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~~June 30, ~~2020~~2021


☐	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~~July 31, ~~2020~~2021
Common Stock, $0.001 par value		~~48,019,773~~48,463,254 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,		June 30,		December 31,
	2020		2019		2021		2020
ASSETS
Current assets
Cash and cash equivalents	$	38,141	$	18,153	$	43,795	$	43,730
Accounts receivable and contract assets, net of allowance of $749 and $343, respectively		66,239		77,076
Accounts receivable and contract assets, net of allowance of $137 and $368, respectively						69,944		67,473
Prepaid expenses and other current assets		4,556		4,572		4,210		3,412
Total current assets		108,936		99,801		117,949		114,615
Restricted cash		91		88		92		95
Furniture, fixtures and equipment, net		5,003		6,014		4,907		5,001
Right-of-use lease assets		4,983		6,572		5,074		5,909
Goodwill		90,789		85,349		90,914		91,008
Intangible assets, net		15,962		16,605		13,701		15,064
Deferred tax assets		3,349		3,589		2,506		2,255
Other assets		957		737		3,553		5,573
Total assets	$	230,070	$	218,755	$	238,696	$	239,520
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	9,410	$	8,862	$	16,259	$	11,176
Current maturities of long-term debt		4,300		11,000		4,300		4,300
Contract liabilities		4,546		4,935		7,486		5,121
Accrued expenses and other current liabilities		25,622		16,454		29,689		30,064
Total current liabilities		43,878		41,251		57,734		50,661
Long-term debt, net of current maturities		74,564		74,823		71,522		73,551
Deferred tax liabilities		3,460		3,472		3,779		3,811
Operating lease liabilities		3,784		5,013		3,560		4,332
Other liabilities		10,772		4,522		5,220		8,028
Total liabilities		136,458		129,081		141,815		140,383
Commitments and contingencies (Note 9)
Commitments and contingencies (Note 8)
Stockholders’ equity
Preferred stock, $0.001 par value; 10,000 shares authorized; NaN 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
Common stock, $0.001 par value, 100,000 shares authorized; 49,362 shares issued and 48,377 outstanding at June 30, 2021 and 48,297 shares issued and 48,189 outstanding at December 31, 2020						49		48
Additional paid-in capital		245,731		245,572		243,710		248,018
Treasury stock (158 and 634 common shares, respectively, at cost)		(319)		(2,051)
Treasury stock (985 and 108 common shares, respectively, at cost)						(4,883)		(256)
Accumulated other comprehensive loss		(6,398)		(7,138)		(5,523)		(4,671)
Accumulated deficit		(145,450)		(146,757)		(136,472)		(144,002)
Total stockholders’ equity		93,612		89,674		96,881		99,137
Total liabilities and stockholders’ equity	$	230,070	$	218,755	$	238,696	$	239,520

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

INFORMATION SERVICES GROUP, INC.

CONDENSED CONSOLIDATED ~~STATEMENTS~~STATEMENT OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)

(In thousands, except per share data)


	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	September 30,				September 30,				June 30,				June 30,
	2020		2019		2020		2019		2021		2020		2021		2020
Revenues	$	61,635	$	68,143	$	182,739	$	200,262	$	70,597	$	57,394	$	137,168	$	121,104
Operating expenses
Direct costs and expenses for advisors		36,762		37,725		111,539		116,636		43,007		33,759		84,163		74,776
Selling, general and administrative		20,318		23,092		60,792		70,327		20,492		18,593		39,532		40,474
Depreciation and amortization		1,581		1,672		4,641		5,031		1,255		1,529		2,615		3,060
Operating income		2,974		5,654		5,767		8,268		5,843		3,513		10,858		2,794
Interest income		61		41		188		133		60		54		131		127
Interest expense		(687)		(1,598)		(2,890)		(4,763)		(613)		(819)		(1,256)		(2,203)
Foreign currency transaction (loss) gain		(66)		7		14		(28)
Foreign currency transaction gain (loss)										8		(82)		(3)		80
Income before taxes		2,282		4,104		3,079		3,610		5,298		2,666		9,730		798
Income tax provision		227		2,373		1,772		2,363		1,192		2,054		2,200		1,545
Net income	$	2,055	$	1,731	$	1,307	$	1,247
Net income (loss)									$	4,106	$	612	$	7,530	$	(747)
Weighted average shares outstanding:
Basic		47,880		47,426		47,599		46,704		48,307		47,601		48,406		47,458
Diluted		49,908		48,404		49,546		47,204		51,315		48,962		51,814		47,458
Earnings per share:
Earnings (loss) per share:
Basic	$	0.04	$	0.04	$	0.03	$	0.03	$	0.08	$	0.01	$	0.16	$	(0.02)
Diluted	$	0.04	$	0.04	$	0.03	$	0.03	$	0.08	$	0.01	$	0.15	$	(0.02)
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
Net income (loss)									$	4,106	$	612	$	7,530	$	(747)
Foreign currency translation, net of tax (expense) benefit of $(66), $(287), $277, and $192 respectively										209		929		(852)		(521)
Comprehensive income (loss)									$	4,315	$	1,541	$	6,678	$	(1,268)

