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 withthe 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 theSEC onMarch 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. 27 -------------------------------------------------------------------------------- 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 theSEC 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 endedDecember 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 asRimini Street, Inc. ("RSI") in the state ofNevada inSeptember 2005 . InMay 2017 , RSI entered into an Agreement and Plan of Merger (the "Merger Agreement") withGP Investments Acquisition Corp. ("GPIA"), a publicly-held special purpose acquisition company incorporated in theCayman 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 inOctober 2017 , and closing occurred onOctober 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 aDelaware 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. InNovember 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. 28 -------------------------------------------------------------------------------- InAugust 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 inNorth 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 ofSeptember 30, 2020 , we employed over 1,380 professionals and supported over 2,360 active clients globally, including 72 Fortune 500 companies and 16 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 endedSeptember 30, 2020 and 2019, we generated revenue of$82.5 million and$69.2 million , respectively, representing an increase of 19%. We have a history of losses, and as ofSeptember 30, 2020 , we had an accumulated deficit of$305.3 million . Approximately 58% and 65% of our revenue was generated inthe United States for the three months endedSeptember 30, 2020 and 2019, respectively. Approximately 42% and 35% of our revenue was generated in foreign jurisdictions for the three months endedSeptember 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
Impact of COVID-19
During the third 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 nine months ended September 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 have realized 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 December 2020 ). While some of our offices have
partially re-opened with limited staffing, our offices will not fully re-open
until local authorities permit us to and our own criteria and conditions to
ensure employee health and safety are satisfied. We continue to 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 have authorized COVID-19 special bonuses during pandemic that have
been paid throughout 2020. The cost of these special bonuses were more than
offset by the cost reductions 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 third quarter of 2020, and we continued to deliver
uninterrupted and critical support services to our clients during this period.
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 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 to our results. However, the COVID-19 pandemic has impacted
business markets worldwide, primarily due to the uncertainty relating to the
continued effects of the pandemic. As a result, we have experienced some clients
not renewing our services as their businesses have been adversely impacted
during the pandemic. Despite this, 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. We have elected to defer payroll tax payments which
totaled $2.5 million as of September 30, 2020 as permitted by the CARES Act
(such deferred payroll taxes are due in two installments: 50% by December 31,
2021 and 50% by December 31, 2022 ). 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 onJune 20, 2019 ,March 7, 2019 andJuly 19, 2018 , and the related private placements of Series A Preferred Stock, Common Stock and Convertible Notes.
On
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from the August 2020 Offering were approximately $25.1 million after deducting
underwriting discounts and offering expenses. We intend to use the net proceeds
from the August 2020 Offering for working capital and other general corporate
purposes. Reference is made to Note 6 to our unaudited condensed consolidated
financial statements included in Part I, Item 1 of this Report for information
about the August 2020 Offering.
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.
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 ofSeptember 30, 2020 and 2019, we had over 2,360 and 2,030 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 ofSeptember 30, 2020 and 2019, we had over 1,280 and 1,150 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 recurring revenue
We recognize subscription revenue on a daily basis. We define annualized recurring 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 recurring revenue was$327 million and$275 million as ofSeptember 30, 2020 and 2019, respectively. We believe the sequential increase in annualized recurring 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 recurring 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 endedSeptember 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
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61.2% and 62.5% for the three months ended September 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
Our consolidated statements of operations for the three months ended
Three Months Ended
September 30, Variance
2020 2019 Amount Percent
Revenue $ 82,518 $ 69,182 $ 13,336 19.3%
Cost of revenue:
Employee compensation and benefits 20,996 17,518 3,478 19.9%
Engineering consulting costs 5,656 3,698 1,958 52.9%
Administrative allocations (1) 3,544 3,035 509 16.8%
All other costs 1,795 1,664 131 7.9%
Total cost of revenue 31,991 25,915 6,076 23.4%
Gross profit 50,527 43,267 7,260 16.8%
Gross margin 61.2 % 62.5 %
Operating expenses:
Sales and marketing 29,195 26,756 2,439 9.1%
General and administrative 13,025 11,041 1,984 18.0%
Litigation costs and related recoveries, net 3,773 3,303 470 14.2%
Total operating expenses 45,993 41,100 4,893 11.9%
Operating income 4,534 2,167 2,367 109.2%
Non-operating income and (expenses):
Interest expense (10) (27) 17 (63.0)%
Other income (expenses), net 54 (329) 383 (116.4)%
Income before income taxes 4,578 1,811 2,767 152.8%
Income tax expense (1,272) (451) (821) 182.0%
Net income $ 3,306 $ 1,360 $ 1,946 143.1%
(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 $69.2 million for the three months ended
September 30, 2019 to $82.5 million for the three months ended September 30,
2020 , an increase of $13.3 million or 19%. The increase was driven by an 10%
increase in the average number of unique clients from 1,132 for the three months
ended September 30, 2019 to 1,246 for the three months ended September 30, 2020 .
