Information Services Group Inc. - Quarter Report: 2020 September (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


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

For the quarterly period ended September 30, 2020


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

For the transition period from to

Commission File Number 001-33287

INFORMATION SERVICES GROUP, INC.

(Exact name of Registrant as specified in its charter)

Delaware		20-5261587
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

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

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

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


Title of each class	Trading symbol	Name of each exchange on which registered
Shares of Common Stock, $0.001 par value	III	The Nasdaq Stock Market LLC

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

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

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

Large accelerated filer ◻		Accelerated filer ☒		Non-accelerated filer ◻		Smaller reporting company ☒
						Emerging growth company ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ⌧ No

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding at October 31, 2020
Common Stock, $0.001 par value		48,019,773 shares

CAUTIONARY NOTE REGARDING

FORWARD-LOOKING STATEMENTS

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

PART I — FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS (UNAUDITED)

INFORMATION SERVICES GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except par value)


	September 30,		December 31,
	2020		2019
ASSETS
Current assets
Cash and cash equivalents	$	38,141	$	18,153
Accounts receivable and contract assets, net of allowance of $749 and $343, respectively		66,239		77,076
Prepaid expenses and other current assets		4,556		4,572
Total current assets		108,936		99,801
Restricted cash		91		88
Furniture, fixtures and equipment, net		5,003		6,014
Right-of-use lease assets		4,983		6,572
Goodwill		90,789		85,349
Intangible assets, net		15,962		16,605
Deferred tax assets		3,349		3,589
Other assets		957		737
Total assets	$	230,070	$	218,755
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	9,410	$	8,862
Current maturities of long-term debt		4,300		11,000
Contract liabilities		4,546		4,935
Accrued expenses and other current liabilities		25,622		16,454
Total current liabilities		43,878		41,251
Long-term debt, net of current maturities		74,564		74,823
Deferred tax liabilities		3,460		3,472
Operating lease liabilities		3,784		5,013
Other liabilities		10,772		4,522
Total liabilities		136,458		129,081
Commitments and contingencies (Note 9)
Stockholders’ equity
Preferred stock, $0.001 par value; 10,000 shares authorized; none issued		—		—
Common stock, $0.001 par value, 100,000 shares authorized; 48,112 shares issued and 47,954 outstanding at September 30, 2020 and 48,112 shares issued and 47,478 outstanding at December 31, 2019		48		48
Additional paid-in capital		245,731		245,572
Treasury stock (158 and 634 common shares, respectively, at cost)		(319)		(2,051)
Accumulated other comprehensive loss		(6,398)		(7,138)
Accumulated deficit		(145,450)		(146,757)
Total stockholders’ equity		93,612		89,674
Total liabilities and stockholders’ equity	$	230,070	$	218,755

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

INFORMATION SERVICES GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands, except per share data)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Revenues	$	61,635	$	68,143	$	182,739	$	200,262
Operating expenses
Direct costs and expenses for advisors		36,762		37,725		111,539		116,636
Selling, general and administrative		20,318		23,092		60,792		70,327
Depreciation and amortization		1,581		1,672		4,641		5,031
Operating income		2,974		5,654		5,767		8,268
Interest income		61		41		188		133
Interest expense		(687)		(1,598)		(2,890)		(4,763)
Foreign currency transaction (loss) gain		(66)		7		14		(28)
Income before taxes		2,282		4,104		3,079		3,610
Income tax provision		227		2,373		1,772		2,363
Net income	$	2,055	$	1,731	$	1,307	$	1,247
Weighted average shares outstanding:
Basic		47,880		47,426		47,599		46,704
Diluted		49,908		48,404		49,546		47,204
Earnings per share:
Basic	$	0.04	$	0.04	$	0.03	$	0.03
Diluted	$	0.04	$	0.04	$	0.03	$	0.03
Comprehensive income:
Net income	$	2,055	$	1,731	$	1,307	$	1,247
Foreign currency translation, net of tax (expense) benefit of ($398), $294, ($207) and $309, respectively.		1,261		(927)		740		(982)
Comprehensive income	$	3,316	$	804	$	2,047	$	265

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

INFORMATION SERVICES GROUP, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited)

(In thousands)


								Accumulated
					Additional			Other				Total
	Common Stock				Paid-in-		Treasury	Comprehensive		Accumulated		Stockholders’
	Shares	Amount			Capital		Stock	Loss		Deficit		Equity
Balance June 30, 2020	48,112	$	48	$	244,257	$	(847)	$	(7,659)	$	(147,505)	$	88,294
Net Income	—		—		—		—		—		2,055		2,055
Other comprehensive income	—		—		—		—		1,261		—		1,261
Treasury shares repurchased	—		—		—		(277)		—		—		(277)
Proceeds from issuance of ESPP shares	—		—		(21)		141		—		—		120
Issuance of treasury shares	—		—		(664)		664		—		—		—
Stock based compensation	—		—		2,159		—		—		—		2,159
Balance September 30, 2020	48,112	$	48	$	245,731	$	(319)	$	(6,398)	$	(145,450)	$	93,612