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													Accumulated
					Additional			Other				Total						Additional			Other				Total
	Common Stock				Paid-in-		Treasury	Comprehensive		Accumulated		Stockholders’		Common Stock				Paid-in-		Treasury	Comprehensive		Accumulated		Stockholders’
	Shares	Amount			Capital		Stock	Loss		Deficit		Equity		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
Balance December 31, 2020														48,297	$	48	$	248,018	$	(256)	$	(4,671)	$	(144,002)	$	99,137
Net income														—		—		—		—		—		7,530		7,530
Other comprehensive loss														—		—		—		—		(852)		—		(852)
Treasury shares repurchased	—		—		—		(277)		—		—		(277)	—		—		—		(11,216)		—		—		(11,216)
Proceeds from issuance of ESPP shares	—		—		(21)		141		—		—		120	—		—		21		266		—		—		287
Issuance of treasury shares	—		—		(664)		664		—		—		—	—		—		(6,323)		6,323		—		—		—
Issuance of common stock for RSUs vested														1,065		1		(1)		—		—		—		—
Accrued dividends on unvested shares														—		—		(130)		—		—		—		(130)
Cash dividends paid to shareholders														—		—		(1,451)		—		—		—		(1,451)
Stock based compensation	—		—		2,159		—		—		—		2,159	—		—		3,576		—		—		—		3,576
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
Balance June 30, 2021														49,362	$	49	$	243,710	$	(4,883)	$	(5,523)	$	(136,472)	$	96,881

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)~~


								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 loss	—		—		—		—		—		(747)		(747)
Other comprehensive loss	—		—		—		—		(521)		—		(521)
Treasury shares repurchased	—		—		—		(4,775)		—		—		(4,775)
Proceeds from issuance of ESPP shares	—		—		(59)		338		—		—		279
Issuance of treasury shares	—		—		(5,641)		5,641		—		—		—
Stock based compensation	—		—		4,385		—		—		—		4,385
Balance June 30, 2020	48,112	$	48	$	244,257	$	(847)	$	(7,659)	$	(147,504)	$	88,295

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

INFORMATION SERVICES GROUP, INC.

CONDENSED CONSOLIDATED STATEMENT 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


	Six Months Ended
	June 30,
	2021		2020
Cash flows from operating activities
Net income (loss)	$	7,530	$	(747)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation expense		1,257		1,355
Amortization of intangible assets		1,358		1,705
Deferred tax (benefit) expense from stock issuances		(1,358)		884
Write-off of deferred financing costs		—		167
Amortization of deferred financing costs		179		218
Stock-based compensation		3,576		4,385
Change in fair value of contingent consideration		66		—
(Benefits) provisions for accounts receivable		(149)		676
Deferred tax provision		1,785		315
Changes in operating assets and liabilities:
Accounts receivable and contract assets		(2,300)		8,708
Prepaid expense and other assets		1,290		1,699
Accounts payable		4,849		1,433
Contract liabilities		2,365		(1,747)
Accrued expenses		482		7,920
Net cash provided by operating activities		20,930		26,971
Cash flows from investing activities
Purchase of furniture, fixtures and equipment		(965)		(427)
Net cash used in investing activities		(965)		(427)
Cash flows from financing activities
Principal payments on borrowings		(2,150)		(5,938)
Proceeds from issuance of employee stock purchase plan shares		287		279
Debt financing costs		—		(934)
Payments related to tax withholding for stock-based compensation		(4,595)		(1,631)
Cash dividends paid to shareholders		(1,451)		—
Treasury shares repurchased		(11,216)		(4,775)
Net cash used in financing activities		(19,125)		(12,999)
Effect of exchange rate changes on cash		(778)		(146)
Net increase in cash, cash equivalents, and restricted cash		62		13,399
Cash, cash equivalents, and restricted cash, beginning of period		43,825		18,241
Cash, cash equivalents, and restricted cash, end of period	$	43,887	$	31,640

Non-cash investing and financing activities:
Issuance of treasury stock for vested restricted stock awards	$	6,323	$	5,641

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~~is a leading global technology research and advisory firm. A trusted business partner to over 700 clients, including more than 75 of the top 100 enterprises in ~~2006 with the strategic vision~~our markets, ISG is committed to ~~become a high-growth, leading provider of information-based advisory services.~~helping corporations, public sector organizations, and service and technology providers achieve operational excellence and faster growth. The ~~Company~~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.