On a geographic basis, United States revenue grew from $44.6 million for the
three months ended September 30, 2019 to $48.2 million for the three months
ended September 30, 2020 , an increase of $3.5 million or 8%. Our International
revenue grew from $24.5 million for the three months ended September 30, 2019 to
$34.4 million for the three months ended September 30, 2020 , an increase of $9.8
million or 40%. Our international revenue growth was led by strong results from
our Asia-Pacific region .
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
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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 quarter-over-quarter revenue growth increased
from approximately 9% for the third quarter of 2019 to 19% for the third quarter
of 2020.
Cost of revenue. Cost of revenue increased from $25.9 million for the three
months ended September 30, 2019 to $32.0 million for the three months ended
September 30, 2020 , an increase of $6.1 million or 23%. The key drivers related
to the cost of revenue increase were a $3.5 million increase in compensation
costs, a $2.0 million increase in engineering consulting costs and an increase
of $0.1 million of other costs. The compensation cost increase was attributable
to an increase of 20% in the average number of employees required to support the
revenue growth. In addition, administrative allocations increased $0.5 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 United States
District Court for the District of Nevada (the "District Court") entered a
permanent injunction prohibiting us from using certain processes, including
processes adjudicated as infringing at trial, that we ceased using no later than
July 2014 , which we 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 our 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, we expect 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 ("Process 2.0") that are being litigated
in the "Rimini II" lawsuit and that have not been found to be infringing. On
July 10, 2020 , Oracle filed a motion to show cause contending that we are in
contempt of the injunction. We filed a response to Oracle's motion on July 31,
2020 . The matter is fully briefed to the District Court, and there is no known
timeline for a court ruling.
Gross profit. Gross profit increased from $43.3 million for the three months
ended September 30, 2019 compared to $50.5 million for the three months ended
September 30, 2020 , an increase of $7.3 million or 17%. Gross margin for the
three months ended September 30, 2019 was 62.5% compared to 61.2% for three
months ended September 30, 2020 . For the three months ended September 30, 2020 ,
total cost of revenue increased by 23%, compared to an increase in revenue of
19% for the three months ended September 30, 2020 . As a result, our gross profit
margin decreased by 1.3% 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 39% for the three months ended September 30,
2019 to 35% for the three months ended September 30, 2020 . In dollar terms,
sales and marketing expenses increased from $26.8 million for the three months
ended September 30, 2019 to $29.2 million for the three months ended September
30, 2020 , an increase of $2.4 million or 9%. This increase was primarily due to
(i) an increase in employee compensation and benefits of $1.5 million , (ii) an
increase in marketing promotional expenses and advertising expenses of
$2.0 million and (iii) an increase in other costs of $0.6 million . These
increases were offset, in part, by (iv) a decrease in travel expenses of
$1.4 million , (v) a decrease of trade show expenses of $0.2 million and (vi) a
decrease in administrative allocations of $0.1 million . We continue to
accelerate our future revenue growth by investing in more resources.
