Item 2. Management’s Discussion and Analysis
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 2022 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 2021 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 over 800 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 more than 1,300 digital-ready professionals operating in more than 20 countries—a global team known for its innovative thinking, market influence, deep industry and technology expertise, and world-class research and analytical capabilities based on the industry’s most comprehensive marketplace data. For more information, visit www.isg-one.com.
Our strategy is to strengthen our existing market position and develop new services and products to support future growth plans. As a result, we are focused on growing our existing service model, expanding geographically, developing new industry sectors, productizing market data assets, expanding our managed services offerings and growing via acquisitions. Although we do not expect any adverse conditions that will impact our ability to execute against our strategy over the next twelve months, the more significant factors that could limit our ability to grow in these areas include global macro-economic conditions and the impact on the overall sourcing market, competition, our ability to retain advisors and reductions in discretionary spending with our top client accounts or other significant client events. Other areas that could impact the business would also include natural disasters, pandemics, such as COVID-19, legislative and regulatory changes and capital market disruptions.
We principally derive revenues from fees for services generated on a project by project basis. Prior to the commencement of a project, we reach agreement with the client on rates for services based upon the scope of the project, staffing requirements and the level of client involvement. Revenues for services rendered are recognized on a time and materials basis or on a fixed fee or capped fee basis in accordance with accounting and disclosure requirements for revenue recognition.
Revenues for time and materials contracts are recognized based on the number of hours worked by our advisors at an agreed upon rate per hour and are recognized in the period in which services are performed. Revenues for time and materials contracts are billed monthly, semimonthly or in accordance with the specific contractual terms of each project.
We also derive our revenues from certain recurring revenue streams. These include such annuity-based ISG offerings as ISG GovernX, Research, Software as a Subscription (Automation licenses), ISG Inform and the multi-year Public Sector contracts. These offerings are characterized by subscriptions (i.e., renewal centric as opposed to project centric revenue streams) or, in some instances, multi-year contracts. Our digital services now span a volume of offerings and have become
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embedded as part of even our traditional transaction services. Digital enablement provides capabilities, digital insights and better engagement with clients and partners.
Our results are impacted principally by our full-time consultants’ utilization rate, the number of business days in each quarter and the number of our revenue-generating professionals who are available to work. Our utilization rate can be negatively affected by increased hiring because there is generally a transition period for new professionals that result in a temporary drop in our utilization rate. Our utilization rate can also be affected by seasonal variations in the demand for our services from our clients. The number of business workdays is also affected by the number of vacation days taken by our consultants and holidays in each quarter. We typically have fewer business workdays available in the fourth quarter of the year, which can impact revenues during that period. Time-and-expense engagements do not provide us with a high degree of predictability as to performance in future periods. Unexpected changes in the demand for our services can result in significant variations in utilization and revenues and present a challenge to optimal hiring and staffing. The volume of work performed for any particular client can vary widely from period to period.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2022 AND SEPTEMBER 30, 2021
Revenues
Geographical revenue information for the segment is as follows:
Three Months Ended September 30,
Percent
Geographic Area
2022
2021
Change
Change
(in thousands)
Americas
$
42,174
$
42,825
$
(651)
(2)
%
Europe
19,321
20,138
(817)
(4)
%
Asia Pacific
7,341
8,132
(791)
(10)
%
Total revenues
$
68,836
$
71,095
$
(2,259)
(3)
%
Revenues decreased $2.3 million for the third quarter of 2022. The decrease in revenue in the Americas was primarily attributable to a decrease in our Automation service line, partially offset by an increase in our Network & Software Advisory Services (NaSa), Advisory, Research, and GovernX service lines. The decrease in revenue in Europe was primarily attributable to a decrease in our Automation and Research service lines, partially offset by an increase in our GovernX and NaSa service lines. The decrease in revenue in Asia Pacific was primarily attributable to a decrease in our Advisory service line, partially offset by an increase in our GovernX and NaSa service lines. The translation of foreign currency revenues into U.S. dollars negatively impacted performance in Europe and Asia Pacific compared to the prior year by $4.0 million.