								Accumulated
					Additional			Other				Total
	Common Stock				Paid-in-		Treasury	Comprehensive		Accumulated		Stockholders’
	Shares	Amount			Capital		Stock	Loss		Deficit		Equity
Balance December 31, 2019	48,112	$	48	$	245,572	$	(2,051)	$	(7,138)	$	(146,757)	$	89,674
Net Income	—		—		—		—		—		1,307		1,307
Other comprehensive income	—		—		—		—		740		—		740
Treasury shares repurchased	—		—		—		(5,052)		—		—		(5,052)
Proceeds from issuance of ESPP shares	—		—		(80)		479		—		—		399
Issuance of treasury shares	—		—		(6,305)		6,305		—		—		—
Stock based compensation	—		—		6,544		—		—		—		6,544
Balance September 30, 2020	48,112	$	48	$	245,731	$	(319)	$	(6,398)	$	(145,450)	$	93,612


								Accumulated
					Additional			Other				Total
	Common Stock				Paid-in-		Treasury	Comprehensive		Accumulated		Stockholders’
	Shares	Amount			Capital		Stock	Loss		Deficit		Equity
Balance June 30, 2019	48,063	$	48	$	241,983	$	(3,179)	$	(7,210)	$	(150,582)	$	81,060
Net Income	—		—		—		—		—		1,731		1,731
Other comprehensive loss	—		—		—		—		(927)		—		(927)
Treasury shares repurchased	—		—		—		—		—		—		—
Proceeds from issuance of ESPP shares	51		—		146		—		—		—		146
Issuance of treasury shares	—		—		(847)		847		—		—		—
Stock based compensation	—		—		2,456		—		—		—		2,456
Balance September 30, 2019	48,114	$	48	$	243,738	$	(2,332)	$	(8,137)	$	(148,851)	$	84,466

								Accumulated
					Additional			Other				Total
	Common Stock				Paid-in-		Treasury	Comprehensive		Accumulated		Stockholders’
	Shares	Amount			Capital		Stock	Loss		Deficit		Equity
Balance December 31, 2018	45,477	$	45	$	235,998	$	(203)	$	(7,155)	$	(150,098)	$	78,587
Net Income	—		—		—		—		—		1,247		1,247
Other comprehensive loss	—		—		—		—		(982)		—		(982)
Treasury shares repurchased	—		—		—		(2,976)		—		—		(2,976)
Proceeds from issuance of ESPP shares	173		—		575		—		—		—		575
Issuance of treasury shares	—		—		(847)		847		—		—		—
Issuance of common stock for contingent earn-out	243		1		864		—		—		—		865
Issuance of common stock for RSUs vested	2,221		2		(2)		—		—		—		—
Stock based compensation	—		—		7,150		—		—		—		7,150
Balance September 30, 2019	48,114	$	48	$	243,738	$	(2,332)	$	(8,137)	$	(148,851)	$	84,466

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

INFORMATION SERVICES GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)


	Nine Months Ended
	September 30,
	2020		2019
Cash flows from operating activities
Net income	$	1,307	$	1,247
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense		2,023		2,022
Amortization of intangible assets		2,618		3,009
Deferred tax expense from stock issuances		972		172
Write-off of deferred financing costs		167		—
Amortization of deferred financing costs		313		460
Stock-based compensation		6,544		7,150
Provisions for accounts receivable		599		738
Deferred tax (benefit) provision		(984)		68
Loss on disposal of fixed assets		—		4
Changes in operating assets and liabilities:
Accounts receivable and contract assets		10,764		(8,090)
Prepaid expense and other assets		2,134		1,008
Accounts payable		323		189
Contract liabilities		(669)		(2,184)
Accrued expenses		11,196		9
Net cash provided by operating activities		37,307		5,802
Cash flows from investing activities
Purchase of furniture, fixtures and equipment		(795)		(1,115)
Neuralify acquisition (Note 4)		(2,282)		—
Net cash used in investing activities		(3,077)		(1,115)
Cash flows from financing activities
Principal payments on borrowings, net		(7,013)		(2,688)
Payment of contingent consideration		—		(865)
Proceeds from issuance of employee stock purchase plan shares		399		575
Debt financing costs		(934)		—
Payments related to tax withholding for stock-based compensation		(1,909)		(2,732)
Treasury shares repurchased		(5,052)		(2,976)
Net cash used in financing activities		(14,509)		(8,686)
Effect of exchange rate changes on cash		270		(433)
Net increase (decrease) in cash, cash equivalents, and restricted cash		19,991		(4,432)
Cash, cash equivalents, and restricted cash, beginning of period		18,241		18,725
Cash, cash equivalents, and restricted cash, end of period	$	38,232	$	14,293

Non-cash investing and financing activities:
Issuance of treasury stock for vested restricted stock awards	$	6,305	$	847

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

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(tabular amounts in thousands, except per share data)

(unaudited)

NOTE 1—DESCRIPTION OF ORGANIZATION AND BUSINESS OPERATIONS

Information Services Group, Inc. (the “Company” or “ISG”) was founded in 2006 with the strategic vision to become a high-growth, leading provider of information-based advisory services. The Company specializes in digital transformation services, including automation, cloud and data analytics; sourcing advisory; managed governance and risk services; network carrier services; technology strategy and operations design; change management; market intelligence and technology research and analysis.

NOTE 2—BASIS OF PRESENTATION

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

Certain information and disclosures normally included in the notes to annual financial statements prepared in accordance with GAAP have been omitted from these interim financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the financial statements for the fiscal year ended December 31, 2019, which are included in the Company’s 2019 Annual Report on Form 10-K filed with the SEC.