NOTE 2—BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements as of ~~September~~June 30, ~~2020~~2021 and for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, 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~~June 30, ~~2020~~2021 and the results of operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019~~2020 and the cash flows for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019.~~2020. The condensed consolidated balance sheet as of December 31, ~~2019~~2020 has been derived from the Company’s audited consolidated financial statements. Operating results for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2020.~~2021.

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,~~2020, which are included in the Company’s ~~2019~~2020 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~~The complexity of the ~~satisfaction~~estimation process and issues related to the assumptions, risks and uncertainties inherent in the application of ~~performance obligations,~~ the ~~standalone selling price (“SSP”)~~revenue recognition guidance for contracts in which control is transferred to the customer over time affect the amounts of ~~certain performance obligations, among other judgments associated with revenue recognition.~~revenues, expenses, contract assets and contract liabilities. Numerous internal and external factors can affect estimates. Estimates are also used for ~~(but~~but not limited ~~to):~~to: allowance for doubtful ~~accounts;~~accounts, useful lives of furniture, fixtures and equipment and ~~definite-lived~~definite lived intangible ~~assets;~~assets, depreciation ~~expense;~~expense, fair value assumptions in ~~analyzing~~evaluating goodwill ~~and other long-lived assets~~ for ~~impairment;~~impairment, income taxes and deferred tax asset ~~valuation;~~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.~~deposits and are not available for general corporate purposes.

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

Fair Value

The carrying value of the Company’s cash and cash equivalents, receivables, accounts payable, other current liabilities, and accrued interest approximated their fair values at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019~~2020 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)

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


	Basis of Fair Value Measurements
	June 30, 2021
	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents	$	5,017	$	—	$	—	$	5,017
Total	$	5,017	$	—	$	—	$	5,017

Liabilities:
Contingent consideration ⁽¹⁾	$	—	$	—	$	5,385	$	5,385
Total	$	—	$	—	$	5,385	$	5,385


	Basis of Fair Value Measurements
	December 31, 2020
	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents	$	17	$	—	$	—	$	17
Total	$	17	$	—	$	—	$	17

Liabilities:
Contingent consideration ⁽²⁾	$	—	$	—	$	5,319	$	5,319
Total	$	—	$	—	$	5,319	$	5,319

⁽¹⁾Contingent consideration is included in “Accrued expenses and other current liabilities” as of June 30, 2021.

⁽²⁾ The current and noncurrent Contingent consideration is included in “Accrued expenses and other current liabilities” and “Other liabilities,” respectively, as of December 31, 2020.

The fair value measurement of the contingent consideration is classified within Level 3 of the fair value hierarchy and reflects the Company’s own assumptions in measuring fair values using the income approach. In developing these estimates, the Company considered certain performance projections, historical results, and industry trends. This amount was estimated through a valuation model that incorporated probability-weighted assumptions related to the achievement of these milestones and the likelihood of the Company making payments. These cash outflow projections have then been discounted using a rate of 2.50%.

The following table represents the change in the contingent consideration liability during the ~~nine~~six months ended ~~September~~June 30, ~~2020 and 2019:~~2021:


	Nine Months Ended				Six Months Ended
	September 30,				June 30,
	2020		2019		2021
Beginning Balance	$	—	$	1,703	$	5,319
Neuralify contingent consideration accrued		4,900		—		—
Payment of contingent consideration		—		(1,730)		—
Accretion of contingent consideration		48		30		66
Unrealized gain (loss) related to currency translation		—		(3)		—
Ending Balance	$	4,948	$	—	$	5,385

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

The Company’s financial instruments include outstanding borrowings of ~~$79.9~~$76.6 million at ~~September~~June 30, ~~2020~~2021 and ~~$86.9~~$78.8 million at December 31, ~~2019,~~2020, 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~~$75.8 million and ~~$86.7~~$77.7 million at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, 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%.~~1.9% and 2.5% at June 30, 2021 and December 31, 2020, respectively. 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~~firm focused on 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 certain former employees of 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~~At the Agreement date, the Company ~~estimates~~estimated such earn-out payments ~~will~~would 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:


