RIMINI STREET, INC. CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this "Report") includes forward-looking
statements. All statements other than statements of historical facts contained
in this Report, including statements regarding our future results of operations
and financial position, business strategy and plans, and our objectives for
future operations, are forward-looking statements. The words "anticipate,"
"believe," "continue," "could," "estimate," "expect," "intend," "may," "might,"
"plan," "possible," "potential," "predict," "project," "should," "will," "would"
and similar expressions that convey uncertainty of future events or outcomes are
intended to identify forward-looking statements, but the absence of these words
does not mean that a statement is not forward-looking. Forward-looking
statements include, but are not limited to, information concerning:
•the duration of and economic, operational and financial impacts on our business
of the COVID-19 pandemic, as well as the actions taken by governmental
authorities, clients or others in response to the COVID-19 pandemic;
•the evolution of the enterprise software management and support landscape
facing our clients and prospects;
•our ability to educate the market regarding the advantages of our enterprise
software management and support services and products;
•estimates of our total addressable market;
•projections of client savings;
•the occurrence of catastrophic events that may disrupt our business or that of
our current and prospective clients;
•our ability to maintain an adequate rate of revenue growth;
•our expectations about future financial, operating and cash flow results;
•the sufficiency of future cash and cash equivalents to meet our liquidity
requirements;
•our business plan and our ability to effectively manage our growth and
associated investments;
•beliefs and objectives for future operations;
•our ability to expand our leadership position in independent enterprise
software support and sell our new application managed services;
•our ability to attract and retain clients;
•our ability to further penetrate our existing client base;
•our ability to maintain our competitive technological advantages against new
entrants in our industry;
•our ability to timely and effectively scale and adapt our existing technology;
•our ability to innovate new products and bring them to market in a timely
manner, including our announced salesforce and our announced application
management services offerings;
•our ability to maintain, protect, and enhance our brand and intellectual
property;
•our ability to capitalize on changing market conditions including a market
shift to hybrid and cloud/SaaS offerings for information technology environments
and retirement of certain software releases by software vendors;
•our ability to develop strategic partnerships;
•benefits associated with the use of our services;
•our ability to expand internationally;
•our ability to raise equity or debt financing and other transactions to
simplify our capital structure in the future;
•the effects of increased competition in our market and our ability to compete
effectively;
•our intentions with respect to our pricing model;
•cost of revenues, including changes in costs associated with production,
manufacturing, and client support;
•operating expenses, including changes in sales and marketing, and general
administrative expenses;
•anticipated income tax rates;
•our ability to maintain our good standing with the United States and
international governments and capture new contracts;
•costs associated with defending intellectual property infringement and other
claims, such as those claims discussed under the section titled "Business-Legal
Proceedings" in our 2019 Annual Report on Form 10-K, as filed with the SEC on
March 16, 2020 (the "2019 Form 10-K");
•our expectations concerning relationships with third parties, including channel
partners and logistics providers;
•economic and industry trends or trend analysis;
•the attraction and retention of qualified employees and key personnel;
•future acquisitions of or investments in complementary companies, products,
subscriptions or technologies;
•uncertainty from the expected discontinuance of LIBOR and transition to any
other interest rate benchmarks;
•the effects of seasonal trends on our results of operations; and
•other risks and uncertainties, including those discussed under "Risk Factors"
in Part II, Item 1A of this Report.
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We have based these forward-looking statements largely on our current
expectations and projections about future events and financial trends that we
believe may affect our financial condition, results of operations, business
strategy, short-term and long-term business operations and objectives, and
financial needs. These forward-looking statements are subject to a number of
risks, uncertainties and assumptions, including those referred to Part II, Item
1A of this Report. Moreover, we operate in very competitive and rapidly changing
markets. New risks emerge from time to time. It is not possible for our
management to predict all risks, nor can we assess the impact of all factors on
our business or the extent to which any factor, or combination of factors, may
cause actual results to differ materially from those contained in any
forward-looking statements we may make. In light of these risks, uncertainties
and assumptions, the forward-looking events and circumstances discussed in this
Report may not occur and actual results could differ materially and adversely
from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future
events. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee that the future
results, levels of activity, performance or events and circumstances reflected
in the forward-looking statements will be achieved or occur. Moreover, neither
we nor any other person assumes responsibility for the accuracy and completeness
of the forward-looking statements. The forward-looking statements in this Report
are made as of the date of the filing, and except as required by law, we
disclaim and do not undertake any obligation to update or revise publicly any
forward-looking statements in this Report. You should read this Report and the
documents that we reference in this Report and have filed with the SEC as
exhibits with the understanding that our actual future results, levels of
activity and performance, as well as other events and circumstances, may be
materially different from what we expect.
Overview
The following discussion and analysis of our financial condition and results
of operations should be read in conjunction with the unaudited condensed
consolidated financial statements and the related notes to those statements
included in Part I, Item 1 of this Report, and our audited consolidated
financial statements for the year ended December 31, 2019 , included in our 2019
Form 10-K.
Certain figures, such as interest rates and other percentages included in
this section have been rounded for ease of presentation. Percentage figures
included in this section have not in all cases been calculated based on such
rounded figures but on the basis of such amounts prior to rounding. For this
reason, percentage amounts in this section may vary slightly from those obtained
by performing the same calculations using the figures in our unaudited condensed
consolidated financial statements or in the associated text. Certain other
amounts that appear in this section may similarly not sum due to rounding.
We were incorporated as Rimini Street, Inc. ("RSI") in the state of Nevada in
September 2005 . In May 2017 , RSI entered into an Agreement and Plan of Merger
(the "Merger Agreement") with GP Investments Acquisition Corp. ("GPIA"), a
publicly-held special purpose acquisition company incorporated in the Cayman
Islands and formed for the purpose of effecting a business combination with one
or more businesses. Substantially all of GPIA's assets consisted of cash and
cash equivalents. The Merger Agreement was approved by the respective
shareholders of RSI and GPIA in October 2017 , and closing occurred on
October 10, 2017 , resulting in (i) the merger of a wholly-owned subsidiary of
GPIA with and into RSI, with RSI as the surviving corporation, after which (ii)
RSI merged with and into GPIA, with GPIA as the surviving corporation. Prior to
consummation of the mergers, GPIA domesticated as a Delaware corporation (the
"Delaware Domestication"). Immediately after the Delaware Domestication and the
consummation of the second merger, GPIA was renamed "Rimini Street, Inc. "
(referred to herein as the Company, as distinguished from RSI with the same
legal name).
