibits filed as part of the Annual Report on Form 10-K - Documents filed as part of this report include the Report of Independent Registered Public Accounting Firm, Consolidated Balance Sheets, Consolidated Statement of Comprehensive Income, Consolidated Statement of Stockholders' Equity, Consolidated Statement of Cash Flows, and Notes to Consolidated Financial Statements[208] - Financial Statement Schedule includes Schedule II—Valuation and Qualifying Accounts for the years ended December 31, 2019, and 2018[209] - A comprehensive list of exhibits is filed as part of this Annual Report on Form 10-K[210][370][372][373] Item 16. Form 10-K Summary No Form 10-K Summary is provided in this report - There is no Form 10-K Summary provided[211] Report of Independent Registered Public Accounting Firm PricewaterhouseCoopers LLP issued an unqualified opinion on ISG's consolidated financial statements and internal control over financial reporting for 2019, noting changes in accounting principles for leases and revenue Report of Independent Registered Public Accounting Firm Summary PricewaterhouseCoopers LLP issued an unqualified opinion on ISG's consolidated financial statements and internal control over financial reporting for 2019, noting changes in accounting principles for leases and revenue - PricewaterhouseCoopers LLP issued an unqualified opinion on the consolidated financial statements of Information Services Group, Inc. as of December 31, 2019 and 2018, and for the two years then ended[214][215] - The firm also issued an unqualified opinion on the effectiveness of the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO[215] - The report notes changes in accounting principles for leases in 2019 and for revenue from contracts with customers in 2018[216] - PricewaterhouseCoopers LLP has served as the Company's auditor since 2008[222] Consolidated Financial Statements This section presents ISG's core financial statements, including balance sheets, comprehensive income, stockholders' equity, and cash flows for the reported periods Consolidated Balance Sheets Presents the financial position of Information Services Group, Inc. as of December 31, 2019, and 2018, detailing assets, liabilities, and stockholders' equity Consolidated Balance Sheet Summary (in thousands) | Item | Dec 31, 2019 | Dec 31, 2018 | | :--------------------------------------- | :----------- | :----------- | | ASSETS | | |\n| Cash and cash equivalents | $18,153 | $18,636 |\n| Accounts receivable and contract assets, net | $77,076 | $75,934 |\n| Prepaid expenses and other current assets | $4,572 | $3,620 |\n| Total current assets | $99,801 | $98,190 |\n| Restricted cash | $88 | $89 |\n| Furniture, fixtures and equipment, net | $6,014 | $6,636 |\n| Right-of-use lease assets | $6,572 | — |\n| Goodwill | $85,349 | $85,389 |\n| Intangible assets, net | $16,605 | $20,622 |\n| Deferred tax assets | $3,589 | $2,944 |\n| Other assets | $737 | $861 |\n| Total assets | $218,755 | $214,731 |\n| LIABILITIES AND STOCKHOLDERS' EQUITY | | |\n| Current liabilities | | |\n| Accounts payable | $8,862 | $8,453 |\n| Current maturities of long-term debt | $11,000 | $8,250 |\n| Contract liabilities | $4,935 | $6,187 |\n| Accrued expenses and other current liabilities | $16,454 | $17,759 |\n| Total current liabilities | $41,251 | $40,649 |\n| Long-term debt, net of current maturities | $74,823 | $89,212 |\n| Deferred tax liabilities | $3,472 | $1,790 |\n| Operating lease liabilities | $5,013 | — |\n| Other liabilities | $4,522 | $4,493 |\n| Total liabilities | $129,081 | $136,144 |\n| Stockholders' equity | | |\n| Common stock | $48 | $45 |\n| Additional paid-in capital | $245,572 | $235,998 |\n| Treasury stock | $(2,051) | $(203) |\n| Accumulated other comprehensive loss | $(7,138) | $(7,155) |\n| Accumulated deficit | $(146,757) | $(150,098) |\n| Total stockholders' equity | $89,674 | $78,587 |\n| Total liabilities and stockholders' equity | $218,755 | $214,731 | - Total assets increased by $4.0 million, from $214.7 million in 2018 to $218.8 million in 2019[225] - Total liabilities decreased by $7.1 million, from $136.1 million in 2018 to $129.1 million in 2019[225] - Total