NOTE 3—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the periods reported. Actual results may differ from those estimates. Additionally, ISG has to determine the nature and timing of the satisfaction of performance obligations, the standalone selling price (“SSP”) of certain performance obligations, among other judgments associated with revenue recognition. Numerous internal and external factors can affect estimates. Estimates are also used for (but not limited to): allowance for doubtful accounts; useful lives of furniture, fixtures and equipment and definite-lived intangible assets; depreciation expense; fair value assumptions in analyzing goodwill and other long-lived assets for impairment; income taxes and deferred tax asset valuation; and the valuation of stock-based compensation.

Restricted Cash

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

Fair Value

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

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

Fair value measurements were applied with respect to our nonfinancial assets and liabilities measured on a nonrecurring basis, which would consist of measurements primarily to contingent consideration in a business combination.

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

●

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

●

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

●

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

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


	Basis of Fair Value Measurements
	September 30, 2020
	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents	$	17	$	—	$	—	$	17
Total	$	17	$	—	$	—	$	17

Liabilities:
Contingent consideration ⁽¹⁾	$	—	$	—	$	4,948	$	4,948
Total	$	—	$	—	$	4,948	$	4,948


	Basis of Fair Value Measurements
	December 31, 2019
	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents	$	17	$	—	$	—	$	17
Total	$	17	$	—	$	—	$	17

Liabilities:
Contingent consideration ⁽¹⁾	$	—	$	—	$	—	$	—
Total	$	—	$	—	$	—	$	—

⁽¹⁾Contingent consideration is included in “Other liabilities.”

The fair value measurement of this contingent consideration is classified within Level 3 of the fair value hierarchy and reflects the Company’s own assumptions in measuring fair values using the income approach. In developing these

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

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 of 2.50%.

The following table represents the change in the contingent consideration liability during the nine months ended September 30, 2020 and 2019:


	Nine Months Ended
	September 30,
	2020		2019
Beginning Balance	$	—	$	1,703
Neuralify contingent consideration accrued		4,900		—
Payment of contingent consideration		—		(1,730)
Accretion of contingent consideration		48		30
Unrealized gain (loss) related to currency translation		—		(3)
Ending Balance	$	4,948	$	—

The Company’s financial instruments include outstanding borrowings of $79.9 million at September 30, 2020 and $86.9 million at December 31, 2019, which are carried at amortized cost. The fair value of debt is classified within Level 3 of the fair value hierarchy. The fair value of the Company's outstanding borrowings is approximately $78.8 million and $86.7 million at September 30, 2020 and December 31, 2019, respectively. The fair values of debt have been estimated using a discounted cash flow analysis based on the Company's incremental borrowing rate for similar borrowing arrangements. The incremental borrowing rate used to discount future cash flows is 2.48%. The Company also considered recent transactions of peer group companies for similar instruments with comparable terms and maturities as well as an analysis of current market conditions.

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued new guidance on the measurement of credit losses for financial assets measured at amortized cost, which includes accounts receivable, and available-for-sale debt securities. The new guidance replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses and additional disclosures. As a smaller reporting company, this guidance is effective for fiscal years beginning after December 15, 2022. The Company is currently evaluating the potential impact of adopting this guidance on its financial statements.

NOTE 4—ACQUISITION

Neuralify Acquisition

On July 8, 2020, a subsidiary of the Company executed an Asset Purchase Agreement with Neuralify, LLC (“the Agreement”), a market leader in intelligent automation enablement solutions and services, and consummated the acquisition of substantially all of the assets and assumed certain liabilities of Neuralify, LLC. The primary reason for the acquisition was to expand the capabilities of ISG’s pure-play automation service line, ISG Automation. The purchase price was comprised of $2.3 million of cash consideration paid at closing and Neuralify, LLC will also have the right to receive additional consideration paid via earn-out payments during the next 18 months, if certain financial targets are met. The Company estimates such earn-out payments will be up to $4.9 million.

The following table summarizes the consideration transferred to acquire Neuralify, LLC and the amounts of identified assets acquired, and liabilities assumed as of the Agreement date:

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)


Cash	$	2,282
Contingent consideration		4,900
Total allocable purchase price	$	7,182

Recognized amounts of identifiable assets acquired and liabilities assumed as of the Agreement date:


Accounts receivable	$	226
Contract assets		1
Intangible assets		1,970
Accounts payable		(79)
Contract liabilities		(280)
Net assets acquired	$	1,838

Goodwill	$	5,344

The primary factors that drove the goodwill recognized, the majority of which is deductible for tax purposes, are the inclusion of legacy Neuralify software and workforce which expands the Company’s pure-play automation service line, ISG Automation.

Costs associated with this acquisition are included in the selling, general and administrative expenses in the condensed consolidated statement of comprehensive income and totaled $0.1 million during the nine months ended September 30, 2020. This business combination was accounted for under the acquisition method of accounting, and as such, the aggregate purchase price was allocated on a preliminary basis to the assets acquired and liabilities assumed based on estimated fair values as of the closing date. The purchase price allocations will be finalized after the completion of the valuation of certain intangible assets and any adjustments to the preliminary purchase price allocations are not expected to have a material impact on the Company’s results of operations. Based on the valuation and other factors as described above, the purchase price assigned to intangible assets and the amortization period were as follows:


	Purchase Price		Estimated
	Allocation		Useful Lives
Amortizable intangible assets:
Trademark and trade names	$	240	3 years
Software		160	7 years
Customer relationships		1,560	7 years
Noncompete agreements		10	2 years
Total intangible assets	$	1,970

The Condensed Consolidated Statements of Comprehensive Income includes the results of the Neuralify acquisition subsequent to the closing. Had the acquisition occurred as of January 1, 2019, the impact on the Company’s results of operations would not have been material.