Operating Expenses
The following table presents a breakdown of our operating expenses by category:
Three Months Ended September 30,
Percent
Operating Expenses
2022
2021
Change
Change
(in thousands)
Direct costs and expenses for advisors
$
39,786
$
43,249
$
(3,463)
(8)
%
Selling, general and administrative
20,334
19,236
1,098
6
%
Depreciation and amortization
1,286
1,347
(61)
(5)
%
Total operating expenses
$
61,406
$
63,832
$
(2,426)
(4)
%
Total operating expenses decreased $2.4 million, or approximately 4%, for the third quarter of 2022. The decrease in operating expenses was primarily due to lower: contract labor of $2.7 million and license fees of $1.5 million. These costs
16
were partially offset by higher: travel and entertainment expense of $0.9 million, non-cash stock compensation of $0.5 million, and professional fees of $0.4 million.
Compensation costs consist of a mix of fixed and variable salaries, annual bonuses, benefits and profit sharing plan contributions. A portion of compensation expenses for certain billable employees are allocated between direct costs and selling, general and administrative costs based on relative time spent between billable and non-billable activities. Bonus compensation is determined based on achievement against Company financial and individual targets and is accrued monthly throughout the year based on management’s estimates of target achievement. Statutory and elective profit sharing plans are offered to employees as appropriate. Direct costs also include employee taxes, health insurance, workers compensation and disability insurance.
Sales and marketing costs consist principally of compensation expense related to business development, proposal preparation and delivery and negotiation of new client contracts. Costs also include travel expenses relating to the pursuit of sales opportunities, expenses for hosting periodic client conferences, public relations activities, participation in industry conferences, industry relations, website maintenance and business intelligence activities. The Company maintains a dedicated global marketing function responsible for developing and managing sales campaigns, brand promotion, the ISG Index and assembling proposals.
We maintain a comprehensive program for training and professional development. Related expenses include product training, updates on new service offerings or methodologies and development of project management skills. Also included in training and professional development are expenses associated with the development, enhancement and maintenance of our proprietary methodologies and tools and the systems that support them.
General and administrative expenses consist principally of executive management compensation, allocations of billable employee compensation related to general management activities, IT infrastructure, and costs for the finance, accounting, information technology and human resource functions. General and administrative costs also reflect continued investment associated with implementing and operating client and employee management systems. Because our billable personnel operate primarily on client premises or work remotely, all occupancy expenses are recorded as general and administrative.
Depreciation and amortization expense in the third quarter of 2022 and 2021 was $1.3 million, respectively. 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.
Other Income (Expense), Net
The following table presents a breakdown of other income (expense), net:
Three Months Ended September 30,
Percent
Other income (expense), net
2022
2021
Change
Change
(in thousands)
Interest income
$
37
$
65
$
(28)
(43)
%
Interest expense
(824)
(538)
(286)
(53)
%
Foreign currency transaction gain
131
1
130
13,000
%
Total other income (expense), net
$
(656)
$
(472)
$
(184)
(39)
%
The total increase of $0.2 million, or approximately 39%, was primarily the result of higher interest expense attributable to higher interest rates, partially offset by higher foreign currency transaction gains.