We are a global provider of enterprise software management and support
products and services, and the leading independent software support provider for
Oracle and SAP products, based on both the number of active clients supported
and recognition by industry analyst firms.
In November 2019 , we announced the global availability of our Application
Management Services ("AMS") for Oracle, which includes coverage for Oracle
Database, Middleware and a wide range of Oracle applications including
E-Business Suite, JD Edwards, PeopleSoft and Siebel. In addition to leveraging
our support services for Oracle that replaces expensive and less robust software
vendor annual support with a more responsive and comprehensive support offering,
our clients can now have us manage their Oracle systems day-to-day with an
integrated application management and support service provided by a single
trusted vendor. As an integrated service, we believe we can provide clients a
better model, better service providers, and better outcomes with higher
satisfaction and significant savings of time, labor and money. The AMS for
Oracle includes system administration, operational support, health monitoring
and enhancement support.
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In August 2019 , we announced plans to globally offer AMS for SAP enterprise
software, expanding the scope of support services we will offer clients
globally. This AMS service is in addition to our traditional enterprise Support
Services. We are already providing this new SAP AMS service to clients in North
and South America . The service includes system administration and SAP Basis
support, system health monitoring with proactive analysis, preventative system
recommendations and event detection; and enhancement support for complex SAP
software landscapes.
In 2018, we announced plans to support Software as a Service ("SaaS")
solutions beginning with Salesforce products. As a partner of Salesforce, we
provide our award-winning service and support for custom code, release updates
and application integrations in addition to ongoing administrative,
configuration and enhancement of Salesforce's industry leading cloud solutions.
We founded our company to disrupt and redefine the enterprise software
support market by developing and delivering innovative new products and services
that fill a then unmet need in the market. We believe we have achieved our
leadership position in independent enterprise software support by recruiting and
hiring experienced, skilled and proven staff; delivering outcomes-based,
value-driven and award-winning enterprise software support products and
services; seeking to provide an exceptional client-service, satisfaction and
success experience; and continuously innovating our unique products and services
by leveraging our proprietary knowledge, tools, technology and processes.
Enterprise software support products and services is one of the largest
categories of overall global information technology ("IT") spending. We believe
core enterprise resource planning ("ERP"), client relationship management
("CRM"), product lifecycle management ("PLM") and technology software platforms
have become increasingly important in the operation of mission-critical business
processes over the last 30 years, and also that the costs associated with
failure, downtime, security exposure and maintaining the tax, legal and
regulatory compliance of these core software systems have also increased. As a
result, we believe that licensees often view software support as a mandatory
cost of doing business, resulting in recurring and highly profitable revenue
streams for enterprise software vendors. For example, for fiscal year 2019, SAP
reported that support revenue represented approximately 42% of its total
revenue. For fiscal year 2020, Oracle reported a margin of 85% for cloud
services and license support.
We believe that software vendor support is an increasingly costly model that
has not evolved to offer licensees the responsiveness, quality, breadth of
capabilities or value needed to meet the needs of licensees. Organizations are
under increasing pressure to reduce their IT costs while also delivering
improved business performance through the adoption and integration of emerging
technologies, such as mobile, virtualization, internet of things ("IoT") and
cloud computing. Today, however, the majority of IT budget is spent operating,
maintaining and supporting existing infrastructure and systems. As a result, we
believe organizations are increasingly seeking ways to redirect budgets from
maintenance to new technology investments that provide greater strategic value,
and our software management and support products and services help clients
achieve these objectives by reducing the total cost of support.
As of June 30, 2020 , we employed over 1,340 professionals and supported over
2,150 active clients globally, including 74 Fortune 500 companies and 18 Fortune
Global 100 companies across a broad range of industries. We define an active
client as a distinct entity, such as a company, an educational or government
institution, or a business unit of a company that purchases our services to
support a specific product. For example, we count as two separate active client
instances in circumstances where we provide support for two different products
to the same entity.
Our subscription-based revenue provides a strong foundation for, and
visibility into, future period results. For the three months ended June 30, 2020
and 2019, we generated revenue of $78.4 million and $69.9 million , respectively,
representing an increase of 12%. We have a history of losses, and as of June 30,
2020 , we had an accumulated deficit of $308.6 million . Approximately 60% and 66%
of our revenue was generated in the United States for the three months ended
June 30, 2020 and 2019, respectively. Approximately 40% and 34% of our revenue
was generated in foreign jurisdictions for the three months ended June 30, 2020
and 2019, respectively.
Since our inception, we have financed our operations through cash collected
from clients and net proceeds from equity financings and borrowings. As of June
30, 2020 , we have no outstanding contractual debt obligations.
Impact of COVID-19
During the second quarter of 2020, we continued investing for long-term growth.
However, as we neared the end of the first quarter of 2020, the emergence of the
COVID-19 pandemic took hold and is having widespread, rapidly evolving and
unpredictable impacts on global society, economies, financial markets and
business practices. Federal and state governments have implemented multiple
measures aiming to contain the spread of the virus, including social distancing,
travel restrictions,
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border closures, quarantine guidance following travel to certain jurisdictions,
limitations on public gatherings and continued closures of certain non-essential
businesses. As a result, to protect the health and well-being of our employees,
clients and the communities in which we operate, we transitioned as many of our
employees as possible to a work-at-home model, temporarily closed our offices
worldwide, placed restrictions on non-essential business travel, transitioned to
a no in-person event marketing strategy and implemented a fully remote sales
model. We believe these measures have been successful and have not significantly
affected our financial results for the three and six months ended June 30, 2020 .
We have implemented business continuity measures and will continue to respond to
the COVID-19 pandemic as circumstances dictate.
As a result of the measures that we have taken in response to the COVID-19
pandemic described above, we are expecting reduced costs of travel, reductions
in costs resulting from cancelling certain in-person marketing events,
reductions in office operating costs and potential rent abatement related to
office closures around the world (that began mid-March 2020 and are expected to
continue through at least September 2020 ). While some offices have partially
opened, our offices will not re-open until local authorities permit us to and
our own criteria and conditions to ensure employee health and safety are
satisfied. We expect to offset some of these reduced costs with accelerated
investments including implementing virtual sales and other marketing programs,
special compensation bonuses for lower-paid employees and special compensation
bonuses for employees who have tested positive for COVID-19. For example, in
March 2020 , we paid COVID-19 special bonuses to certain of our employees to help
with pandemic-related special costs and for the few of our employees who have
tested positive for COVID-19. We authorized a second round of COVID-19 special
bonuses in April 2020 which were paid during the second quarter of 2020. The
cost of these special bonuses is more than offset by the reduced costs relating
to travel and in-person marketing event fees and expenses described above.