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

NOTE 5—GOODWILL

The changes in the carrying amount of goodwill for the period ended September 30, 2020 are as follows:


Balance as of December 31, 2019	$	85,349
Neuralify Acquisition		5,344
Foreign currency impact		96
Balance as of September 30, 2020	$	90,789

NOTE 6—REVENUE

The majority of our revenue is derived from contracts that can span from a few months to several years. We enter into contracts that can include various combinations of services, which, depending on contract type, are sometimes capable of being distinct. If services are determined to be distinct, they are accounted for as separate performance obligations. A performance obligation is a promise in a contract to transfer a distinct good or service to the client and is the unit of account. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of our contracts have a single performance obligation as the promise to transfer the individual services is not separately identifiable from other promises in the contracts and, therefore, not distinct. For contracts with multiple performance obligations, including our managed service implementation and software and implementation contract types, the Company allocates the transaction price to each performance obligation using our best estimate of the standalone selling price, or SSP, of each distinct good or service in the contract.

Our contracts may include promises to transfer multiple services and products to a client. Determining whether services and products are considered distinct performance obligations that should be accounted for separately versus together may require judgment.

Estimates were required to determine the SSP for each distinct performance obligation identified within our managed service implementation contracts, software and implementation contracts, and research and subscription contracts.

Contract Balances

The timing of revenue recognition, billings, and cash collections results in billed accounts receivables, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities). Our clients are billed based on the type of arrangement. A portion of our services is billed monthly based on hourly or daily rates. There are also client engagements in which we bill a fixed amount for our services. This may be one single amount covering the whole engagement or several amounts for various phases, functions, or milestones. Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. However, we sometimes receive advances or deposits before revenue is recognized, resulting in contract liabilities. Contract assets and liabilities are reported in the current assets and current liabilities sections of the consolidated balance sheet, at the end of each reporting period, based on the timing of the satisfaction of the related performance obligation(s). See the table below for a breakdown of contract assets and contract liabilities.


	September 30,		December 31,
	2020		2019
Contract assets	$	29,569	$	28,529
Contract liabilities	$	4,546	$	4,935

Revenue recognized for the three months ended September 30, 2020 that was included in the contract liability balance at July 1, 2020 was $2.4 million and represented primarily revenue from our fixed fee and subscription contracts.

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

Revenue recognized for the nine months ended September 30, 2020 that was included in the contract liability balance at January 1, 2020 was $4.6 million and represented primarily revenue from our fixed fee and subscription contracts.

Disaggregation of Revenue

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


		Three Months Ended				Nine Months Ended
		September 30,				September 30,
Geographic area		2020	2019			2020	2019
Americas	$	34,968	$	40,253		103,422	$	118,738
Europe		20,928		22,558		64,044		67,562
Asia Pacific		5,739		5,332		15,273		13,962
	$	61,635	$	68,143	$	182,739	$	200,262

Remaining Performance Obligations

As of September 30, 2020, the Company had $102.6 million of remaining performance obligations, the majority of which are expected to be satisfied within the next year.

NOTE 7—NET INCOME PER COMMON SHARE

Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that would share in the net income of the Company. For the three and nine months ended September 30, 2020, 1.9 million and 3.7 million restricted stock units, respectively, have not been considered in the diluted earnings per share calculation, as the effect would be anti-dilutive.

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Basic:
Net income	$	2,055	$	1,731	$	1,307	$	1,247
Weighted average common shares		47,880		47,426		47,599		46,704
Earnings per share	$	0.04	$	0.04	$	0.03	$	0.03
Diluted:
Net income	$	2,055	$	1,731	$	1,307	$	1,247

Basic weighted average common shares		47,880		47,426		47,599		46,704
Potential common shares		2,028		978		1,947		500
Diluted weighted average common shares		49,908		48,404		49,546		47,204
Diluted earnings per share	$	0.04	$	0.04	$	0.03	$	0.03

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

NOTE 8—INCOME TAXES

The Company’s effective tax rate for the three and nine months ended September 30, 2020 was 9.9% and 57.6% based on pretax income of $2.3 million and $3.1 million, respectively. The Company’s effective tax rate for the quarter ended September 30, 2020 was impacted by the earnings and losses in certain foreign jurisdictions, the impact of a tax law in a foreign jurisdiction, and the impact of vesting of restricted stock units. The Company’s effective tax rate for the three and nine months ended September 30, 2019 was 57.8% and 65.5%. The difference was primarily due to the impact of earnings and losses in certain foreign jurisdictions.

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

NOTE 9—COMMITMENTS AND CONTINGENCIES

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

Neuralify Contingent Consideration

As of September 30, 2020, the Company has recorded a liability of $4.9 million representing the estimated fair value of contingent consideration related to the acquisition of Neuralify, all of which is classified as non-current and included in Other liabilities on the consolidated balance sheet.