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

The primary factors that drove the goodwill recognized, the majority of which is deductible for tax purposes, are the inclusion of legacy Neuralify workforce and know-how 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 Consolidated Statement of Income and Comprehensive Income and totaled $0.1 million during the year ended December 31, 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. Based on the valuation and other factors as described above, the purchase price assigned to intangible assets were as follows:

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~~Consolidated Statement of ~~which is deductible for tax purposes, are the inclusion of legacy Neuralify software~~Income 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,~~2020, 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 (GovernX) implementation, ~~and~~ software and implementation, ~~contract types,~~and research and subscription contracts, 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 (including GovernX) 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 generally 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~~For multi-year software sales with annual invoicing, we perform a significant financing component calculation and recognize the ~~table below for a breakdown~~associated interest income throughout the duration of the financing period. In addition, we reclassify the resulting contract ~~assets~~asset balances as current 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.noncurrent receivables as

1110

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

receipt of the consideration is conditional only on the passage of time and there are no performance risk factors present. See the table below for a breakdown of contract assets and contract liabilities.


	June 30,		December 31,
	2021		2020
Contract assets	$	27,145	$	21,825
Contract liabilities	$	7,486	$	5,121

Revenue recognized for the ~~nine~~three and six months ended ~~September~~June 30, ~~2020~~2021 that was included in the contract liability balance at January 1, ~~2020~~2021 was ~~$4.6~~$1.3 million and $3.2 million, respectively, 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~~June 30, ~~2020,~~2021, the Company had ~~$102.6~~$113.8 million of remaining performance obligations, the majority of which are expected to be satisfied within the next year.

NOTE 7—6—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~~six months ended ~~September~~June 30, ~~2020, 1.9~~2021, 0.2 million and ~~3.7~~0.3 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 June 30,				Six Months Ended June 30,
	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019		2021		2020		2021		2020
Basic:
Net income	$	2,055	$	1,731	$	1,307	$	1,247
Net income (loss)									$	4,106	$	612	$	7,530	$	(747)
Weighted average common shares		47,880		47,426		47,599		46,704		48,307		47,601		48,406		47,458
Earnings per share	$	0.04	$	0.04	$	0.03	$	0.03
Earnings (loss) per share									$	0.08	$	0.01	$	0.16	$	(0.02)
Diluted:
Net income	$	2,055	$	1,731	$	1,307	$	1,247
Net income (loss)									$	4,106	$	612	$	7,530	$	(747)

Basic weighted average common shares		47,880		47,426		47,599		46,704		48,307		47,601		48,406		47,458
Potential common shares		2,028		978		1,947		500		3,008		1,361		3,408		—
Diluted weighted average common shares		49,908		48,404		49,546		47,204		51,315		48,962		51,814		47,458
Diluted earnings per share	$	0.04	$	0.04	$	0.03	$	0.03
Diluted earnings (loss) per share									$	0.08	$	0.01	$	0.15	$	(0.02)

NOTE 7—INCOME TAXES

The Company’s effective tax rate for the three and six months ended June 30, 2021 was 22.5% and 22.6% based on pretax income of $5.3 million and $9.7 million, respectively. The Company’s effective tax rate for the quarter ended June 30, 2021 was impacted by the earnings and losses in certain foreign jurisdictions and the impact of vesting of restricted stock units. The Company’s effective tax rate for the three and six months ended June 30, 2020 was 77.0% and 193.6%.

1211

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~~jurisdictions and 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 effectvesting of these changes total $0.8 million and are included in Prepaid expenses and other current assets and Deferred tax assets; there is 0 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.restricted stock units.

NOTE 9—8—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~~June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.

Neuralify Contingent Consideration

As of ~~September~~June 30, ~~2020,~~2021, the Company has recorded a liability of ~~$4.9~~$5.4 million representing the estimated fair value of contingent consideration related to the acquisition of Neuralify, all of which is classified as ~~non-current~~current and included in Other current liabilities on the consolidated balance sheet.

NOTE ~~10—~~9—SEGMENT AND GEOGRAPHICAL INFORMATION

The Company operates as 1 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				Three Months Ended				Six Months Ended
	September 30,				September 30,				June 30,				June 30,
	2020		2019		2020		2019		2021		2020		2021		2020
Revenues
Americas	$	34,968	$	40,253	$	103,422	$	118,738	$	40,339	$	31,620	$	78,429	$	68,453
Europe		20,928		22,558		64,044		67,562		23,715		20,958		46,457		43,117
Asia Pacific		5,739		5,332		15,273		13,962		6,543		4,816		12,282		9,534
	$	61,635	$	68,143	$	182,739	$	200,262	$	70,597	$	57,394	$	137,168	$	121,104

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—~~10—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.