The COVID-19 pandemic had no significant net impact on our revenue or results of
operations during the second quarter of 2020, and we continued to deliver
uninterrupted and critical support services to our clients during this period.
While we did implement discounted or extended payment terms for certain of our
clients, in most cases it was in exchange for contractual concessions favorable
to us, for example, extended contract terms or marketing support for references,
and the collective impact of such changes was not material. Our ability to
utilize our secure remote-connectivity global infrastructure promotes the safety
of our employees while abiding by the restrictions currently in place throughout
the world. While COVID-19 has impacted business markets worldwide, subject to
the uncertainty relating to the continued effects of the COVID-19 pandemic, we
expect to continue to be able to market, sell and provide our current and future
products and services to clients globally. We also expect to continue investing
in the development and improvement of new and existing products and services to
address client needs.
The extent to which the COVID-19 pandemic impacts our business going forward
will depend on numerous evolving factors we cannot reliably predict, including
the duration and scope of the pandemic; governmental and business actions in
response to the pandemic; and the impact on economic activity, including the
possibility of recession or financial market instability. These factors may
adversely impact consumer, business, and government spending on technology as
well as our clients' ability to pay for our services on an ongoing basis. This
uncertainty also affects management's accounting estimates and assumptions,
which could result in greater variability in a variety of areas that depend on
these estimates and assumptions, including receivables and forward-looking
guidance. As such, the effects of the COVID-19 pandemic may not be fully
reflected in our financial results until future periods. Refer to Risk Factors
(Part II, Item 1A of this Report) for a discussion of these factors and other
risks.
On March 27, 2020 , the Coronavirus Aid, Relief, and Economic Security ("CARES")
Act was signed into law in the United States to address the economic impact of
the COVID-19 pandemic. The Company has elected to defer payroll tax payments
which totaled $1.3 million as of June 30, 2020 as permitted by the CARES Act. We
continue to monitor any effects that may result from the CARES Act and other
similar legislation or actions in geographies in which our business operates.
Recent Developments
Reference is made to Note 5 to our unaudited condensed consolidated
financial statements included in Part I, Item 1 of this Report for a discussion
of recent developments related to the securities purchase agreements entered
into on June 20, 2019 , March 7, 2019 and July 19, 2018 , and the related private
placements of Series A Preferred Stock, Common Stock and Convertible Notes.
Additionally, reference is made to Note 8 to our unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report for a discussion of developments in our litigation with Oracle.
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--------------------------------------------------------------------------------Key Business Metrics
Number of clients
Since we founded our company, we have made the expansion of our client base
a priority. We believe that our ability to expand our client base is an
indicator of the growth of our business, the success of our sales and marketing
activities, and the value that our services bring to our clients. We define an
active client as a distinct entity, such as a company, an educational or
government institution, or a business unit of a company that purchases our
services to support a specific product. For example, we count as two separate
active clients when support for two different products is being provided to the
same entity. As of June 30, 2020 and 2019, we had over 2,150 and 1,890 active
clients, respectively.
We define a unique client as a distinct entity, such as a company, an
educational or government institution or a subsidiary, division or business unit
of a company that purchases one or more of our products or services. We count as
two separate unique clients when two separate subsidiaries, divisions or
business units of an entity purchase our products or services. As of June 30,
2020 and 2019, we had over 1,200 and 1,100 unique clients, respectively.
The increases in both our active and unique client counts have been almost
exclusively from new unique clients and not from sales of new products and
services to existing unique clients. However, as noted previously, we intend to
focus future growth on both new and existing clients. We believe that the growth
in our number of clients is an indication of the increased adoption of our
enterprise software products and services.
Annualized subscription revenue
We recognize subscription revenue on a daily basis. We define annualized
subscription revenue as the amount of subscription revenue recognized during a
quarter and multiplied by four. This gives us an indication of the revenue that
can be earned in the following 12-month period from our existing client base
assuming no cancellations or price changes occur during that period.
Subscription revenue excludes any non-recurring revenue, which has been
insignificant to date.
Our annualized subscription revenue was $311 million and $278 million as of
June 30, 2020 and 2019, respectively. We believe the sequential increase in
annualized subscription revenue demonstrates a growing client base, which is an
indicator of stability in future subscription revenue.
Revenue retention rate
A key part of our business model is the recurring nature of our revenue. As
a result, it is important that we retain clients after the completion of the
non-cancellable portion of the support period. We believe that our revenue
retention rate provides insight into the quality of our products and services
and the value that our products and services provide our clients.
We define revenue retention rate as the actual subscription revenue
(dollar-based) recognized in a 12-month period from clients that existed on the
day prior to the start of the 12-month period divided by our annualized
subscription revenue as of the day prior to the start of the 12-month period.
Our revenue retention rate was 92% for both the 12 months ended June 30, 2020
and 2019, respectively.
Gross profit percentage
We derive revenue through the provision of our enterprise software products
and services. All the costs incurred in providing these products and services
are recognized as part of the cost of revenue. The cost of revenue includes all
direct product line expenses, as well as the expenses incurred by our shared
services organization which supports all product lines.
We define gross profit as the difference between revenue and the costs
incurred in providing the software products and services. Gross profit
percentage is the ratio of gross profit divided by revenue. Our gross profit
percentage was approximately 61.2% and 64.2% for the three months ended June 30,
2020 and 2019, respectively. We believe the gross profit percentage provides an
indication of how efficiently and effectively we are operating our business and
serving our clients.
Results of Operations
Comparison of Three Months Ended
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Our consolidated statements of operations for the three months ended
Three Months Ended
June 30, Variance
2020 2019 Amount Percent
Revenue $ 78,402 $ 69,869 $ 8,533 12.2%
Cost of revenue:
Employee compensation and benefits 20,475 17,323 3,152 18.2%
Engineering consulting costs 5,005 3,602 1,403 39.0%
Administrative allocations (1) 3,501 2,925 576 19.7%
All other costs 1,456 1,184 272 23.0%
Total cost of revenue 30,437 25,034 5,403 21.6%
Gross profit 47,965 44,835 3,130 7.0%
Gross margin 61.2 % 64.2 %
Operating expenses:
Sales and marketing 26,836 26,899 (63) (0.2)%
General and administrative 13,133 10,630 2,503 23.5%
Litigation costs and related recoveries, net 2,863 144 2,719 1,888.2%
Total operating expenses 42,832 37,673 5,159 13.7%
Operating income 5,133 7,162 (2,029) (28.3)%
Non-operating income and (expenses):
Interest expense (12) (116) 104 (89.7)%
Other expenses, net (567) (343) (224) 65.3%
Income before income taxes 4,554 6,703 (2,149) (32.1)%
Income tax expense (1,084) (621) (463) 74.6%
Net income $ 3,470 $ 6,082 $ (2,612) (42.9)%
(1)Includes the portion of costs for information technology, security services
and facilities costs that are allocated to cost of revenue. In our unaudited
condensed consolidated financial statements, the total of such costs is
allocated between cost of revenue, sales and marketing, and general and
administrative expenses, based primarily on relative headcount, except for
facilities which is based on occupancy.