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Income Tax Expense
Our quarterly effective tax rate varies from period to period based on the mix of earnings among the various state and foreign tax jurisdictions in which business is conducted and the level of non-deductible expenses projected to be incurred during the current fiscal year. Our effective tax rate for the quarter ended September 30, 2022 was 18.0% compared to 34.9% for the quarter ended September 30, 2021. The difference for the quarter ended September 30, 2022 was primarily due to the impact of earnings and losses in certain foreign jurisdictions and the impact of vesting of restricted stock units. The Company’s effective tax rate for the quarter ended September 30, 2022 was lower than the statutory rate primarily due to the impact of vesting of restricted stock units. There were no significant changes in uncertain tax position reserves or valuation allowances during the quarter ended September 30, 2022.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND SEPTEMBER 30, 2021
Revenues
Geographical revenue information for the segment is as follows:
Nine Months Ended September 30,
Percent
Geographic Area
2022
2021
Change
Change
(in thousands)
Americas
$
123,059
$
121,254
$
1,805
1
%
Europe
66,039
66,595
(556)
(1)
%
Asia Pacific
23,002
20,414
2,588
13
%
Total revenues
$
212,100
$
208,263
$
3,837
2
%
Revenues increased $3.8 million, or approximately 2%, for the nine months of 2022. The increase in revenue in the Americas was primarily attributable to an increase in our Research, GovernX and NaSa service lines, partially offset by a decrease in our Automation service line. The decrease in revenue in Europe was primarily attributable to a decrease in our NaSa service line, partially offset by an increase in our GovernX service line. The increase in revenue in Asia Pacific was primarily attributable to an increase in our Advisory and NaSa service lines. The translation of foreign currency revenues into U.S. dollars negatively impacted performance in Europe and Asia Pacific compared to the prior year by $9.5 million.
Operating Expenses
The following table presents a breakdown of our operating expenses by category:
Nine Months Ended September 30,
Percent
Operating Expenses
2022
2021
Change
Change
(in thousands)
Direct costs and expenses for advisors
$
125,111
$
127,412
$
(2,301)
(2)
%
Selling, general and administrative
60,806
58,768
2,038
3
%
Depreciation and amortization
3,872
3,962
(90)
(2)
%
Total operating expenses
$
189,789
$
190,142
$
(353)
(0)
%
Total operating expenses decreased $0.4 million for the nine months of 2022. The decrease in operating expenses were primarily due to lower: contract labor of $4.6 million, license fees of $1.7 million, change in fair value of contingent consideration of $1.4 million, and severance, and integration and other expense of $0.9 million. These costs were partially offset by higher: travel and entertainment expense of $2.6 million, compensation costs of $2.1 million, event related expenses of $1.1 million, professional fees of $0.7 million, bad debt expense of $0.5 million, computer expenses of $0.5 million and non-cash stock compensation of $0.4 million.
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Compensation costs consist of a mix of fixed and variable salaries, annual bonuses, benefits and profit sharing plan contributions. A portion of compensation expenses for certain billable employees are allocated between direct costs and selling, general and administrative costs based on relative time spent between billable and non-billable activities. Bonus compensation is determined based on achievement against Company financial and individual targets and is accrued monthly throughout the year based on management’s estimates of target achievement. Statutory and elective profit sharing plans are offered to employees as appropriate. Direct costs also include employee taxes, health insurance, workers compensation and disability insurance.
Sales and marketing costs consist principally of compensation expense related to business development, proposal preparation and delivery and negotiation of new client contracts. Costs also include travel expenses relating to the pursuit of sales opportunities, expenses for hosting periodic client conferences, public relations activities, participation in industry conferences, industry relations, website maintenance and business intelligence activities. The Company maintains a dedicated global marketing function responsible for developing and managing sales campaigns, brand promotion, the ISG Index and assembling proposals.
We maintain a comprehensive program for training and professional development. Related expenses include product training, updates on new service offerings or methodologies and development of project management skills. Also included in training and professional development are expenses associated with the development, enhancement and maintenance of our proprietary methodologies and tools and the systems that support them.
General and administrative expenses consist principally of executive management compensation, allocations of billable employee compensation related to general management activities, IT infrastructure, and costs for the finance, accounting, information technology and human resource functions. General and administrative costs also reflect continued investment associated with implementing and operating client and employee management systems. Because our billable personnel operate primarily on client premises or work remotely, all occupancy expenses are recorded as general and administrative.
Depreciation and amortization expense in the nine months of 2022 and 2021 was $3.9 million and $4.0 million, respectively. 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.