The $1.5 million increase in sales and marketing expense attributable to
employee compensation and benefits for the three months ended September 30,
2020 , was primarily due to an increase in salaries, wages and benefit costs of
$0.6 million due to a 1% increase in the average number of employees devoted to
sales and marketing functions, pay increases, and higher bonus payouts and
commissions of $0.9 million .
General and administrative expenses. General and administrative expenses
increased from $11.0 million for the three months ended September 30, 2019 to
$13.0 million for the three months ended September 30, 2020 , an increase of
$2.0 million or 18%. This increase was comprised of several items, which
included increased costs in salaries, wages and benefits of $2.3 million as the
average number of employees increased by 40 or 17%, an increase in rent and
facility costs of $0.3 million and an increase of our computer software and
license costs of $0.4 million for the three months ended September 30, 2020 . In
addition, we had an increase in outside services of $0.7 million due in part to
system implementations and compliance in the current period. These unfavorable
variances were offset, in part, by favorable variances including a decrease in
other costs of
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--------------------------------------------------------------------------------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 no longer being classified as an "emerging growth company" for purposes ofSEC reporting. Public company costs that are expected to increase in the future include costs relating to initial compliance with the auditor attestation requirements under Section 404 of the Sarbanes-Oxley Act, additional information systems costs, costs for additional personnel in our accounting, human resources, IT and legal functions,SEC and Nasdaq fees, and incremental professional, legal, audit and insurance costs. As a result, not taking into account temporary reductions in certain expenses resulting from the COVID-19 pandemic, we expect our general and administrative expenses related to public company costs will continue to increase in future periods. Litigation costs, net of related insurance recoveries. Litigation costs, net of related insurance recoveries for the three months endedSeptember 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 - (339)
339
Litigation costs and related recoveries, net
Professional fees and other costs associated with litigation increased from$3.6 million for the three months endedSeptember 30, 2019 to$3.8 million for the three months endedSeptember 30, 2020 , an increase of$0.1 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 endedSeptember 30, 2020 . InMay 2018 , we 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-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). A portion of the award received by us was 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 reflected a deduction of the costs of our past appeal and remand proceedings. Insurance costs and related recoveries, net increased from a benefit of$0.3 million for the three months endedSeptember 30, 2019 to no costs for the three months endedSeptember 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 endedSeptember 30, 2020 , we recognized no costs as we paid the amount due to the insurance company (for portions of theCourt of Appeals andU.S. Supreme Court awards) inSeptember 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$27 thousand for the three months endedSeptember 30, 2019 to$10 thousand for the three months endedSeptember 30, 2020 , a decrease of$17 thousand or approximately 63%. Interest expense decreased due to a reduction in interest related to capital leases during the current year period. Other income (expenses), net. Other income (expenses), net is primarily comprised of interest income, foreign exchange gains and losses, and other non-operating income and expenses. For the three months endedSeptember 30, 2020 , net other income of approximately$54 thousand was comprised primarily of foreign exchange gains of approximately$70 thousand and interest income of approximately$20 thousand offset by miscellaneous expenses of approximately$36 thousand . For the three months endedSeptember 30, 2019 , net other expense of$0.3 million was also comprised primarily of foreign exchange losses of approximately$0.3 million . 34 -------------------------------------------------------------------------------- Income tax expense. We had an income tax expense of$0.5 million for the three months endedSeptember 30, 2019 compared to$1.3 million for the three months endedSeptember 30, 2020 . For the three months endedSeptember 30, 2020 , our income taxes were attributable to both our foreign andU.S. operations of$1.2 million and$29 thousand , respectively. The income taxes in theU.S. related primarily to foreign withholding taxes. For the three months endedSeptember 30, 2019 , no income tax expense was recognized in theU.S. due to utilization of net operating loss carryforwards.
