INFORMATION SERVICES GROUP, INC. You should read the following discussion and analysis in conjunction with our financial statements and related notes included elsewhere in this report. Except for historical information, the discussion in this report contains certain forward-looking statements that involve risks and uncertainties. We have based these forward-looking statements on our current expectations and assumptions about future events. In some cases, you can identify forward-looking statements by terminology, such as "may," "should," "could," "predict," "potential," "continue," "expect," "anticipate," "future," "intend," "plan," "believe," "estimate," "forecast" and similar expressions (or the negative of such expressions.) Forward-looking statements include statements concerning 2020 revenue growth rates and capital expenditures. Forward-looking statements are based on our beliefs as well as assumptions based on information currently available to us, including financial and operational information, the volatility of our stock price, current competitive conditions and the impact of COVID-19. As a result, these statements are subject to various risks and uncertainties. For a discussion of material risks and uncertainties that the Company faces, see the discussion in our 2019 Annual Report on Form 10-K titled "Risk Factors" and in this Quarterly Report on Form 10-Q under Item 1A of Part II, "Risk Factors." BUSINESS OVERVIEW ISG (Information Services Group ) (Nasdaq: III) is a leading global technology research and advisory firm. A trusted business partner to approximately 700 clients, including more than 75 of the top 100 enterprises in our markets, ISG is committed to helping corporations, public sector organizations, and service and technology providers achieve operational excellence and faster growth. The firm specializes in digital transformation services, including automation, cloud and data analytics; sourcing advisory; managed governance and risk services; network carrier services; technology strategy and operations design; change management; market intelligence and technology research and analysis. Founded in 2006, and based inStamford, 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 macroeconomic 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
17
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 fulltime consultants' utilization
rate, the number of business days in each quarter and the number of our
revenue-generating professionals who are available to work. Our utilization rate
can be negatively affected by increased hiring because there is generally a
transition period for new professionals that results in a temporary drop in our
utilization rate. Our utilization rate can also be affected by seasonal
variations in the demand for our services from our clients. The number of
business work days is also affected by the number of vacation days taken by our
consultants and holidays in each quarter. We typically have fewer business work
days available in the fourth quarter of the year, which can impact revenues
during that period. Timeandexpense 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 fromperiod to period. CURRENT ENVIRONMENT OnMarch 11, 2020 , theWorld Health Organization categorized the novel coronavirus (COVID-19) as a pandemic, and COVID-19 has spread throughoutthe 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," onMarch 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
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 outofpocket
18
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, factbased sourcing advisory services. We operate principally in theAmericas ,Europe , andAsia Pacific . Our foreign operations are subject to local government regulations and to the uncertainties of the economic and political conditions of those areas, and the revenue for our foreign operations is predominantly invoiced and collected in local currency.
Geographical revenue information for the segment is as follows:
Three Months Ended September 30,
Percent
Geographic Area 2020 2019 Change Change
(in thousands)
Americas $ 34,968 $ 40,253 $ (5,285) (13) %
Europe 20,928 22,558 (1,630) (7) %
Asia Pacific 5,739 5,332 407 8 %
Total revenues $ 61,635 $ 68,143 $ (6,508) (10) %
Revenues decreased$6.5 million , or approximately 10%, for the three months ended in the third quarter. The decrease in revenues in theAmericas andEurope was primarily attributable to a decline in our Advisory service line, primarily related to the COVID-19 pandemic. The increase in revenues inAsia Pacific was primarily attributable to the increase in our Advisory service line. The translation of foreign currency revenues intoU.S. dollars positively impacted performance inEurope andAsia Pacific compared to the prior year. Operating Expenses The following table presents a breakdown of our operating expenses by category: Three Months Ended September 30, Percent Operating Expenses 2020 2019 Change Change (in thousands)
Direct costs and expenses for advisors$ 36,762 $ 37,725 $ (963) (3) % Selling, general and administrative 20,318 23,092 (2,774)
(12) %
Depreciation and amortization 1,581 1,672 (91) (5) %
Total operating expenses $ 58,661 $ 62,489 $ (3,828) (6) %
Total operating expenses decreased $3.8 million , or approximately 6%, for the
three months ended in the third quarter with a decrease in direct costs and
expenses for advisors, selling, general and administrative ("SG&A") expenses,
and depreciation and amortization. The decrease in operating expenses were
primarily due to lower travel and entertainment of $4.3 million .
Compensation costs consist of a mix of fixed and variable salaries, annual
bonuses, benefits and profit sharing plan contributions. A portion of
compensation expenses for certain billable employees are allocated between
direct costs and selling, general and administrative costs based on relative
time spent between billable and non-billable activities. Bonus compensation is
determined based on achievement against Company financial and individual
targets, and is accrued monthly throughout the year based on management's
estimates of target achievement. Statutory and elective profit sharing plans are
offered to employees as appropriate. Direct costs also include employee taxes,
health insurance, workers compensation and disability insurance.