Other Income (Expense), Net
The following table presents a breakdown of other income (expense), net:
Nine Months Ended September 30,
Percent
Other income (expense), net
2022
2021
Change
Change
(in thousands)
Interest income
$
126
$
196
$
(70)
(36)
%
Interest expense
(1,997)
(1,794)
(203)
(11)
%
Foreign currency transaction gain (loss)
248
(2)
250
12,500
%
Total other income (expense), net
$
(1,623)
$
(1,600)
$
(23)
(1)
%
The total increase of approximately 1%, was primarily the result of higher interest expense attributable to higher interest rates, partially offset by higher foreign currency transaction gains.
19
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 months ended September 30, 2022 was 25.4% compared to 27.7% for the nine months ended September 30, 2021. The difference for the nine months ended September 30, 2022 was primarily due to the impact of earnings and losses in certain foreign jurisdictions and the impact of vesting of restricted stock units. The Company’s effective tax rate for the nine months ended September 30, 2022 was higher than the statutory rate primarily due to the impact of foreign operations. There were no significant changes in uncertain tax position reserves or valuation allowances during the quarter ended September 30, 2022.
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, interest accretion associated with contingent consideration, acquisition-related costs, and severance, integration and other expense), adjusted net income (defined as net income, plus amortization of intangible assets, non-cash stock compensation, foreign currency transaction gains/losses, interest accretion associated with contingent consideration, acquisition-related costs, and severance, integration and other expense on a tax-adjusted basis) and adjusted net income 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,
2022
2021
2022
2021
(in thousands)
Net income
$
5,556
$
4,421
$
15,443
$
11,951
Interest expense (net of interest income)
787
473
1,871
1,598
Income taxes
1,218
2,370
5,245
4,570
Depreciation and amortization
1,286
1,347
3,872
3,962
Interest accretion associated with contingent consideration
—
47
8
113
Acquisition-related costs (1)
25
18
41
(14)
Severance, integration and other expense
8
41
458
1,341
Foreign currency transaction (gain) loss
(131)
(1)
(248)
2
Non-cash stock compensation
1,987
1,499
5,432
5,075
Adjusted EBITDA
$
10,736
$
10,215
$
32,122
$
28,598
20
Three Months Ended September 30,
Nine Months Ended September 30,
2022
2021
2022
2021
(in thousands)
Net income
$
5,556
$
4,421
$
15,443
$
11,951
Non-cash stock compensation
1,987
1,499
5,432
5,075
Intangible amortization
525
643
1,580
2,001
Interest accretion associated with contingent consideration
—
47
8
113
Acquisition-related costs (1)
25
18
41
(14)
Severance, integration and other expense
8
41
458
1,341
Foreign currency transaction (gain) loss
(131)
(1)
(248)
2
Tax effect (2)
(772)
(719)
(2,327)
(2,726)
Adjusted net income
$
7,198
$
5,949
$
20,387
$
17,743
Three Months Ended September 30,
Nine Months Ended September 30,
2022
2021
2022
2021
Net income per diluted share
$
0.11
$
0.09
$
0.30
$
0.23
Non-cash stock compensation
0.04
0.03
0.11
0.10
Intangible amortization
0.01
0.01
0.03
0.04
Interest accretion associated with contingent consideration
0.00
0.00
0.00
0.00
Acquisition-related costs (1)
0.00
0.00
0.00
(0.00)
Severance, integration and other expense
0.00
0.00
0.01
0.02
Foreign currency transaction (gain) loss
(0.00)
(0.00)
(0.00)
0.00
Tax effect (2)
(0.02)
(0.01)
(0.05)
(0.05)
Adjusted net income per diluted share
$
0.14
$
0.12
$
0.40
$
0.34
_________________________________
(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%, 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 30, 2022, our cash, cash equivalents and restricted cash were $19.8 million, a net decrease of $27.8 million from December 31, 2021, which was primarily attributable to the following:
● net cash provided by operating activities of $4.6 million;
● treasury shares repurchased of $12.1 million;
● cash dividends paid to shareholders of $5.4 million;
● negative effects of exchange rate changes of $5.0 million;
● principal payments on borrowings of $3.2 million;
21
● purchase of furniture, fixtures and equipment of $2.6 million; and
● payments related to tax withholding for stock-based compensation of $3.7 million.