Revenue. Revenue increased from $69.9 million for the three months ended
June 30, 2019 to $78.4 million for the three months ended June 30, 2020 , an
increase of $8.5 million or 12%. The increase was driven by an 8% increase in
the average number of unique clients from 1,095 for the three months ended June
30, 2019 to 1,185 for the three months ended June 30, 2020 . On a geographic
basis, United States revenue grew from $45.8 million for the three months ended
June 30, 2019 to $47.4 million for the three months ended June 30, 2020 , an
increase of $1.6 million or 4%. Our International revenue grew from
$24.1 million for the three months ended June 30, 2019 to $31.0 million for the
three months ended June 30, 2020 , an increase of $6.9 million or 29%.
Our former multi-draw term loan financing agreement (the "Credit Facility")
included covenants that restricted our spending on sales and marketing activity
that resulted in sequential reductions in new business activity during fiscal
2017. These covenants became less restrictive beginning in October 2017 when the
Credit Facility was amended and were eliminated in July 2018 as a result of the
termination of the Credit Facility. The October 2017 amendment allowed us to
increase our sales and marketing spending in the fourth quarter of 2017.
However, even though we are currently increasing our sales and marketing
spending, it can take several quarters before these efforts are expected to
translate into revenue. In addition, beginning in the second quarter of 2017
some potential sales transactions were adversely affected by certain competitive
actions, and we are encountering increased competitive discounting by enterprise
software vendors. Despite these constraints, our revenue for the three months
ended June 30, 2020 versus our prior year period, our quarter-over-quarter
revenue growth increased from approximately 10% for the second quarter of 2019
to 12% for the second quarter of 2020.
Cost of revenue. Cost of revenue increased from $25.0 million for the three
months ended June 30, 2019 to $30.4 million for the three months ended June 30,
2020 , an increase of $5.4 million or 22%. The key drivers related to the cost of
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revenue increase were a $3.2 million increase in compensation costs, a
$1.4 million increase in engineering consulting costs and an increase of
$0.2 million of other costs. The compensation cost increase was attributable to
an increase in employees required to support the revenue growth. In addition,
administrative allocations increased $0.6 million as facility, technology and
security costs increased.
As discussed in Note 8 to our consolidated financial statements included in Part
1, Item 1 of this Report, following post-trial motions, the District Court
entered a permanent injunction prohibiting the Company from using certain
processes, including processes adjudicated as infringing at trial, that the
Company ceased using no later than July 2014 , which the Company subsequently
appealed to the United States Court of Appeals for the Ninth Circuit ("Court of
Appeals "), arguing on appeal that the injunction is vague and contains
overly-broad language that could be read to cover some of the Company's current
business practices that were not adjudicated to be infringing at trial and that
the injunction should not have been issued under applicable law. After multiple
rounds of remand and appeal, in August 2019 , the Court of Appeals entered an
Order affirming the permanent injunction. However, the Court of Appeals agreed
that the injunction was overbroad in two respects and instructed the District
Court to remove the restriction on "local hosting" of J.D. Edwards and Siebel
software and the prohibition against "accessing" J.D. Edwards and Siebel
software source code. A copy of the injunction is publicly available in the case
docket. As a result of the injunction, the Company expects to incur additional
expenses in the range of 1% to 2% of revenue for additional labor costs because,
as drafted, the injunction contains language that could be read to cover some
current support practices that are being litigated in the "Rimini II" lawsuit
and that have not been found to be infringing.
Gross profit. Gross profit increased from $44.8 million for the three months
ended June 30, 2019 compared to $48.0 million for the three months ended June
30, 2020 , an increase of $3.1 million or 7%. Gross margin for the three months
ended June 30, 2019 was 64.2% compared to 61.2% for three months ended June 30,
2020 . For the three months ended June 30, 2020 , total cost of revenue increased
by 22%, compared to an increase in revenue of 12% for the three months ended
June 30, 2020 . As a result, our gross profit margin decreased by 3.0% period
over period. The decline in gross margin reflects, in part, our investment in
the launch of new products and services, including our new AMS product.
Sales and marketing expenses. As a percentage of our revenue, sales and
marketing expenses declined from 38% for the three months ended June 30, 2019 to
34% for the three months ended June 30, 2020 . In dollar terms, sales and
marketing expenses slightly decreased from $26.9 million for the three months
ended June 30, 2019 to $26.8 million for the three months ended June 30, 2020 , a
decrease of $0.1 million or 1%. This decrease was primarily due to (i) a
decrease in travel expenses of $1.8 million and (ii) a decrease in trade show
expenses of $1.1 million offset by (iii) an increase in employee compensation
and benefits of $1.3 million , (iv) an increase in marketing and promotion of
$1.2 million and (v) an increase in all other costs of $0.3 million . Our overall
spending declined slightly due to a drop in our travel and trade shows as events
occurred virtually during the second quarter. However, we continue to accelerate
our future revenue growth by investing in more resources.
The $1.3 million increase in sales and marketing expense attributable to
employee compensation and benefits for the three months ended June 30, 2020 , was
primarily due to an increase in salaries, wages and benefit costs of
$1.0 million due to a 3% increase in the average number of employees devoted to
sales and marketing functions, pay increases, and higher bonus payouts and
commissions of $0.3 million .
General and administrative expenses. General and administrative expenses
increased from $10.6 million for the three months ended June 30, 2019 to $13.1
million for the three months ended June 30, 2020 , an increase of $2.5 million or
24%. This increase was comprised of several items, which included increased
costs in salaries, wages and benefits of $2.1 million as the average number of
employees increased by 42 or 19%, an increase in other costs of $1.1 million and
an increase of our computer software and license costs of $0.6 million for the
three months ended June 30, 2020 . In addition, we had an increase in outside
services of $0.5 million due in part to system implementations and compliance.