Sales and marketing costs consist principally of compensation expense related to
business development, proposal preparation and delivery and negotiation of new
client contracts. Costs also include travel expenses relating to the pursuit of
sales opportunities, expenses for hosting periodic client conferences, public
relations activities, participation in industry
19
conferences, industry relations, website maintenance and business intelligence
activities. The Company maintains a dedicated global marketing function
responsible for developing and managing sales campaigns, brand promotion, the
ISG Index and assembling proposals.
We maintain a comprehensive program for training and professional development.
Related expenses include product training, updates on new service offerings or
methodologies and development of project management skills. Also included in
training and professional development are expenses associated with the
development, enhancement and maintenance of our proprietary methodologies and
tools and the systems that support them.
General and administrative expenses consist principally of executive management
compensation, allocations of billable employee compensation related to general
management activities, IT infrastructure, and costs for the finance, accounting,
information technology and human resource functions. General and administrative
costs also reflect continued investment associated with implementing and
operating client and employee management systems. Because our billable personnel
operate primarily on client premises or work remotely, all occupancy expenses
are recorded as general and administrative.
Depreciation and amortization expense in the third quarter of 2020 and 2019 was
$1.6 million and $1.7 million , respectively. The decrease of $0.1 million in
depreciation and amortization expense was primarily due to prior year intangible
assets that are now fully amortized. Our fixed assets consist of furniture,
fixtures, equipment (mainly personal computers) and leasehold improvements.
Depreciation expense is generally computed by applying the straight-line method
over the estimated useful lives of assets. We also capitalize certain costs
associated with the purchase and development of internal-use software, system
conversions and website development costs. These costs are amortized over the
estimated useful life of the software or system.
We amortize our intangible assets (e.g. client relationships and databases) over
their estimated useful lives. Goodwill related to acquisitions is not amortized,
but is subject to annual impairment testing and interim impairment tests, if
triggering events are identified. No interim impairment testing triggering
events were identified during the first, second, or third quarter of 2020 or
2019, inclusive of our consideration of the impact of COVID-19 on our business.
Other Income (Expense), Net
The following table presents a breakdown of other (expense), net:
Three Months Ended September 30,
Percent
Other income (expense), Net 2020 2019 Change Change
(in thousands)
Interest income $ 61 $ 41 $ 20 49 %
Interest expense (687) (1,598) 911 57 %
Foreign currency (loss) gain (66) 7 (73) (1,043) %
Total other income (expense), net $ (692) $ (1,550) $ 858 55 %
The total decrease of
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 endedSeptember 30, 2020 was 9.9% compared to 57.8% for the quarter endedSeptember 30, 2019 . The difference for the quarter endedSeptember 30, 2020 was primarily due to the impact of earnings and losses in certain foreign jurisdictions, the impact of a tax law in a foreign jurisdiction, and the impact of vesting of restricted stock units. The Company's effective tax rate for the quarter endedSeptember 30, 2020 was lower than the statutory rate primarily due to the impact of earnings in foreign jurisdictions, including reduction of foreign unremitted earnings tax accruals related to tax law change inIndia impacting the company's hypothetical 20
dividend withholding tax liability. There were no significant changes in
uncertain tax position reserves or valuation allowances during the quarter ended
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED
Revenues
Geographical revenue information for the segment is as follows:
Nine Months Ended September 30,
Percent
Geographic Area 2020 2019 Change Change
(in thousands)
Americas $ 103,422 $ 118,738 $ (15,316) (13) %
Europe 64,044 67,562 (3,518) (5) %
Asia Pacific 15,273 13,962 1,311 9 %
Total revenues $ 182,739 $ 200,262 $ (17,523) (9) %
Revenues decreased $17.5 million , or approximately 9%, in 2020 to date. The
decrease in revenues in the Americas and Europe was primarily attributable to a
decline in our Advisory service line, primarily related to the COVID-19
pandemic. The increase in revenues in Asia Pacific was primarily attributable
to the increase in our Advisory service lines. The translation of foreign
currency revenues into U.S. dollars positively impacted performance in Europe
and Asia Pacific compared to the prior year.
Operating Expenses
The following table presents a breakdown of our operating expenses by category:
Nine Months Ended September 30,
Percent
Operating Expenses 2020 2019 Change Change
(in thousands)
Direct costs and expenses for advisors
(5,097) (4) % Selling, general and administrative 60,792 70,327
(9,535) (14) % Depreciation and amortization 4,641 5,031 (390) (8) % Total operating expenses$ 176,972 $ 191,994 $ (15,022) (8) % Total operating expenses decreased$15.0 million , or approximately 8%, in 2020 with a decrease in direct costs and expenses for advisors, selling, general and administrative ("SG&A") expenses, and depreciation and amortization. The decrease in operating expenses were primarily due to lower: travel and entertainment of$10.9 million , contract labor of$1.7 million , marketing expense of$0.9 million , conference expense of$0.9 million , and non-cash stock compensation of$0.6 million . 21 Depreciation and amortization expense in 2020 and 2019 were$4.6 million and$5.0 million , respectively. The decrease of$0.4 million in depreciation and amortization expense was primarily due to prior year intangible assets that
are now fully amortized.