NOTE 10—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				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Revenues
Americas	$	34,968	$	40,253	$	103,422	$	118,738
Europe		20,928		22,558		64,044		67,562
Asia Pacific		5,739		5,332		15,273		13,962
	$	61,635	$	68,143	$	182,739	$	200,262

The segregation of revenues by geographic region is based upon the location of the legal entity performing the services. The Company does not measure or monitor gross profit or operating income by geography or by service line for the purposes of making operating decisions or allocating resources.

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

NOTE 11—FINANCING ARRANGEMENTS AND LONG-TERM DEBT

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

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

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

The Company’s financial statements include outstanding borrowings of $79.9 million and $86.9 million at September 30, 2020 and December 31, 2019, respectively, which are carried at amortized cost. The fair value of debt is classified within Level 3 of the fair value hierarchy. The fair value of the Company's outstanding borrowings is approximately $78.8 million and $86.7 million at September 30, 2020 and December 31, 2019, respectively. The fair values of debt have been estimated using a discounted cash flow analysis based on the Company's incremental borrowing rate for similar borrowing arrangements. The incremental borrowing rate used to discount future cash flows is 2.48%. 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.

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

As of September 30, 2020, the total principal outstanding under the term loan facility and revolving credit facility was $79.9 million and $0.0 million, respectively. The effective interest rate for the term loan facility and revolving credit facility as of September 30, 2020 was 2.48% and 2.40%, respectively.

NOTE 12 - RISKS AND UNCERTAINTIES

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

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

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

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

NOTE 13—RESTRUCTURING CHARGES

2020 Restructuring Plan

In the third quarter of 2020, the Company took restructuring actions to lower our operating expenses structurally and permanently relative to revenue and to accelerate the transformation of our business (the “September 2020 Plan”). Most of these actions are based on our recent experience and learning in the COVID-19 pandemic and a resulting review of our operations, which continues to address certain operating expenses such as occupancy expense and salaries and related expenses.

A summary of the activity affecting the Company's accrued contractual termination benefit liability for the period ended September 30, 2020 is as follows:

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)


	September 2020 Plan
Balance at June 30, 2020	$	—
Amounts accrued		1,362
Amounts paid/incurred		(1,069)
Balance at September 30, 2020	$	293

The $1.4 million of net restructuring charges was primarily related to contractual termination benefits, and was recorded in selling, general and administrative expenses. We expect that the remaining actions of the September 2020 Plan will be completed over the next three months.

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis in conjunction with our financial statements and related notes included elsewhere in this report. Except for historical information, the discussion in this report contains certain forward-looking statements that involve risks and uncertainties. We have based these forward-looking statements on our current expectations and assumptions about future events. In some cases, you can identify forward-looking statements by terminology, such as “may,” “should,” “could,” “predict,” “potential,” “continue,” “expect,” “anticipate,” “future,” “intend,” “plan,” “believe,” “estimate,” “forecast” and similar expressions (or the negative of such expressions.) Forward-looking statements include statements concerning 2020 revenue growth rates and capital expenditures. Forward-looking statements are based on our beliefs as well as assumptions based on information currently available to us, including financial and operational information, the volatility of our stock price, current competitive conditions and the impact of COVID-19. As a result, these statements are subject to various risks and uncertainties. For a discussion of material risks and uncertainties that the Company faces, see the discussion in our 2019 Annual Report on Form 10-K titled “Risk Factors” and in this Quarterly Report on Form 10-Q under Item 1A of Part II, “Risk Factors.”

BUSINESS OVERVIEW

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

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

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

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

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

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

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

CURRENT ENVIRONMENT

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

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

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

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

Revenues

Revenues are generally derived from fixed fee contracts as well as engagements priced on a time and materials basis, which are recorded based on actual time worked as the services are performed. In addition, we also earn revenues which are contingent on the attainment of certain contractual milestones. Revenues related to materials (mainly out‑of‑pocket

expenses such as airfare, lodging and meals) required during an engagement generally do not include a profit mark up and can be charged and reimbursed separately or as part of the overall fee arrangement. Invoices are issued to clients monthly, semimonthly or in accordance with the specific contractual terms of each project.

We operate in one segment, fact‑based sourcing advisory services. We operate principally in the Americas, Europe, and Asia Pacific. Our foreign operations are subject to local government regulations and to the uncertainties of the economic and political conditions of those areas, and the revenue for our foreign operations is predominantly invoiced and collected in local currency.

Geographical revenue information for the segment is as follows:


	Three Months Ended September 30,
							Percent
Geographic Area	2020		2019		Change		Change

	(in thousands)
Americas	$	34,968	$	40,253	$	(5,285)	(13)	%
Europe		20,928		22,558		(1,630)	(7)	%
Asia Pacific		5,739		5,332		407	8	%
Total revenues	$	61,635	$	68,143	$	(6,508)	(10)	%

Revenues decreased $6.5 million, or approximately 10%, for the three months ended in the third quarter. The decrease in revenues in the Americas and Europe was primarily attributable to a decline in our Advisory service line, primarily related to the COVID-19 pandemic. The increase in revenues in Asia Pacific was primarily attributable to the increase in our Advisory service line. The translation of foreign currency revenues into U.S. dollars positively impacted performance in Europe and Asia Pacific compared to the prior year.