Comparison of Nine Months Ended
Our consolidated statements of operations for the nine months ended
Nine Months Ended
September 30, Variance
2020 2019 Amount Percent
Revenue $ 238,952 $ 204,924 $ 34,028 16.6%
Cost of revenue:
Employee compensation and benefits 61,842 51,644 10,198 19.7%
Engineering consulting costs 15,526 10,116 5,410 53.5%
Administrative allocations (1) 10,637 8,887 1,750 19.7%
All other costs 4,622 4,139 483 11.7%
Total cost of revenue 92,627 74,786 17,841 23.9%
Gross profit 146,325 130,138 16,187 12.4%
Gross margin 61.2 % 63.5 %
Operating expenses:
Sales and marketing 84,443 77,610 6,833 8.8%
General and administrative 38,159 34,659 3,500 10.1%
Litigation costs and related recoveries, net 10,309 (2,648) 12,957 (489.3)%
Total operating expenses 132,911 109,621 23,290 21.2%
Operating income 13,414 20,517 (7,103) (34.6)%
Non-operating income and (expenses):
Interest expense (35) (375) 340 (90.7)%
Other expenses, net (731) (629) (102) 16.2%
Income before income taxes 12,648 19,513 (6,865) (35.2)%
Income tax expense (3,327) (1,777) (1,550) 87.2%
Net income $ 9,321 $ 17,736 $ (8,415) (47.4)%
(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 $204.9 million for the nine months ended
September 30, 2019 to $239.0 million for the nine months ended September 30,
2020 , an increase of $34.0 million or 17%. The increase was driven by a 9%
increase in the average number of unique clients from 1,100 for the nine months
ended September 30, 2019 to 1,204 for the nine months ended September 30, 2020 .
On a geographic basis, United States revenue grew from $133.1 million for the
nine months ended September 30, 2019 to $143.0 million for the nine months ended
September 30, 2020 , an increase of $9.9 million or 7%. Our International revenue
grew from $71.8 million for the nine months ended September 30, 2019 to
$96.0 million for the nine months ended September 30, 2020 , an increase of $24.2
million or 34%. Our international revenue growth was led by strong results from
our Asia-Pacific region .
Cost of revenue. Cost of revenue increased from $74.8 million for the nine
months ended September 30, 2019 to $92.6 million for the nine months ended
September 30, 2020 , an increase of $17.8 million or 24%. The key drivers related
to the cost
35
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of revenue increase were a $10.2 million increase in compensation costs and
$5.4 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
$1.7 million and other costs by $0.5 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 us from using certain processes,
including processes adjudicated as infringing at trial, that we ceased using no
later than July 2014 , which we subsequently appealed to the Court of Appeals ,
arguing on appeal that the injunction is vague and contains overly-broad
language that could be read to cover some of our 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, we expect 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
("Process 2.0") that are being litigated in the "Rimini II" lawsuit and that
have not been found to be infringing. On July 10, 2020 , Oracle filed a motion to
show cause contending that we are in contempt of the injunction. We filed a
response to Oracle's motion on July 31, 2020 . The matter is fully briefed to the
District Court, and there is no known timeline for a court ruling.
Gross profit. Gross profit increased from $130.1 million for the nine months
ended September 30, 2019 compared to $146.3 million for the nine months ended
September 30, 2020 , an increase of $16.2 million or 12%. Gross margin for the
nine months ended September 30, 2019 was 63.5% compared to 61.2% for the nine
months ended September 30, 2020 . For the nine months ended September 30, 2020 ,
total cost of revenue increased by 24%, compared to an increase in revenue of
17% for the nine months ended September 30, 2020 . As a result, our gross profit
margin decreased 2.3% 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 38% for the nine months ended September
30, 2019 to 35% for the nine months ended September 30, 2020 . In dollar terms,
sales and marketing expenses increased from $77.6 million for the nine months
ended September 30, 2019 to $84.4 million for the nine months ended September
30, 2020 , an increase of $6.8 million or 9%. This increase was primarily due to
(i) an increase in employee compensation and benefits of $5.0 million , (ii) an
increase in marketing and promotional costs as well as advertising expenses cost
of $3.6 million (iii) an increase in all other costs of $0.8 million , (iv) an
increase in contract labor of $0.4 million , and (v) an increase in shared
service allocations for facilities, security and technology of $0.3 million .