stockholders' equity increased by $11.1 million, from $78.6 million in 2018 to $89.7 million in 2019[225] Consolidated Statement of Comprehensive Income Details ISG's revenues, operating expenses, income before taxes, net income, and comprehensive income for the years ended December 31, 2019, and 2018 Consolidated Statement of Comprehensive Income Summary (in thousands, except per share data) | Item | 2019 | 2018 | | :------------------------------------ | :---------- | :---------- | | Revenues | $265,763 | $275,769 |\n| Operating expenses | $252,405 | $263,092 |\n| Operating income | $13,358 | $12,677 |\n| Interest income | $194 | $116 |\n| Interest expense | $(6,267) | $(6,688) |\n| Foreign currency transaction gain (loss) | $(146) | $7 |\n| Income before taxes | $7,139 | $6,112 |\n| Income tax provision | $3,798 | $435 |\n| Net income | $3,341 | $5,677 |\n| Basic weighted average shares outstanding | 46,917 | 44,673 |\n| Diluted weighted average shares outstanding | 47,620 | 46,067 |\n| Basic earnings per share | $0.07 | $0.13 |\n| Diluted earnings per share | $0.07 | $0.12 |\n| Foreign currency translation, net of tax | $17 | $(1,489) |\n| Comprehensive income | $3,358 | $4,188 | - Revenues decreased by $10.0 million (3.6%) from $275.8 million in 2018 to $265.8 million in 2019[228] - Net income decreased by $2.3 million (41.1%) from $5.7 million in 2018 to $3.3 million in 2019[228] - Diluted earnings per share decreased from $0.12 in 2018 to $0.07 in 2019[228] Consolidated Statement of Stockholders' Equity Provides a detailed breakdown of changes in stockholders' equity for Information Services Group, Inc. for the years ended December 31, 2019, and 2018, including net income, other comprehensive income/loss, treasury share transactions, and stock-based compensation - Total stockholders' equity increased from $78,587 thousand at December 31, 2018, to $89,674 thousand at December 31, 2019[231] - Key changes in stockholders' equity during 2019 included net income of $3,341 thousand, other comprehensive gain of $17 thousand, treasury shares repurchased of $(3,428) thousand, and stock-based compensation of $9,589 thousand[231] Consolidated Statement of Cash Flows Presents the cash flow activities of Information Services Group, Inc. for the years ended December 31, 2019, and 2018, categorized into operating, investing, and financing activities Consolidated Statement of Cash Flows Summary (in thousands) | Cash flows from: | 2019 | 2018 | | :-------------------------------------------------- | :---------- | :---------- | | Operating activities | $20,437 | $19,128 |\n| Investing activities | $(1,922) | $(3,999) |\n| Financing activities | $(18,934) | $(24,003) |\n| Effect of exchange rate changes on cash | $(65) | $(915) |\n| Net decrease in cash, cash equivalents, and restricted cash | $(484) | $(9,789)|\n| Cash, cash equivalents, and restricted cash, end of period | $18,241 | $18,725 | - Net cash provided by operating activities increased by $1.3 million, from $19.1 million in 2018 to $20.4 million in 2019[234] - Net cash used in investing activities decreased by $2.1 million, from $4.0 million in 2018 to $1.9 million in 2019, primarily due to lower purchases of furniture, fixtures, and equipment[234] - Net cash used in financing activities decreased by $5.1 million, from $24.0 million in 2018 to $18.9 million in 2019, mainly due to lower principal payments on borrowings and no payment of Alsbridge Notes in 2019[234] - Cash paid for interest was $5.69 million in 2019, down from $5.98 million in 2018[234] - Cash paid for taxes was $0.50 million in 2019, significantly lower than $2.62 million in 2018[234] Notes to Consolidated Financial Statements This section provides detailed explanatory notes supporting the consolidated financial statements, covering significant accounting policies, revenue, debt, and other financial disclosures NOTE 1—DESCRIPTION OF ORGANIZATION AND BUSINESS OPERATIONS This note describes Information Services Group (ISG) as a leading provider of information-based advisory services specializing in digital transformation and sourcing advisory - Information Services Group, Inc. (ISG) was