Operating Expenses

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


	Three Months Ended September 30,
							Percent
Operating Expenses	2020		2019		Change		Change

	(in thousands)
Direct costs and expenses for advisors	$	36,762	$	37,725	$	(963)	(3)	%
Selling, general and administrative		20,318		23,092		(2,774)	(12)	%
Depreciation and amortization		1,581		1,672		(91)	(5)	%
Total operating expenses	$	58,661	$	62,489	$	(3,828)	(6)	%

Total operating expenses decreased $3.8 million, or approximately 6%, for the three months ended in the third quarter with a decrease in direct costs and expenses for advisors, selling, general and administrative (“SG&A”) expenses, and depreciation and amortization. The decrease in operating expenses were primarily due to lower travel and entertainment of $4.3 million.

Compensation costs consist of a mix of fixed and variable salaries, annual bonuses, benefits and profit sharing plan contributions. A portion of compensation expenses for certain billable employees are allocated between direct costs and selling, general and administrative costs based on relative time spent between billable and non-billable activities. Bonus compensation is determined based on achievement against Company financial and individual targets, and is accrued monthly throughout the year based on management’s estimates of target achievement. Statutory and elective profit sharing plans are offered to employees as appropriate. Direct costs also include employee taxes, health insurance, workers compensation and disability insurance.

Sales and marketing costs consist principally of compensation expense related to business development, proposal preparation and delivery and negotiation of new client contracts. Costs also include travel expenses relating to the pursuit of sales opportunities, expenses for hosting periodic client conferences, public relations activities, participation in industry

conferences, industry relations, website maintenance and business intelligence activities. The Company maintains a dedicated global marketing function responsible for developing and managing sales campaigns, brand promotion, the ISG Index and assembling proposals.

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

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

Depreciation and amortization expense in the third quarter of 2020 and 2019 was $1.6 million and $1.7 million, respectively. The decrease of $0.1 million in depreciation and amortization expense was primarily due to prior year intangible assets that are now fully amortized. Our fixed assets consist of furniture, fixtures, equipment (mainly personal computers) and leasehold improvements. Depreciation expense is generally computed by applying the straight-line method over the estimated useful lives of assets. We also capitalize certain costs associated with the purchase and development of internal-use software, system conversions and website development costs. These costs are amortized over the estimated useful life of the software or system.

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

Other Income (Expense), Net

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


	Three Months Ended September 30,
							Percent
Other income (expense), Net	2020		2019		Change		Change

	(in thousands)
Interest income	$	61	$	41	$	20	49	%
Interest expense		(687)		(1,598)		911	57	%
Foreign currency (loss) gain		(66)		7		(73)	(1,043)	%
Total other income (expense), net	$	(692)	$	(1,550)	$	858	55	%

The total decrease of $0.9 million was primarily the result of lower interest expense attributable to our lower debt balance and lower interest rates.

Income Tax Expense

Our quarterly effective tax rate varies from period to period based on the mix of earnings among the various state and foreign tax jurisdictions in which business is conducted and the level of non-deductible expenses projected to be incurred during the current fiscal year. Our effective tax rate for the quarter ended September 30, 2020 was 9.9% compared to 57.8% for the quarter ended September 30, 2019. The difference for the quarter ended September 30, 2020 was primarily due to the impact of earnings and losses in certain foreign jurisdictions, the impact of a tax law in a foreign jurisdiction, and the impact of vesting of restricted stock units. The Company’s effective tax rate for the quarter ended September 30, 2020 was lower than the statutory rate primarily due to the impact of earnings in foreign jurisdictions, including reduction of foreign unremitted earnings tax accruals related to tax law change in India impacting the company’s hypothetical

dividend withholding tax liability. There were no significant changes in uncertain tax position reserves or valuation allowances during the quarter ended September 30, 2020.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND SEPTEMBER 30, 2019

Revenues

Geographical revenue information for the segment is as follows:


	Nine Months Ended September 30,
							Percent
Geographic Area	2020		2019		Change		Change

	(in thousands)
Americas	$	103,422	$	118,738	$	(15,316)	(13)	%
Europe		64,044		67,562		(3,518)	(5)	%
Asia Pacific		15,273		13,962		1,311	9	%
Total revenues	$	182,739	$	200,262	$	(17,523)	(9)	%

Revenues decreased $17.5 million, or approximately 9%, in 2020 to date. The decrease in revenues in the Americas and Europe was primarily attributable to a decline in our Advisory service line, primarily related to the COVID-19 pandemic. The increase in revenues in Asia Pacific was primarily attributable to the increase in our Advisory service lines. The translation of foreign currency revenues into U.S. dollars positively impacted performance in Europe and Asia Pacific compared to the prior year.

Operating Expenses

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


	Nine Months Ended September 30,
							Percent
Operating Expenses	2020		2019		Change		Change

	(in thousands)
Direct costs and expenses for advisors	$	111,539	$	116,636	$	(5,097)	(4)	%
Selling, general and administrative		60,792		70,327		(9,535)	(14)	%
Depreciation and amortization		4,641		5,031		(390)	(8)	%
Total operating expenses	$	176,972	$	191,994	$	(15,022)	(8)	%

Total operating expenses decreased $15.0 million, or approximately 8%, in 2020 with a decrease in direct costs and expenses for advisors, selling, general and administrative (“SG&A”) expenses, and depreciation and amortization. The decrease in operating expenses were primarily due to lower: travel and entertainment of $10.9 million, contract labor of $1.7 million, marketing expense of $0.9 million, conference expense of $0.9 million, and non-cash stock compensation of $0.6 million.