These unfavorable variances were offset, in part, by a favorable increase in
administrative allocations of $0.6 million from general and administrative
expenses, a decrease in travel expenses of $0.5 million , a reduction of sales
and other related taxes of $0.5 million , and a decrease in recruitment costs of
$0.2 million .
Looking forward on a quarter-over-quarter basis, we are monitoring the
demand for our services in light of the COVID-19 pandemic related environment
and will adjust our spend accordingly. However, we expect to incur higher
expenses associated with supporting the growth of our business, both in terms of
size and geographical diversity, and to meet the increased compliance
requirements associated with our transition to being a public company and no
longer being classified as an "emerging growth company." Public company costs
that are expected to increase in the future include additional information
systems costs, costs for additional personnel in our accounting, human
resources, IT and legal functions, SEC and Nasdaq fees, costs relating to
initial compliance with the auditor attestation requirements under Section 404
of the Sarbanes-Oxley Act and incremental professional, legal, audit and
insurance costs. As a result, not taking into account temporary reductions in
certain
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Litigation costs, net of related insurance recoveries. Litigation costs, net
of related insurance recoveries for the three months ended June 30, 2020 and
2019, consist of the following (in thousands):
2020 2019 Change
Professional fees and other costs of litigation
- - -
Insurance costs and recoveries, net 141 (300)
441
Litigation costs and related recoveries, net
Professional fees and other costs associated with litigation increased from
$0.4 million for the three months ended June 30, 2019 to $2.7 million for the
three months ended June 30, 2020 , an increase of $2.3 million . This increase was
primarily due to increased costs associated with discovery work on the Rimini II
litigation and the Rimini I appeal during the three months ended June 30, 2020 .
In May 2018 , we appealed to the U.S. Supreme Court for approximately $12.8
million of the District Court's award of non-taxable expenses related to the
judgment. On March 4, 2019 , the U.S. Supreme Court issued a unanimous decision
reversing earlier decisions by the lower courts and ruling that Oracle must
return approximately $12.8 million in non-taxable expenses that we had
previously paid to Oracle (plus interest). As further described in Note 8 to our
unaudited condensed consolidated financial statements included in Part I, Item 1
of this Report, as mandated by the U.S. Supreme Court , on April 5, 2019 , Oracle
paid us approximately $13.0 million (the principal amount plus post-judgment
interest). A portion of the award received by the Company will be shared on a
pro rata basis with an insurance company that had paid for part of the judgment
and a portion of Rimini's defense costs. This reimbursement will reflect a
deduction of the costs of the Company's past and pending appeal and remand
proceedings.
Insurance costs and related recoveries, net increased from a benefit of
$0.3 million for the three months ended June 30, 2019 to costs of $0.1 million
for the three months ended June 30, 2020 . We recognized a benefit of
$0.3 million in the prior year period, reflecting a change in our estimate of
the amounts owed to the insurance company at that time. The liability, noted
above, was subject to change as additional costs related to any future Rimini I
appeal and remand proceedings were incurred. For the three months ended June 30,
2020 , we recognized costs of $0.1 million to revise our estimated amounts due to
the insurance company (for portions of the Court of Appeals and U.S. Supreme
Court awards) to $5.5 million as of June 30, 2020 . We are self-insured for any
costs related to any current or future intellectual property litigation. We
currently believe our cash on hand, accounts receivable and contractually
committed backlog provides us with sufficient liquidity to cover costs related
to our litigation with Oracle.
Interest expense. Interest expense decreased from $0.1 million for the three
months ended June 30, 2019 to $12 thousand for the three months ended June 30,
2020 , a decrease of $0.1 million or approximately 90%. Interest expense
decreased due to a reduction in accretion expense of approximately $57 thousand
related to the GP Sponsor note payable. The GP Sponsor note was paid off on June
28, 2019 . Interest expense related to capital leases also decreased by
approximately $47 thousand during the current year period.
Other expenses, net. Other expenses, net is primarily comprised of interest
income, foreign exchange gains and losses, and other non-operating income and
expenses. For the three months ended June 30, 2020 , net other expense of
approximately $0.6 million was comprised primarily by foreign exchange losses of
approximately $0.5 million . For the three months ended June 30, 2019 , net other
expense of $0.3 million was also comprised primarily by foreign exchange losses
of approximately $0.3 million .
Income tax expense. We had an income tax expense of $0.6 million for the
three months ended June 30, 2019 compared to $1.1 million for the three months
ended June 30, 2020 . For the three months ended June 30, 2020 , our income taxes
were attributable to both our foreign and U.S. operations of $0.6 million and
$0.5 million , respectively. The income taxes in the U.S. related primarily to
foreign withholding taxes. For the three months ended June 30, 2019 , no income
tax expense was recognized in the U.S. due to utilization of net operating loss
carryforwards.
Comparison of Six Months Ended
33
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Our consolidated statements of operations for the six months ended
Six Months Ended
June 30, Variance
2020 2019 Amount Percent
Revenue $ 156,434 $ 135,742 $ 20,692 15.2%
Cost of revenue:
Employee compensation and benefits 40,845 34,126 6,719 19.7%
Engineering consulting costs 9,871 6,418 3,453 53.8%
Administrative allocations (1) 7,093 5,852 1,241 21.2%
All other costs 2,827 2,475 352 14.2%
Total cost of revenue 60,636 48,871 11,765 24.1%
Gross profit 95,798 86,871 8,927 10.3%
Gross margin 61.2 % 64.0 %
Operating expenses:
Sales and marketing 55,248 50,854 4,394 8.6%
General and administrative 25,134 23,618 1,516 6.4%
Litigation costs and related recoveries, net 6,536 (5,951) 12,487 (209.8)%
Total operating expenses 86,918 68,521 18,397 26.8%
Operating income 8,880 18,350 (9,470) (51.6)%
Non-operating income and (expenses):
Interest expense (25) (348) 323 (92.8)%
Other expenses, net (785) (300) (485) 161.7%
Income before income taxes 8,070 17,702 (9,632) (54.4)%
Income tax expense (2,055) (1,326) (729) 55.0%
Net income $ 6,015 $ 16,376 $ (10,361) (63.3)%
(1)Includes the portion of costs for information technology, security services
and facilities costs that are allocated to cost of revenue. In our unaudited
condensed consolidated financial statements, the total of such costs is
allocated between cost of revenue, sales and marketing, and general and
administrative expenses, based primarily on relative headcount, except for
facilities which is based on occupancy.