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

●

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 19 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~~$76.6 million and ~~$86.9~~$78.8 million at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, 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~~$75.8 million and ~~$86.7~~$77.7 million at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, 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%~~1.9%. 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 1211 - 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, during fiscal year 2020, 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

INFORMATION SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(tabular amounts in thousands, except per share data)

(unaudited)

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~~reduced 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 ana Debt to 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. The Company is currently in compliance 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 1312—RESTRUCTURING CHARGES

2020 Restructuring Plan

In the third ~~quarter~~and fourth quarters 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~~“Restructuring 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~~June 30, ~~2020~~2021 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		Restructuring Plan
Balance at June 30, 2020	$	—
Balance at January 1, 2020			$	—
Amounts accrued		1,362		2,349
Amounts paid/incurred		(1,069)		(2,029)
Balance at September 30, 2020	$	293
Balance at June 30, 2021			$	320

The ~~$1.4~~$2.3 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~~Restructuring Plan will be completed over the next three months.

1614

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~~2021 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~~2020 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~~over 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~~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‑~~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~~result in a temporary drop in our utilization rate. Our utilization rate can also be affected by seasonal variations in the demand for our services from our clients. The number of business work days is also affected by the number of vacation days taken by our consultants and holidays in each quarter. We typically have fewer business work days available in the fourth quarter of the year, which can impact revenues during that period. ~~Time‑and‑~~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~~JUNE 30, ~~2020~~2021 AND ~~SEPTEMBER~~JUNE 30, ~~2019~~2020

Revenues

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,								Three Months Ended June 30,
							Percent								Percent
Geographic Area	2020		2019		Change		Change		2021		2020		Change		Change

	(in thousands)								(in thousands)
Americas	$	34,968	$	40,253	$	(5,285)	(13)	%	$	40,339	$	31,620	$	8,719	28	%
Europe		20,928		22,558		(1,630)	(7)	%		23,715		20,958		2,757	13	%
Asia Pacific		5,739		5,332		407	8	%		6,543		4,816		1,727	36	%
Total revenues	$	61,635	$	68,143	$	(6,508)	(10)	%	$	70,597	$	57,394	$	13,203	23	%

Revenues ~~decreased $6.5~~increased $13.2 million, or approximately ~~10%~~23%, for the ~~three months ended~~second quarter of 2021. The increase in ~~the third quarter. The decrease in revenues~~revenue in the Americas and Europe was primarily attributable to ~~a decline~~an increase in our Advisory and Research service ~~line, primarily related to the COVID-19 pandemic.~~lines. The increase in ~~revenues~~revenue in the Asia Pacific was primarily attributable to ~~the~~an 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,								Three Months Ended June 30,
							Percent								Percent
Operating Expenses	2020		2019		Change		Change		2021		2020		Change		Change

	(in thousands)								(in thousands)
Direct costs and expenses for advisors	$	36,762	$	37,725	$	(963)	(3)	%	$	43,007	$	33,759	$	9,248	27	%
Selling, general and administrative		20,318		23,092		(2,774)	(12)	%		20,492		18,593		1,899	10	%
Depreciation and amortization		1,581		1,672		(91)	(5)	%		1,255		1,529		(274)	(18)	%
Total operating expenses	$	58,661	$	62,489	$	(3,828)	(6)	%	$	64,754	$	53,881	$	10,873	20	%

Total operating expenses ~~decreased $3.8~~increased $10.9 million, or approximately 6%20%, for the ~~three months ended in the third~~second quarter ~~with a decrease in direct costs and expenses for advisors, selling, general and administrative (“SG&A”) expenses, and depreciation and amortization.~~of 2021. The ~~decrease~~increase in operating expenses were primarily due to ~~lower travel~~higher compensation costs of $7.3 million and ~~entertainment~~contract labor of ~~$4.3~~$3.9 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.