Depreciation and amortization expense in 2020 and 2019 were $4.6 million and $5.0 million, respectively. The decrease of $0.4 million in depreciation and amortization expense was primarily due to prior year intangible assets that are now fully amortized.

Other Income (Expense), Net

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


	Nine Months Ended September 30,
							Percent
Other income (expense), Net	2020		2019		Change		Change

	(in thousands)
Interest income	$	188	$	133	$	55	41	%
Interest expense		(2,890)		(4,763)		1,873	39	%
Foreign currency gain (loss)		14		(28)		42	150	%
Total other income (expense), net	$	(2,688)	$	(4,658)	$	1,970	42	%

The total decrease of $2.0 million was primarily the result of lower interest expense of $1.9 million attributable to our lower debt balance and lower interest rates, partially offset by an increase in interest expense associated with the write-off of deferred financing costs.

Income Tax Expense

Our effective tax rate for the nine months ended September 30, 2020 was 57.6% compared to 65.5% for the nine months ended September 30, 2019. The difference was primarily due to the impact of vesting of restricted stock units for the nine months ended September 30, 2020 and due to the impact of earnings and losses in certain foreign jurisdictions, the impact of a tax law in a foreign jurisdiction, and the release of $0.7 million of accruals for uncertain tax positions due to the expiration of statute limitations in a foreign jurisdiction for the nine months ended September 30, 2019.

NON-GAAP FINANCIAL PRESENTATION

This management’s discussion and analysis presents supplemental measures of our performance that are derived from our consolidated financial information but are not presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”). We refer to these financial measures, which are considered “non-GAAP financial measures” under SEC rules, as adjusted EBITDA, adjusted net income, and adjusted earnings per diluted share, each as defined below. See “Non-GAAP Financial Measures” below for information about our use of these non-GAAP financial measures, including our reasons for including these measures and reconciliations of each non-GAAP financial measure to the most directly comparable GAAP financial measure.

NON-GAAP FINANCIAL MEASURES

We use non-GAAP financial measures to supplement the financial information presented on a GAAP basis. We provide adjusted EBITDA (defined as net income, plus interest, taxes, depreciation and amortization, foreign currency transaction gains/losses, non-cash stock compensation, change in contingent consideration, acquisition-related costs, severance, integration and other expense, tax indemnity receivable, and financing-related costs), adjusted net income (defined as net income, plus amortization of intangible assets, non-cash stock compensation, foreign currency transaction gains/losses, change in contingent consideration, acquisition-related costs, severance, integration and other expense, financing-related costs, and write-off of deferred financing costs on a tax-adjusted basis) and adjusted net income as earnings per diluted share, excluding the net of tax effect of the items set forth in the table below. These are non-GAAP measures that the Company believes provide useful information to both management and investors by excluding certain expenses and financial implications of foreign currency translations that management believes are not indicative of ISG’s core operations. These non-GAAP measures are used by the Company to evaluate the Company’s business strategies and management’s performance. These non-GAAP financial measures exclude non-cash and certain other special charges that many investors believe may obscure the user’s overall understanding of the Company’s current financial performance and the Company’s prospects for the future. We believe that these non-GAAP measures provide useful information to investors

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019

	(in thousands)
Net income	$	2,055	$	1,731	$	1,307	$	1,247
Interest expense (net of interest income)		626		1,557		2,702		4,630
Income taxes		227		2,373		1,772		2,363
Depreciation and amortization		1,581		1,672		4,641		5,031
Change in contingent consideration		48		—		48		30
Acquisition-related costs		100		50		350		58
Severance, integration and other expense		1,362		462		1,730		1,371
Tax indemnity receivable		—		31		—		31
Financing-related costs		—		—		92		—
Foreign currency transaction loss (gain)		66		(7)		(14)		28
Non-cash stock compensation		2,159		2,456		6,544		7,150
Adjusted EBITDA	$	8,224	$	10,325	$	19,172	$	21,939


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019

	(in thousands)
Net income	$	2,055	$	1,731	$	1,307	$	1,247
Non-cash stock compensation		2,159		2,456		6,544		7,150
Intangible amortization		913		1,001		2,618		3,009
Change in contingent consideration		48		—		48		30
Acquisition-related costs		100		50		350		58
Severance, integration and other expense		1,362		462		1,730		1,371
Financing-related costs		—		—		92		—
Write-off of deferred financing costs		—		—		167		—
Foreign currency transaction loss (gain)		66		(7)		(14)		28
Tax effect ⁽¹⁾		(1,487)		(1,268)		(3,691)		(3,727)
Adjusted net income	$	5,216	$	4,425	$	9,151	$	9,166


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Net income per diluted share	$	0.04	$	0.04	$	0.03	$	0.03
Non-cash stock compensation		0.04		0.05		0.13		0.15
Intangible amortization		0.02		0.02		0.05		0.06
Change in contingent consideration		0.00		—		0.00		0.00
Acquisition-related costs		0.00		0.00		0.01		0.00
Severance, integration and other expense		0.03		0.01		0.03		0.03
Financing-related costs		—		—		0.00		—
Write-off of deferred financing costs		—		—		0.00		—
Foreign currency transaction loss (gain)		0.00		0.00		0.00		0.00
Tax effect ⁽¹⁾		(0.03)		(0.03)		(0.07)		(0.08)
Adjusted net income per diluted share	$	0.10	$	0.09	$	0.18	$	0.19

_________________________________

(1)

Marginal tax rate of 32% applied.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

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

As of September 30, 2020, our cash, cash equivalents and restricted cash were $38.2 million, a net increase of $20.0 million from December 31, 2019, which was primarily attributable to the following:

●

net cash provided by operating activities of $37.3 million;

●

principal payments on borrowings of $7.0 million;

●

equity repurchases of $5.1 million;

●

Neuralify acquisition of $2.3 million; and

●

debt financing costs of $0.9 million.