Capital Resources
On March 10, 2020, the Company amended and restated its senior secured credit facility to include a $86.0 million term facility and to increase the revolving commitments per the revolving facility (as amended by that certain First Amendment to Credit Agreement, dated as of June 1, 2022, the “2020 Credit Agreement”) from $30.0 million to $54.0 million. The material terms under the 2020 Credit Agreement are as follows:
● Each of the term loan facility and revolving credit facility has a maturity date of March 10, 2025 (the “Maturity Date”).
● The credit facility is secured by all of the equity interests owned by the Company, and its direct and indirect domestic subsidiaries and, subject to agreed exceptions, the Company’s direct and indirect “first-tier” foreign subsidiaries and a perfected first priority security interest in all of the Company’s and its direct and indirect domestic subsidiaries’ tangible and intangible assets.
● The Company’s direct and indirect existing and future wholly owned domestic subsidiaries serve as guarantors to the Company’s obligations under the senior secured facility.
● At the Company’s option, the credit facility bears interest at a rate per annum equal to either (i) the “Base Rate” (which is the highest of (a) the rate publicly announced from time to time by the administrative agent as its “prime rate”, (b) the Federal Funds Rate plus 0.5% per annum and (c) the Eurodollar Rate, plus 1.0%), plus the applicable margin (as defined below) or (ii) Eurodollar Rate (adjusted for maximum reserves) as determined by the Administrative Agent, plus the applicable margin. The applicable margin is adjusted quarterly based upon the Company’s quarterly leverage ratio.
● The term loan is repayable in nineteen consecutive quarterly installments of $1,075,000 each that commenced on June 30, 2020 and a final payment of the outstanding principal amount of the term loan on the Maturity Date.
● Mandatory repayments of term loans shall be required from (subject to agreed exceptions) (i) 100% of the net proceeds from issuances of debt and equity by the Company and its subsidiaries and (ii) 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 $71.3 million at September 30, 2022 and $74.5 million at December 31, 2021, 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 $69.1 million and $73.6 million at September 30, 2022 and December 31, 2021, 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 5.3% and 2.0% at September 30, 2022 and December 31, 2021, 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 and interest rates. As of September 30, 2022 and December 31, 2021, there were no outstanding borrowings under the revolver.
22
We anticipate that our current cash and the ongoing cash flows from our operations will be adequate to meet our working capital, capital expenditure, and debt financing needs for at least the next twelve months. The anticipated cash needs of our business could change significantly if we pursue and complete additional business acquisitions, if our business plans change, if economic conditions change from those currently prevailing or from those now anticipated, or if other unexpected circumstances arise that may have a material effect on the cash flow or profitability of our business, including the potential impacts of the COVID-19 pandemic and the severity of the related economic downturn and length of time of an economic recovery. If we require additional capital resources to grow our business, either internally or through acquisition, or maintain liquidity, we may seek to sell additional equity securities or to secure additional debt financing. The sale of additional equity securities or certain forms of debt financing could result in additional dilution to our stockholders. We may not be able to obtain financing arrangements in amounts or on terms acceptable to us in the future.
The Company is currently in compliance with its financial covenants.
Dividend Program
In May 2022, the Company announced it will pay a quarterly dividend of $0.04 per share of common stock. The Company expects to pay a total cash dividend of $0.16 per share for the four quarters ending March 2023. On November 1, 2022, the Board of Directors approved the fourth-quarter dividend of $0.04 per share, payable December 19, 2022, to shareholders of record as of December 5, 2022. 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, 2021.
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.
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