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~~second quarter of 2021 and 2020 ~~and 2019~~ was ~~$1.6~~$1.3 million and ~~$1.7~~$1.5 million, respectively. The decrease of ~~$0.1~~$0.3 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 income (expense), net:


	Three Months Ended September 30,								Three Months Ended June 30,
							Percent								Percent
Other income (expense), Net	2020		2019		Change		Change
Other income (expense), net									2021		2020		Change		Change

	(in thousands)								(in thousands)
Interest income	$	61	$	41	$	20	49	%	$	60	$	54	$	6	11	%
Interest expense		(687)		(1,598)		911	57	%		(613)		(819)		206	25	%
Foreign currency (loss) gain		(66)		7		(73)	(1,043)	%
Foreign currency gain (loss)										8		(82)		90	110	%
Total other income (expense), net	$	(692)	$	(1,550)	$	858	55	%	$	(545)	$	(847)	$	302	36	%

The total decrease of ~~$0.9~~$0.3 million, or approximately 36%, 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~~three months ended ~~September~~June 30, ~~2020~~2021 was ~~9.9%~~22.5% compared to ~~57.8%~~77.0% for the quarter ended ~~September~~June 30, ~~2019.~~2020. The difference for the quarter ended ~~September~~June 30, ~~2020~~2021 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~~June 30, ~~2020~~2021 was lower than the statutory rate primarily due to the impact of ~~earnings in foreign jurisdictions, including reduction~~vesting of ~~foreign unremitted earnings tax accruals related to tax law change in India impacting the company’s hypothetical~~

~~dividend withholding tax liability.~~restricted stock units. There were no significant changes in uncertain tax position reserves or valuation allowances during the quarter ended ~~September~~June 30, ~~2020.~~2021.

RESULTS OF OPERATIONS FOR THE ~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2020~~2021 AND ~~SEPTEMBER~~JUNE 30, ~~2019~~2020

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.

Geographical revenue information for the segment is as follows:


	Nine Months Ended September 30,								Six Months Ended June 30,
							Percent								Percent
Geographic Area	2020		2019		Change		Change		2021		2020		Change		Change

	(in thousands)								(in thousands)
Americas	$	103,422	$	118,738	$	(15,316)	(13)	%	$	78,429	$	68,453	$	9,976	15	%
Europe		64,044		67,562		(3,518)	(5)	%		46,457		43,117		3,340	8	%
Asia Pacific		15,273		13,962		1,311	9	%		12,282		9,534		2,748	29	%
Total revenues	$	182,739	$	200,262	$	(17,523)	(9)	%	$	137,168	$	121,104	$	16,064	13	%

Revenues ~~decreased $17.5~~increased $16.1 million, or approximately 9%13%, ~~in 2020 to date.~~for the six months of 2021. The ~~decrease~~increase in revenues in the Americas and ~~Europe~~Asia Pacific was primarily attributable to ~~a decline~~an increase in our Advisory service ~~line, primarily related to the COVID-19 pandemic.~~line. The increase in revenues

in ~~Asia Pacific~~Europe was primarily attributable to the increase in our Advisory and Research 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,								Six Months Ended June 30,
							Percent								Percent
Operating Expenses	2020		2019		Change		Change		2021		2020		Change		Change

	(in thousands)								(in thousands)
Direct costs and expenses for advisors	$	111,539	$	116,636	$	(5,097)	(4)	%	$	84,163	$	74,776	$	9,387	13	%
Selling, general and administrative		60,792		70,327		(9,535)	(14)	%		39,532		40,474		(942)	(2)	%
Depreciation and amortization		4,641		5,031		(390)	(8)	%		2,615		3,060		(445)	(15)	%
Total operating expenses	$	176,972	$	191,994	$	(15,022)	(8)	%	$	126,310	$	118,310	$	8,000	7	%

Total operating expenses ~~decreased $15.0~~increased $8.0 million, or approximately 8%7%, ~~in 2020~~for the six months of 2021 with ~~a decrease~~an increase in direct costs and expenses for ~~advisors, selling, general and administrative (“SG&A”) expenses, and depreciation and amortization.~~advisors. The ~~decrease~~increase in operating expenses were primarily due to higher: compensation costs of $9.5 million and contract labor of $5.4 million. These costs were partially offset by lower: travel and entertainment expenses of ~~$10.9~~$4.9 million, ~~contract labor of $1.7 million, marketing~~bad debt expense of ~~$0.9 million, conference expense of $0.9~~$0.8 million, and non-cash stock based compensation of ~~$0.6~~$0.8 million.

21Compensation 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.

Depreciation and amortization expense in the six months of 2021 and 2020 ~~and 2019 were $4.6~~was $2.6 million and ~~$5.0~~$3.1 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. 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.