Revenue. Revenue increased from $135.7 million for the six months ended June
30, 2019 to $156.4 million for the six months ended June 30, 2020 , an increase
of $20.7 million or 15%. The increase was driven by a 9% increase in the average
number of unique clients from 1,080 for the six months ended June 30, 2019 to
1,177 for the six months ended June 30, 2020 . On a geographic basis, United
States revenue grew from $88.5 million for the six months ended June 30, 2019 to
$94.8 million for the six months ended June 30, 2020 , an increase of $6.3
million or 7%. Our International revenue grew from $47.3 million for the six
months ended June 30, 2019 to $61.6 million for the six months ended June 30,
2020 , an increase of $14.4 million or 30%.
Cost of revenue. Cost of revenue increased from $48.9 million for the six
months ended June 30, 2019 to $60.6 million for the six months ended June 30,
2020 , an increase of $11.8 million or 24%. The key drivers related to the cost
of revenue increase were a $6.7 million increase in compensation costs and
$3.5 million increase in engineering consulting costs. The compensation cost
increase was attributable to an increase in employees required to support the
revenue growth. In addition, administrative allocations increased by
$1.2 million and other costs by $0.4 million as facility, technology, and
security costs increased.
As discussed in Note 8 to our consolidated financial statements included in Part
1, Item 1 of this Report, following post-trial motions, the District Court
entered a permanent injunction prohibiting the Company from using certain
processes, including processes adjudicated as infringing at trial, that the
Company ceased using no later than July 2014 , which the Company subsequently
appealed to the United States Court of Appeals for the Ninth Circuit ("Court of
Appeals "), arguing on appeal that the injunction is vague and contains
overly-broad language that could be read to cover some of the Company's
34
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current business practices that were not adjudicated to be infringing at trial
and that the injunction should not have been issued under applicable law. After
multiple rounds of remand and appeal, in August 2019 , the Court of Appeals
entered an Order affirming the permanent injunction. However, the Court of
Appeals agreed that the injunction was overbroad in two respects and instructed
the District Court to remove the restriction on "local hosting" of J.D. Edwards
and Siebel software and the prohibition against "accessing" J.D. Edwards and
Siebel software source code. A copy of the injunction is publicly available in
the case docket. As a result of the injunction, the Company expects to incur
additional expenses in the range of 1% to 2% of revenue for additional labor
costs because, as drafted, the injunction contains language that could be read
to cover some current support practices that are being litigated in the "Rimini
II" lawsuit and that have not been found to be infringing.
Gross profit. Gross profit increased from $86.9 million for the six months
ended June 30, 2019 compared to $95.8 million for the six months ended June 30,
2020 , an increase of $8.9 million or 10%. Gross margin for the six months ended
June 30, 2019 was 64.0% compared to 61.2% for the six months ended June 30,
2020 . For the six months ended June 30, 2020 , total cost of revenue increased by
24%, compared to an increase in revenue of 15% for the six months ended June 30,
2020 . As a result, our gross profit margin decreased 2.8% period over period.
The decline in gross margin reflects, in part, our investment in the launch of
new products and services, including our new AMS product.
Sales and marketing expenses. As a percentage of our revenue, sales and
marketing expenses have decreased from 37% for the six months ended June 30,
2019 to 35% for the six months ended June 30, 2020 . In dollar terms, sales and
marketing expenses increased from $50.9 million for the six months ended June
30, 2019 to $55.2 million for the six months ended June 30, 2020 , an increase of
$4.4 million or 9%. This increase was primarily due to (i) an increase in
employee compensation and benefits of $3.5 million , (ii) an increase in
marketing and advertising of $1.5 million (iii) an increase in shared service
allocations for facilities, security and technology of $0.4 million , (iv) an
increase in all other costs of $0.5 million , and (v) an increase in contract
labor of $0.2 million . These increases were offset by a reduction of trade show
expenses of $1.5 million , and a decrease in travel expenses of $0.2 million . Our
overall spending increased as we attempt to accelerate our future revenue growth
by investing in more resources.
The $3.5 million increase in sales and marketing expense attributable to
employee compensation and benefits for the six months ended June 30, 2020 , was
primarily due to an increase in salaries, wages and benefit costs of
$2.8 million due to a 6% increase in the average number of employees devoted to
sales and marketing functions, pay increases, and higher bonus payouts and
commissions of $0.7 million .
General and administrative expenses. General and administrative expenses
increased from $23.6 million for the six months ended June 30, 2019 to $25.1
million for the six months ended June 30, 2020 , an increase of $1.5 million or
6%. This increase was primarily driven by higher salaries, wages and benefit
costs of $3.4 million for the six months ended June 30, 2020 as the average
number of employees increased by 40 or 18% and higher bonus costs of
$0.2 million . In addition, our computer software and license costs increased
$1.0 million and rent increased $0.6 million during the six months ended June
30, 2020 due in part to support a larger employee base. These unfavorable
variances were offset, in part by a favorable increase in administrative
allocations of $1.6 million from general and administrative expenses, a decline
in travel and other expenses of $0.9 million , a reduction of sales and other
related taxes of $0.9 million , and a reduction of recruitment costs of
$0.4 million .