These increases were offset by a reduction of trade show expenses of
$1.7 million , and a decrease in travel expenses of $1.6 million . Our overall
spending increased as we attempt to accelerate our future revenue growth by
investing in more resources.
The $5.0 million increase in sales and marketing expense attributable to
employee compensation and benefits for the nine months ended September 30, 2020 ,
was primarily due to an increase in salaries, wages and benefit costs of
$3.4 million due to a 5% increase in the average number of employees devoted to
sales and marketing functions, pay increases, and higher bonus payouts and
commissions of $1.6 million .
General and administrative expenses. General and administrative expenses
increased from $34.7 million for the nine months ended September 30, 2019 to
$38.2 million for the nine months ended September 30, 2020 , an increase of $3.5
million or 10%. This increase was primarily driven by higher salaries, wages and
benefit costs of $5.3 million for the nine months ended September 30, 2020 as
the average number of employees increased by 40 or 18% and higher bonus costs of
$0.5 million . In addition, our computer software and license costs increased
$1.4 million , outside services increased $0.9 million and rent increased
$0.9 million during the nine months ended September 30, 2020 . These unfavorable
variances were offset, in part by a favorable increase in administrative
allocations of $2.0 million from general and administrative expenses, a decline
in travel and other expenses of $1.3 million , a reduction of sales and other
related taxes of $0.8 million , a reduction of all other costs of $0.9 million
and a reduction of recruitment costs of $0.5 million .
Litigation costs, net of related insurance recoveries. Litigation costs, net
of related insurance recoveries for the nine months ended September 30, 2020 and
2019, consist of the following (in thousands):
36
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2020 2019 Change
Professional fees and other costs of litigation
$ 3,120 Litigation appeal refunds - (12,775)
12,775
Insurance costs and recoveries, net 1,062 4,000
(2,938)
Litigation costs and related recoveries, net
$ 12,957 Professional fees and other costs associated with litigation increased from$6.1 million for the nine months endedSeptember 30, 2019 to$9.2 million for the nine months endedSeptember 30, 2020 , an increase of$3.1 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 nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 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-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 nine months endedSeptember 30, 2019 . A portion of the award received by us was shared on a pro rata basis with an insurance company that had paid for part of the judgment and a portion of our defense costs. This reimbursement reflected a deduction of the costs of our past appeal and remand proceedings. Insurance costs and related recoveries, net decreased from costs of$4.0 million for the nine months endedSeptember 30, 2019 to$1.1 million for the nine months endedSeptember 30, 2020 . We recognized costs of$4.0 million for the nine months endedSeptember 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 nine months endedSeptember 30, 2020 , we recognized costs of$1.1 million to revise the amount due to the insurance company (for portions of theCourt of Appeals andU.S. Supreme Court awards), which was paid inSeptember 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$0.4 million for the nine months endedSeptember 30, 2019 to$35 thousand for the nine months endedSeptember 30, 2020 , a decrease of$0.3 million or approximately 91%. 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 nine months endedSeptember 30, 2020 , net other expense of approximately$0.7 million was comprised primarily of foreign exchange losses of approximately$0.6 million . For the nine months endedSeptember 30, 2019 , net other expense of$0.6 million was primarily comprised of foreign exchange losses amounting to approximately$0.8 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$1.8 million for the nine months endedSeptember 30, 2019 compared to$3.3 million for the nine months endedSeptember 30, 2020 . For the nine months endedSeptember 30, 2020 , our income taxes were attributable to both our foreign andU.S. operations of$3.1 million and$0.2 million , respectively. The income taxes in theU.S. related primarily to foreign withholding taxes. For the nine months endedSeptember 30, 2019 , no income tax expense was recognized in theU.S. due to utilization of net operating loss carryforwards. 37 --------------------------------------------------------------------------------
Liquidity and Capital Resources
Overview