founded in 2006 with a strategic vision to be a high-growth, leading provider of information-based advisory services[236] - The Company specializes in digital transformation services, including automation, cloud and data analytics; sourcing advisory; managed governance and risk services; network carrier services; technology strategy and operations design; change management; market intelligence and technology research and analysis[236] NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Outlines the significant accounting policies used in preparing ISG's consolidated financial statements, including basis of presentation, use of estimates, business combinations, cash management, accounts receivable, property and equipment, goodwill, long-lived assets, debt issuance costs, revenue recognition, reimbursable expenditures, stock-based compensation, credit risk, treasury stock, foreign currency translation, fair value measurements, income taxes, and recently issued accounting pronouncements - The consolidated financial statements are prepared in accordance with GAAP and include the accounts of the Company and its wholly-owned subsidiaries[237] - Management makes estimates and assumptions for various items, including revenue recognition, allowance for doubtful accounts, useful lives of assets, goodwill impairment, income taxes, and stock-based compensation[238] - Business acquisitions are accounted for using the purchase method, with acquisition-related costs expensed as incurred[239] - Cash and cash equivalents include highly liquid instruments with original maturities of three months or less[240] - Goodwill is not amortized but tested for impairment at least annually; no impairment was identified in 2019 or 2018[251][252][253][254] - Revenue recognition follows a five-step model, with specific methods for time and materials, fixed-fee, managed services, network contingency, software licenses, and events/research subscriptions[259][260][261][262][263][264][267][268][269] - Reimbursable expenditures totaled $9.6 million in 2019 and $9.8 million in 2018, included in revenues and direct costs[272] - Stock-based compensation expense is recognized ratably over the vesting period for restricted stock units (RSUs)[274][275] - The Company uses the asset and liability method for income taxes, establishing a valuation allowance for deferred tax assets when realization is not more likely than not[290] - Fair value measurements for financial instruments are classified within a three-level hierarchy, with contingent consideration and debt fair values typically classified as Level 3[282][283][284][286][289] - Recently issued accounting pronouncements include ASU 2018-15 (cloud computing), FASB guidance on collaborative arrangements, and FASB guidance on credit losses (CECL), with the latter's effective date deferred for smaller reporting companies[293][294][295] NOTE 3—REVENUE Details ISG's revenue recognition policies under ASC Topic 606, including the five-step model, treatment of distinct performance obligations, practical expedients used, and contract balances, also providing disaggregated revenue by geographic area and remaining performance obligations - The Company adopted ASC Topic 606, "Revenue from Contracts with Customers," as of January 1, 2018, using the cumulative catch-up transition method[298] - The majority of contracts have a single performance obligation; for contracts with multiple performance obligations, the transaction price is allocated using the best estimate of the standalone selling price (SSP)[299][300] - Practical expedients applied include applying new guidance only to uncompleted contracts, expensing incremental costs to obtain a contract (amortization period ≤ 1 year), and presenting all revenue net of sales tax[303] Contract Balances (in thousands) | Item | Dec 31, 2019 | Dec 31, 2018 | | :---------------- | :----------- | :----------- | | Contract assets | $28,529 | $22,878 |\n| Contract liabilities | $4,935 | $6,187 | - Revenue recognized in 2019 that was included in the contract liability balance at January 1, 2019, was $5.9 million, primarily from software and implementation, managed