Other Income (Expense), Net
The following table presents a breakdown of other (expense), net:
Nine Months Ended September 30,
Percent
Other income (expense), Net 2020 2019 Change Change
(in thousands)
Interest income $ 188 $ 133 $ 55 41 %
Interest expense (2,890) (4,763) 1,873 39 %Foreign currency gain (loss) 14 (28) 42 150 % Total other income (expense), net$ (2,688) $ (4,658) $ 1,970
42 % The total decrease of$2.0 million was primarily the result of lower interest expense of$1.9 million attributable to our lower debt balance and lower interest rates, partially offset by an increase in interest expense associated with the write-off of deferred financing costs. Income Tax Expense Our effective tax rate for the nine months endedSeptember 30, 2020 was 57.6% compared to 65.5% for the nine months endedSeptember 30, 2019 . The difference was primarily due to the impact of vesting of restricted stock units for the nine months endedSeptember 30, 2020 and due to the impact of earnings and losses in certain foreign jurisdictions, the impact of a tax law in a foreign jurisdiction, and the release of$0.7 million of accruals for uncertain tax positions due to the expiration of statute limitations in a foreign jurisdiction for the nine months endedSeptember 30, 2019 .
NON-GAAP FINANCIAL PRESENTATION
This management's discussion and analysis presents supplemental measures of our performance that are derived from our consolidated financial information but are not presented in accordance with accounting principles generally accepted inthe United States of America ("GAAP"). We refer to these financial measures, which are considered "non-GAAP financial measures" underSEC 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
22
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 Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
(in thousands)
Net income $ 2,055 $ 1,731 $ 1,307 $ 1,247
Interest expense (net of interest income) 626 1,557 2,702 4,630
Income taxes 227 2,373 1,772 2,363
Depreciation and amortization 1,581 1,672 4,641 5,031
Change in contingent consideration 48 - 48 30
Acquisition-related costs 100 50 350 58
Severance, integration and other expense 1,362 462 1,730 1,371
Tax indemnity receivable - 31 - 31
Financing-related costs - - 92 -
Foreign currency transaction loss (gain) 66 (7) (14) 28
Non-cash stock compensation 2,159 2,456 6,544 7,150
Adjusted EBITDA $ 8,224 $ 10,325 $ 19,172 $ 21,939
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
(in thousands)
Net income $ 2,055 $ 1,731 $ 1,307 $ 1,247
Non-cash stock compensation 2,159 2,456 6,544 7,150
Intangible amortization 913 1,001 2,618 3,009
Change in contingent consideration 48 - 48 30
Acquisition-related costs 100 50 350 58
Severance, integration and other expense 1,362 462 1,730 1,371
Financing-related costs - - 92 -
Write-off of deferred financing costs - - 167 -
Foreign currency transaction loss (gain) 66 (7) (14) 28
Tax effect (1) (1,487) (1,268) (3,691) (3,727)
Adjusted net income $ 5,216 $ 4,425 $ 9,151 $ 9,166
Three Months Ended Nine Months Ended
September 30, 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 0.06Change 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
_________________________________
(1) Marginal tax rate of 32% applied.
23
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 ofSeptember 30, 2020 , our cash, cash equivalents and restricted cash were$38.2 million , a net increase of$20.0 million fromDecember 31, 2019 , which was primarily attributable to the following:
? net cash provided by operating activities of
? principal payments on borrowings of
? equity repurchases of
? Neuralify acquisition of
? debt financing costs of
Capital Resources OnMarch 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
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
?
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
24
(including guarantee obligations), liens, fundamental changes, sales ordisposition of property or assets, investments (including loans, advances,
guarantees and acquisitions), transactions with affiliates, dividends and other
payments in respect of capital stock, optional payments and modifications of
other material debt instruments, negative pledges and agreements restricting
subsidiary distributions and changes in line of business. In addition, the
Company is required to comply with a total leverage ratio and fixed charge
coverage ratio.
The senior secured credit facility contains customary events of default,
? including cross-default to other material agreements, judgment default and
change of control.
The Company's financial statements include outstanding borrowings of$79.9 million atSeptember 30, 2020 and$86.9 million atDecember 31, 2019 , which are carried at amortized cost. The fair value of debt is classified within Level 3 of the fair value hierarchy. The fair value of the Company's outstanding borrowings is approximately$78.8 million and$86.7 million atSeptember 30, 2020 andDecember 31, 2019 , respectively. The fair values of debt have been estimated using a discounted cash flow analysis based on the Company's incremental borrowing rate for similar borrowing arrangements. The incremental borrowing rate used to discount future cash flows is 2.48%. The Company also considered recent transactions of peer group companies for similar instruments with comparable terms and maturities as well as an analysis of current market conditions.
As of
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 has financial covenants underlying its debt which require an adjusted EBITDA to Debt ratio of 3.25. In light of the pandemic, there is uncertainty regarding the marketplace demand for the Company's services and thus the Company's future revenue generation. Accordingly, in light of this uncertainty, the Company has developed plans to further reduce operating expenses to the extent more prolonged revenue shortfalls are experienced which would prevent the Company from complying with its financial covenants.
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 withU.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 25 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 endedDecember 31, 2019 .
© Edgar Online, source