Litigation costs, net of related insurance recoveries. Litigation costs, net
of related insurance recoveries for the six months ended June 30, 2020 and 2019,
consist of the following (in thousands):
2020 2019 Change
Professional fees and other costs of litigation
$ 2,989 Litigation appeal refunds - (12,775)
12,775
Insurance costs and recoveries, net 1,062 4,339
(3,277)
Litigation costs and related recoveries, net
$ 12,487 Professional fees and other costs associated with litigation increased from$2.5 million for the six months endedJune 30, 2019 to$5.5 million for the six months endedJune 30, 2020 , an increase of$3.0 million . This increase was primarily due to increased costs associated with discovery work on the Rimini II litigation and the Rimini I appeal during the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 . InMay 2018 , we also appealed to theU.S. Supreme Court for approximately$12.8 million of the District Court's award of non-taxable expenses related to the judgment. OnMarch 4, 2019 , theU.S. Supreme Court issued a unanimous decision reversing earlier decisions by the lower courts and ruling that Oracle must return approximately$12.8 million in non- 35 -------------------------------------------------------------------------------- taxable expenses that we had previously paid to Oracle (plus interest). As further described in Note 8 to our unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report, as mandated by theU.S. Supreme Court , onApril 5, 2019 , Oracle paid us approximately$13.0 million (the principal amount plus post-judgment interest). As a result, we recognized a recovery of non-taxable expenses for$12.8 million and recorded interest income of$0.2 million during the six months endedJune 30, 2019 . A portion of the award received by the Company will be shared on a pro rata basis with an insurance company that had paid for part of the judgment and a portion of Rimini's defense costs. This reimbursement will reflect a deduction of the costs of the Company's past and pending appeal and remand proceedings. Insurance costs and related recoveries, net decreased from costs of$4.3 million for the six months endedJune 30, 2019 to$1.1 million for the six months endedJune 30, 2020 . We recognized costs of$4.3 million for the six months endedJune 30, 2019 , reflecting the estimate of the amounts owed to the insurance company at that time. The liability, noted above, was subject to change as additional costs related to any future Rimini I appeal and remand proceedings were incurred. For the six months endedJune 30, 2020 , we recognized costs of$1.1 million to revise our estimated amounts due to the insurance company (for portions of theCourt of Appeals andU.S. Supreme Court awards) to$5.5 million as ofJune 30, 2020 . We are self-insured for any costs related to any current or future intellectual property litigation. We currently believe our cash on hand, accounts receivable and contractually committed backlog provides us with sufficient liquidity to cover costs related to our litigation with Oracle. Interest expense. Interest expense decreased from$0.3 million for the six months endedJune 30, 2019 to$25 thousand for the six months endedJune 30, 2020 , a decrease of$0.3 million or approximately 93%. Interest expense decreased due to a reduction in accretion expense of$0.2 million related to the GP Sponsor note payable. The GP Sponsor note was paid off onJune 28, 2019 . Interest expense related to capital leases also decreased by approximately$0.1 million . Other expenses, net. Other expenses, net is primarily comprised of interest income, foreign exchange gains and losses, and other non-operating income and expenses. For the six months endedJune 30, 2020 , net other expense of approximately$0.8 million was comprised primarily by foreign exchange losses of approximately$0.7 million . For the six months endedJune 30, 2019 , net other expense of$0.3 million was primarily comprised of foreign exchange losses amounting to approximately$0.5 million , offset in part by interest income of$0.2 million related to theU.S. Supreme Court decision noted above. Income tax expense. We had an income tax expense of$1.3 million for the six months endedJune 30, 2019 compared to$2.1 million for the six months endedJune 30, 2020 . For the six months endedJune 30, 2020 , our income taxes were attributable to both our foreign andU.S. operations of$1.2 million and$0.9 million , respectively. The income taxes in theU.S. related primarily to foreign withholding taxes. For the six months endedJune 30, 2019 , no income tax expense was recognized in theU.S. due to utilization of net operating loss carryforwards.
Liquidity and Capital Resources
Overview
As of June 30, 2020 , we had a working capital deficit of $91.5 million and
an accumulated deficit of $308.6 million . For the three months ended June 30,
2020 , we had a net income of $3.5 million . As of June 30, 2020 , we had available
cash, cash equivalents and restricted cash of $73.0 million .
A key component of our business model requires that substantially all
clients prepay us annually for the services we will provide over the following
year or longer. As a result, we typically collect cash from our clients in
advance of when the related service costs are incurred, which resulted in
deferred revenue of $195.6 million that is included in current liabilities as of
June 30, 2020 . Therefore, we believe that working capital deficit is not as
meaningful in evaluating our liquidity since the historical costs of fulfilling
our commitments to provide services to clients are currently limited to
approximately 39% of the related deferred revenue based on our gross profit
percentage of 61% for the three months ended June 30, 2020 .
For the next year, assuming that the Company's operations are not
significantly impacted by the COVID-19 pandemic, we believe that cash, cash
equivalents and restricted cash of
For the six months ended June 30, 2020 , we generated cash flows from our
operating activities of approximately $44.2 million , which was derived from our
cash earnings of approximately $13.2 million and by favorable changes in
operating assets and liabilities of approximately $31.0 million . We believe that
our operating cash flows for the year ending December 31, 2020 will be
sufficient to fund the portion of our contractual obligations that is not funded
with existing capital resources.
36
--------------------------------------------------------------------------------Private Placements
Please refer to Note 5 to the unaudited condensed consolidated financial
statements included in Part I, Item 1 of this Report for information regarding
the June 2019 Private Placement, the March 2019 Private Placement and the
Initial Private Placement.
The holders of Series A Preferred Stock are entitled to, from the respective
issuance date, a cash dividend of 10.0% per annum and a payment-in-kind dividend
of 3.0% per annum for the first five years following the initial June 2018
closing and thereafter all dividends accruing on such Series A Preferred Stock
will be payable in cash at a rate of 13.0% per annum. Assuming no redemptions of
the Series A Preferred Stock and no conversions to Common Stock, the following
cash and PIK dividends (settled through issuance of additional shares of Series
A Preferred Stock), regarding the combined June 2019 Private Placement, March
2019 Private Placement and Initial Private Placement, are expected to accrue for
each year through July 19, 2023 (in thousands):
Year Ending December 31: Cash PIK Total
2020 $ 15,819 $ 4,746 $ 20,565
2021 16,299 4,890 21,189
2022 16,794 5,038 21,832
2023 9,455 2,837 12,292
The June 2019 Private Placement, the March 2019 Private Placement and the
Initial Private Placement improved our liquidity and capital resources whereby
future cash payments are expected to be limited to annual cash dividends ranging
from $15.8 million to $16.8 million over the next four years as compared to
payments under our former Credit Facility.
Please refer to Note 5 to the unaudited condensed consolidated financial
statements included in Part I, Item 1 of this Report for further details about
the Series A Preferred Stock including (i) mandatory redemption rights, (ii) the
security agreement and promissory notes that may become payable pursuant to
certain redemption provisions, (iii) rights to convert the Series A Preferred
Stock to shares of Common Stock, (iv) registration rights, and (v) voting rights
and preferences in liquidation.
Cash Flows Summary
Presented below is a summary of our operating, investing and financing cash
flows for the six months ended
2020 2019
Net cash provided by (used in):
Operating activities $ 44,244 $ 24,985
Investing activities (725) (641)
Financing activities (7,348) 664
The effect of foreign currency translation for the six months ended June 30,
2020 was unfavorable for $1.6 million compared to a favorable change for six
months ended June 30, 2019 of $69 thousand . The reason for the change was a
result of the U.S. dollar strengthening against the foreign currencies for the
international countries in which we operate during the first quarter of 2020.