Capital Resources

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

●

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

●

The 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.

●

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

●

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

The Company’s financial statements include outstanding borrowings of $79.9 million at September 30, 2020 and $86.9 million at December 31, 2019, which are carried at amortized cost. The fair value of debt is classified within Level 3 of the fair value hierarchy. The fair value of the Company's outstanding borrowings is approximately $78.8 million and $86.7 million at September 30, 2020 and December 31, 2019, respectively. The fair values of debt have been estimated using a discounted cash flow analysis based on the Company's incremental borrowing rate for similar borrowing arrangements. The incremental borrowing rate used to discount future cash flows is 2.48%. 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.

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

Off-Balance Sheet Arrangements

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

Recently Issued Accounting Pronouncements

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

Critical Accounting Policies and Accounting Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements. We prepare these financial statements in conformity with U.S. generally accepted accounting principles. As such, we are required to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during

the periods presented. We base our estimates on historical experience, available information and various other assumptions we believe to be reasonable under the circumstances. On an on-going basis, we evaluate our estimates; however, actual results may differ from these estimates under different assumptions or conditions. There have been no material changes or developments in our evaluation of the accounting estimates and the underlying assumptions or methodologies that we believe to be Critical Accounting Policies and Estimates as disclosed in our Annual Report on Form 10-K, for the year ended December 31, 2019.

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

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

ITEM 4.CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2020, as required by the Rule 13a-15(b) under the Exchange Act. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2020.

Internal Control Over Financial Reporting

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

PART II - OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

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

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

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

●

the duration and scope of the outbreak;

●

governmental, business and individual actions that have been, and continue to be, taken in response to the outbreak, including travel restrictions, quarantines, social distancing, work-at-home, stay-at-home and shelter-in-place orders and shut-downs;

●

the impact of the outbreak on the financial markets and economic activity generally;

●

the effect of the outbreak on our clients and other business partners;

●

our ability to access the capital markets and our usual sources of liquidity on reasonable terms;

●

our ability to comply with the financial covenants in our Credit Agreement if a material economic downturn results in increased indebtedness or substantially lower EBITDA;

●

potential goodwill or other impairment charges;

●

increased cybersecurity risks as a result of remote working conditions;

●

our ability during the outbreak to provide our services, including the health and well-being of our employees; and

●

the ability of our clients to pay for our services during and following the outbreak.

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

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

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

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

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

Issuer Purchases of Equity Securities

On November 1, 2019, the Company’s Board of Directors approved a new share repurchase authorization of up to $10.8 million. The new share repurchase program will take effect upon completion of the Company’s current program, which had approximately $9.2 million remaining as of November 1, 2019. Therefore, the Company had approximately $20 million in the aggregate available under its share repurchase program as of November 1, 2019. The shares may be repurchased from time to time in open market transactions at prevailing market prices, in privately negotiated transactions, pursuant to a Rule 10b5-1 repurchase plan or by other means in accordance with federal securities laws. The timing and the amount of any repurchases will be determined by the Company’s management based on its evaluation of market conditions, capital allocation alternatives, and other factors. There is no guarantee as to the number of shares that will be repurchased, and the repurchase program may be extended, suspended or discontinued at any time without notice at the Company’s discretion.

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


				Total Numbers of	Approximate Dollar
				Securities	Value of Securities
	Total Number of	Average		Purchased	That May Yet Be
	Securities	Price per		as Part of Publicly	Purchased Under
Period	Purchased	Securities		Announced Plan	The Plan
	(In thousands)			(In thousands)	(In thousands)

July 1 - July 31	6	$	2.12	6	$	14,762
August 1 - August 31	128	$	2.05	128	$	14,500
September 1 - September 30	1	$	2.05	1	$	14,498

ITEM 6.EXHIBITS

The following exhibits are filed as part of this report:


Exhibit Number		Description
31.1	*	Certification of Chief Executive Officer Pursuant to SEC Rule 13a−14(a)/15d−14(a).
31.2	*	Certification of Chief Financial Officer Pursuant to SEC Rule 13a−14(a)/15d−14(a).
32.1	*	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	*	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	*	The following materials from ISG’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 formatted in Inline XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheet, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Statements of Cash Flows and (iv) the Notes to Consolidated Financial Statements.
104	*	Cover Page formatted in Inline XBRL and contained in Exhibit 101 attachments.

*	Filed herewith

SIGNATURES

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


	INFORMATION SERVICES GROUP, INC.


Date: November 9, 2020	/s/ Michael P. Connors
	Michael P. Connors, Chairman of the
	Board and Chief Executive Officer


Date: November 9, 2020	/s/ David E. Berger
	David E. Berger, Executive Vice
	President and Chief Financial Officer