Other Income (Expense), Net

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


	Nine Months Ended September 30,								Six Months Ended June 30,
							Percent								Percent
Other income (expense), Net	2020		2019		Change		Change
Other income (expense), net									2021		2020		Change		Change

	(in thousands)								(in thousands)
Interest income	$	188	$	133	$	55	41	%	$	131	$	127	$	4	3	%
Interest expense		(2,890)		(4,763)		1,873	39	%		(1,256)		(2,203)		947	43	%
Foreign currency gain (loss)		14		(28)		42	150	%
Foreign currency (loss) gain										(3)		80		(83)	(104)	%
Total other income (expense), net	$	(2,688)	$	(4,658)	$	1,970	42	%	$	(1,128)	$	(1,996)	$	868	43	%

The total decrease of ~~$2.0~~$0.9 million, or approximately 43%, 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.~~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 ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 was ~~57.6%~~22.6% compared to ~~65.5%~~193.6% for the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. The difference ~~was primarily due to the impact of vesting of restricted stock units~~ for the ~~nine~~six months ended ~~September~~June 30, ~~2020 and~~2021 was primarily due to the impact of earnings and losses in certain foreign jurisdictions and the impact of avesting of restricted stock units. The Company’s effective tax ~~law in a foreign jurisdiction, and~~rate for the ~~release of $0.7 million of accruals for uncertain tax positions~~six months ended June 30, 2021 was lower than the statutory rate primarily due to the ~~expiration~~impact of ~~statute limitations~~vesting of restricted stock units. There were no significant changes in ~~a foreign jurisdiction for~~uncertain tax position reserves or valuation allowances during the ~~nine months~~quarter ended ~~September~~June 30, ~~2019.~~2021.

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,				Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019		2021		2020		2021		2020

	(in thousands)								(in thousands)
Net income	$	2,055	$	1,731	$	1,307	$	1,247
Net income (loss)									$	4,106	$	612	$	7,530	$	(747)
Interest expense (net of interest income)		626		1,557		2,702		4,630		553		765		1,125		2,076
Income taxes		227		2,373		1,772		2,363		1,192		2,054		2,200		1,545
Depreciation and amortization		1,581		1,672		4,641		5,031		1,255		1,529		2,615		3,060
Change in contingent consideration		48		—		48		30		34		—		66		—
Acquisition-related costs(1)		100		50		350		58		13		201		(32)		250
Severance, integration and other expense		1,362		462		1,730		1,371		1,165		196		1,300		367
Tax indemnity receivable		—		31		—		31
Financing-related costs		—		—		92		—		—		—		—		92
Foreign currency transaction loss (gain)		66		(7)		(14)		28
Foreign currency transaction (gain) loss										(8)		82		3		(80)
Non-cash stock compensation		2,159		2,456		6,544		7,150		1,428		1,966		3,576		4,385
Adjusted EBITDA	$	8,224	$	10,325	$	19,172	$	21,939	$	9,738	$	7,405	$	18,383	$	10,948


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019		2021		2020		2021		2020

	(in thousands)								(in thousands)
Net income	$	2,055	$	1,731	$	1,307	$	1,247
Net income (loss)									$	4,106	$	612	$	7,530	$	(747)
Non-cash stock compensation		2,159		2,456		6,544		7,150		1,428		1,966		3,576		4,385
Intangible amortization		913		1,001		2,618		3,009		644		860		1,358		1,705
Change in contingent consideration		48		—		48		30		34		—		66		—
Acquisition-related costs(1)		100		50		350		58		13		201		(32)		250
Severance, integration and other expense		1,362		462		1,730		1,371		1,165		196		1,300		367
Financing-related costs		—		—		92		—		—		—		—		92
Write-off of deferred financing costs		—		—		167		—		—		—		—		167
Foreign currency transaction loss (gain)		66		(7)		(14)		28
Foreign currency transaction (gain) loss										(8)		82		3		(80)
Tax effect ⁽¹⁾⁽²⁾		(1,487)		(1,268)		(3,691)		(3,727)		(1,048)		(1,058)		(2,007)		(2,204)
Adjusted net income	$	5,216	$	4,425	$	9,151	$	9,166	$	6,334	$	2,859	$	11,794	$	3,935

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Net income (loss) per diluted share	$	0.08	$	0.01	$	0.15	$	(0.02)
Non-cash stock compensation		0.03		0.04		0.07		0.09
Intangible amortization		0.01		0.02		0.03		0.04
Change in contingent consideration		0.00		—		0.00		—
Acquisition-related costs ⁽¹⁾		0.00		0.01		0.00		0.01
Severance, integration and other expense		0.02		0.00		0.02		0.01
Financing-related costs		—		—		—		0.00
Write-off of deferred financing costs		—		—		—		0.00
Foreign currency transaction (gain) loss		(0.00)		0.00		0.00		(0.00)
Tax effect ⁽²⁾		(0.02)		(0.02)		(0.04)		(0.05)
Adjusted net income per diluted share	$	0.12	$	0.06	$	0.23	$	0.08

_________________________________

(1)

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

(2)

Marginal tax rate of 32% ~~applied.~~, reflecting U.S. federal income tax rate of 21% plus 11% attributable to U.S. states and foreign jurisdictions.