Cash Flows Provided by Operating Activities
A key component of our business model requires that clients typically prepay
us annually for the services which we will provide over the following year or
longer. As a result, we typically collect cash in advance of the date when the
vast majority of the related services are provided. The key components in the
calculation of our cash provided by operating activities for the six months
ended June 30, 2020 and 2019, are as follows (in thousands):
37
--------------------------------------------------------------------------------
2020 2019
Net income $ 6,015 $ 16,376
Non-cash expenses, net 7,210 3,426Changes in operating assets and liabilities, net 31,019 5,183
Net cash provided by operating activities
For the six months ended June 30, 2020 , cash flows provided by operating
activities amounted to approximately $44.2 million . The key drivers resulting in
our cash provided by operating activities for the six months ended June 30,
2020 , included our net income of $6.0 million , as adjusted for non-cash and
non-operating expenses totaling $7.2 million and favorable changes in operating
assets and liabilities of $31.0 million , resulting in net cash provided by
operating activities of $44.2 million .
For the six months ended June 30, 2020 , the non-cash expenses, net consisted
primarily of stock-based compensation expense of $3.2 million , amortization and
accretion related to operating lease ROU assets of $3.0 million and depreciation
and amortization expense of $0.9 million . For the six months ended June 30,
2020 , the changes in operating assets and liabilities, net consisted of
favorable changes to accounts receivable of $46.5 million , accounts payable of
$2.4 million and prepaid expenses and other assets of $3.8 million . These
favorable cash sources were offset by unfavorable changes to deferred revenue of
$14.7 million , accrued liabilities of $5.6 million and deferred contract costs
of $1.3 million .
For the six months ended June 30, 2019 , cash flows provided by operating
activities amounted to $25.0 million . The key drivers resulting in our cash
provided by operating activities for the six months ended June 30, 2019 ,
included our net income of $16.4 million , as adjusted for non-cash and
non-operating expenses totaling $3.4 million and favorable changes in operating
assets and liabilities of $5.2 million , resulting in net cash provided by
operating activities of $25.0 million .
For the six months ended June 30, 2019 , non-cash expenses, net consisted
primarily of stock-based compensation of $2.2 million , depreciation and
amortization expense of $1.0 million and accretion related to our GP Sponsor
note payable of $0.2 million . For the six months ended June 30, 2019 , the
changes in operating assets and liabilities, net consisted of primarily of
favorable changes to accounts receivable of $9.2 million , deferred revenue of
$8.1 million , deferred contract costs of $1.1 million and accrued liabilities of
$0.2 million . These favorable changes were partially offset by unfavorable
changes in accounts payable of $9.4 million and prepaid expenses and other
assets of $4.0 million .
Cash Flows Used in Investing Activities
Cash used in investing activities was primarily driven by capital
expenditures for leasehold improvements and computer equipment as we continued
to invest in our business infrastructure and advance our geographic expansion.
Capital expenditures totaled $0.7 million and $0.6 million for the six months
ended June 30, 2020 and 2019, respectively.
For the six months ended June 30, 2020 , capital expenditures of
approximately $0.7 million consisted primarily of $0.3 million for leasehold
improvements, furniture and fixtures, and new computer equipment related to our
U.S. facilities and $0.4 million for computer equipment at our foreign
locations, primarily in India .
For the six months ended June 30, 2019 , capital expenditures of $0.6 million
consisted of $0.2 million for leasehold improvements and new computer equipment
related to our U.S. facilities and $0.4 million for computer equipment at our
foreign locations.
Cash Flows from Financing Activities
For the six months ended
For the six months endedJune 30, 2019 , cash provided by financing activities of$0.7 million was primarily attributable to receiving proceeds of$9.1 million from both theJune 2019 SPA and theMarch 2019 SPA, proceeds of$2.0 million from stock option exercises, which were offset, in part, by dividend payments of$7.1 million , payments of$2.6 million on our GP Sponsor loan and payments of$0.5 million related to transaction costs for theJune 2019 SPA andMarch 2019 SPA and capital lease payments of$0.3 million . 38 --------------------------------------------------------------------------------
Foreign Subsidiaries
Our foreign subsidiaries and branches are dependent on our U.S. -based parent
for continued funding. We currently do not intend to repatriate any amounts that
have been invested overseas back to the U.S. -based parent. The imposition of the
Transition Tax may reduce or eliminate U.S. federal deferred taxes on the
unremitted earnings of our foreign subsidiaries. However, we may still be liable
for withholding taxes, state taxes, or other income taxes that might be incurred
upon the repatriation of foreign earnings. We have not made any provision for
additional income taxes on undistributed earnings of our foreign subsidiaries.
As of June 30, 2020 , we had cash and cash equivalents of $16.2 million in our
foreign subsidiaries.
Critical Accounting Policies and Significant Judgments and Estimates
Our management's discussion and analysis of financial condition and results
of operations is based on our unaudited condensed consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States . The preparation of these consolidated
financial statements requires us 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 consolidated financial statements, as
well as the reported revenue and expenses during the reporting periods. These
items are monitored and analyzed for changes in facts and circumstances, and
material changes in these estimates could occur in the future. We base our
estimates on historical experience and on various other factors that we believe
are reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Changes in estimates are reflected in
reported results for the period in which they become known. Actual results may
differ from these estimates under different assumptions or conditions.
For both the three and six months ended
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial
Accounting Standards Board ("FASB") or other standard setting bodies that are
adopted by us as of the specified effective date. For the three months ended
June 30, 2020 , we adopted ASU No. 2016-02, Leases, which requires organizations
that lease assets, to recognize on the balance sheet the right of use assets and
liabilities for the rights and obligations, created by those leases with lease
terms of more than 12 months. This standard had a material impact to our balance
sheet.
For additional information on recently issued accounting standards and our
plans for adoption of those standards, please refer to the section titled Recent
Accounting Pronouncements under Note 2 to our unaudited condensed consolidated
financial statements included in Part I, Item 1 of this Report.
Recently Issued Accounting Standards
InDecember 2019 , the FASB issued new guidance on income taxes, ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The guidance removes certain exceptions to the general income tax accounting principles, and clarifies and amends existing guidance to facilitate consistent application of the accounting principles. The new guidance is effective for us as ofJanuary 1, 2021 . We are assessing the impact of the adoption of this guidance on our Consolidated Financial Statements. InJanuary 2020 , the FASB issued new guidance ASU 2020-1, Investments -Equity Securities (Topic 321), Investments -Equity and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815). The guidance clarifies the interactions between the existing accounting standards on equity securities, equity method and joint ventures, and derivatives and hedging. The new guidance addresses accounting for the transition into and out of the equity method and measuring certain purchased options and forward contracts to acquire investments. The new guidance is effective for us as ofJanuary 1, 2021 . We do not expect the adoption of this guidance to have a material impact on our Consolidated Financial Statements.
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