services, and research contracts[302] Disaggregation of Revenue by Geographic Area (2019, in thousands) | Geographic area | 2019 | | :-------------- | :---------- | | Americas | $156,075 |\n| Europe | $90,739 |\n| Asia Pacific | $18,949 |\n| Total | $265,763| - As of December 31, 2019, the Company had $94.6 million of remaining performance obligations, with the majority expected to be satisfied within the next year[308] NOTE 4—NET INCOME PER COMMON SHARE Provides the computation of basic and diluted earnings per share for the years ended December 31, 2019, and 2018 Earnings Per Share Computation (2019 vs 2018) | Item | 2019 | 2018 | | :---------------------------------- | :------ | :------ | | Net income (in thousands) | $3,341 | $5,677 |\n| Weighted average common shares (basic) | 46,917 | 44,673 |\n| Basic earnings per share | $0.07 | $0.13 |\n| Potential common shares | 703 | 1,394 |\n| Diluted weighted average common shares | 47,620 | 46,067 |\n| Diluted earnings per share | $0.07 | $0.12 | NOTE 5—ACCOUNTS RECEIVABLE AND CONTRACT ASSETS Details the components of accounts receivable and contract assets, net of valuation allowance, as of December 31, 2019, and 2018 Accounts Receivable and Contract Assets (in thousands) | Item | Dec 31, 2019 | Dec 31, 2018 | | :--------------------------------------- | :----------- | :----------- | | Accounts receivable | $48,416 | $52,935 |\n| Contract assets | $28,529 | $22,878 |\n| Receivables from related parties | $131 | $121 |\n| Total accounts receivable and contract assets, net | $77,076 | $75,934 | NOTE 6—FURNITURE, FIXTURES AND EQUIPMENT Provides a breakdown of furniture, fixtures, and equipment, net of accumulated depreciation, and the depreciation expense for 2019 and 2018 Furniture, Fixtures and Equipment, Net (in thousands) | Item | Estimated Useful Lives | Dec 31, 2019 | Dec 31, 2018 | | :------------------------------------ | :--------------------- | :----------- | :----------- | | Computer hardware, software and other office equipment | 2 to 5 years | $5,037 | $5,873 |\n| Furniture, fixtures and leasehold improvements | 2 to 5 years | $4,742 | $4,921 |\n| Software and development costs | 3 to 5 years | $8,092 | $7,506 |\n| Accumulated depreciation | | $(11,857) | $(11,664) |\n| Total furniture, fixtures and equipment, net | | $6,014 | $6,636 | - Depreciation expense was $2.7 million for both the years ended December 31, 2019, and 2018[313] NOTE 7—LEASES Details the adoption of ASC 842 for leases effective January 1, 2019, and provides information on lease expenses, cash flows, balance sheet items, and maturities of lease liabilities - The Company adopted Accounting Standards Update No. 2016-02, "Leases" (Topic 842), effective January 1, 2019, requiring the recognition of operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet[314] Lease Cost Components (Year Ended December 31, 2019, in thousands) | Lease Cost Components | Amount | | :-------------------------------- | :----- | | Operating lease cost | $2,935 |\n| Finance lease cost: Amortization of right-of-use assets | $15 |\n| Finance lease cost: Interest on lease liabilities | $3 |\n| Short-term lease cost | $30 |\n| Variable lease cost | $319 |\n| Sublease income | $(243) |\n| Total lease cost | $3,059 | Supplemental Balance Sheet Information Related to Leases (December 31, 2019, in thousands) | Item | Amount | | :---------------------------------- | :----- | | Operating lease right-of-use assets | $6,572 |\n| Current operating lease liabilities | $3,013 |\n| Non-current operating lease liabilities | $5,013 |\n| Total operating lease liabilities | $8,026 |\n| Finance lease right-of-use assets | $76 |\n| Current finance lease liabilities | $38 |\n| Non-current finance lease liabilities | $36 |\n| Total finance lease liabilities | $74 | Weighted Average Lease Terms and Discount Rates (December 31, 2019) | Item | Value | | :---------------------------------- | :------ | | Weighted average remaining lease term (Operating leases) | 4.2 years |\n| Weighted average remaining lease term (Finance leases) | 2.1 years |\n| Weighted average discount rate (Operating leases) | 7.7% |\n| Weighted average discount rate (