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~~June 30, ~~2020,~~2021, our cash, cash equivalents and restricted cash were ~~$38.2~~$43.9 million, a net increase of ~~$20.0~~$0.1 million from December 31, ~~2019,~~2020, which was primarily attributable to the following:

●

net cash provided by operating activities of ~~$37.3~~$20.9 million;

●

treasury shares repurchases of $11.2 million;

●

payments related to tax withholding for stock-based compensation of $4.6 million;

●

principal payments on borrowings of ~~$7.0 million;~~

●

~~equity repurchases of $5.1 million;~~

●

~~Neuralify acquisition of $2.3~~$2.2 million; and

●

~~debt financing costs~~cash dividends paid to shareholders of ~~$0.9~~$1.5 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.

●

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.

●

~~(including~~ (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~~$76.6 million at ~~September~~June 30, ~~2020~~2021 and ~~$86.9~~$78.8 million at December 31, ~~2019,~~2020, 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~~$75.8 million and ~~$86.7~~$77.7 million at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, 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%~~1.9%. 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.

Dividend Program

In May 2021, the Company announced it will pay a second-quarter dividend of $0.03 per share of common stock. The Company expects to pay a total cash dividend of $0.12 per share over the four quarters ending March 2022. On August 5, 2021, the Board of Directors approved the third-quarter dividend of $0.03 per share. The dividends are accounted for as a decrease to Stockholders’ Equity. All future dividends will be subject to Board approval.

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.~~2020.

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~~June 30, ~~2020,~~2021, 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~~June 30, ~~2020.~~2021.

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~~The risk 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~~on Form 10-K for 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~~fiscal year ended December 31, 2020 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 benot 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.changed.

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

Dividend Program

Issuer Purchases of Equity Securities

On ~~November 1, 2019,~~August 5, 2021, the Company’s Board of Directors approved a new share repurchase authorization of ~~up to $10.8~~an additional $25.0 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~~$3.2 million in the aggregate available under its share repurchase program as of ~~November 1, 2019.~~June 30, 2021. 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, the amount, and the ~~amount~~method 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~~June 30, ~~2020.~~2021.


				Total Numbers of	Approximate Dollar					Total Numbers of	Approximate Dollar
				Securities	Value of Securities					Securities	Value of Securities
	Total Number of	Average		Purchased	That May Yet Be		Total Number of	Average		Purchased	That May Yet Be
	Securities	Price per		as Part of Publicly	Purchased Under		Securities	Price per		as Part of Publicly	Purchased Under
Period	Purchased	Securities		Announced Plan	The Plan		Purchased	Securities		Announced Plan	The Plan
	(In thousands)			(In thousands)	(In thousands)		(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
April 1 - April 30							958	$	4.41	958	$	7,210
May 1 - May 31							603	$	4.82	603	$	4,304
June 1 - June 30							192	$	5.90	192	$	3,171

ITEM 6.EXHIBITS

The following exhibits are filed as part of this report:


Exhibit Number		Description
10.1		Employment Letter for Humberto P. Alfonso, dated April 30, 2021 (previously filed as Exhibit 10.1 to the Registrant’s Form 8-K filed with the SEC on May 5, 2021 (Commission File Number: 001-33287), and incorporated herein by reference).
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~~June 30, ~~2020~~2021 formatted in Inline XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheet, (ii) Consolidated ~~Statements~~Statement of Income and Comprehensive Income, (iii) Consolidated ~~Statements~~Statement 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~~August 9, ~~2020~~2021	/s/ Michael P. Connors
	Michael P. Connors, Chairman of the
	Board and Chief Executive Officer


Date: ~~November~~August 9, ~~2020~~2021	/s/ ~~David E. Berger~~Humberto P. Alfonso
	~~David E. Berger,~~Humberto P. Alfonso, Executive Vice
	President and Chief Financial Officer

2926


	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	$	—	$	—	$	—	$	—


	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


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