As ofSeptember 30, 2020 , we had a working capital deficit of$64.7 million and an accumulated deficit of$305.3 million . For the three months and the nine months endedSeptember 30, 2020 , we had a net income of$3.3 million and$9.3 million , respectively. As ofSeptember 30, 2020 , we had available cash, cash equivalents and restricted cash of$83.7 million . OnAugust 18, 2020 , we completed theAugust 2020 Offering pursuant to which 6.1 million shares of our Common Stock were sold at a price of$4.50 per share for total gross proceeds of$27.5 million . Net proceeds from theAugust 2020 Offering were approximately$25.1 million after deducting underwriting discounts and offering expenses. We intend to use the net proceeds from theAugust 2020 Offering for working capital and other general corporate purposes. 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$179.5 million that is included in current liabilities as ofSeptember 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 endedSeptember 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$83.7 million as ofSeptember 30, 2020 , plus future cash flows from operating activities will be sufficient to meet our anticipated cash needs including working capital requirements, planned capital expenditures and our contractual obligations. For the nine months endedSeptember 30, 2020 , we generated cash flows from our operating activities of approximately$31.8 million , which was derived from our cash earnings of approximately$20.4 million and by favorable changes in operating assets and liabilities of approximately$11.4 million . We believe that our operating cash flows for the year endingDecember 31, 2020 will be sufficient to fund the portion of our contractual obligations that is not funded with existing capital resources.
Private Placements
Please refer to Note 5 to the unaudited condensed consolidated financial
statements included in Part I, Item 1 of this Report for information regarding
the
The holders of Series A Preferred Stock are entitled to, from the respective issuance date, a cash dividend of 10.0% per annum and a payment-in-kind dividend of 3.0% per annum for the first five years following the initialJune 2018 closing and thereafter all dividends accruing on such Series A Preferred Stock will be payable in cash at a rate of 13.0% per annum. Assuming no redemptions of the Series A Preferred Stock and no conversions to Common Stock, the following cash and PIK dividends (settled through issuance of additional shares of Series A Preferred Stock), regarding the combinedJune 2019 Private Placement,March 2019 Private Placement and Initial Private Placement, are expected to accrue for each year throughJuly 19, 2023 (in thousands): Year Ending December 31: Cash PIK Total 2020$ 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 TheJune 2019 Private Placement, theMarch 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. The amounts above do not include the impact of purchasing 5,000 shares of Series A Preferred Stock onOctober 30, 2020 as discussed in Note 5. 38 -------------------------------------------------------------------------------- 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 nine months ended
2020 2019
Net cash provided by (used in):
Operating activities $ 31,833 $ 20,985
Investing activities (1,159) (1,354)
Financing activities 15,123 (2,283)
The effect of foreign currency translation was unfavorable for $0.4 million for
the nine months ended September 30,2020 compared to an unfavorable change of
$0.4 million for the nine months ended September 30, 2019 .
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 nine months endedSeptember 30, 2020 and 2019, are as follows (in thousands): 2020
2019
Net income $ 9,321 $ 17,736
Non-cash expenses, net 11,107 5,602
Changes in operating assets and liabilities, net 11,405 (2,353)
Net cash provided by operating activities
For the nine months endedSeptember 30, 2020 , cash flows provided by operating activities amounted to approximately$31.8 million . The key drivers resulting in our cash provided by operating activities for the nine months endedSeptember 30, 2020 , included our net income of$9.3 million , as adjusted for non-cash and non-operating expenses totaling$11.1 million and favorable changes in operating assets and liabilities of$11.4 million , resulting in net cash provided by operating activities of$31.8 million . For the nine months endedSeptember 30, 2020 , the non-cash expenses, net consisted primarily of stock-based compensation expense of$5.4 million , amortization and accretion related to operating lease right of use (ROU) assets of$4.6 million and depreciation and amortization expense of$1.3 million . For the nine months endedSeptember 30, 2020 , the changes in operating assets and liabilities, net consisted of favorable changes to accounts receivable of$42.4 million , accounts payable of$1.7 million and prepaid expenses and other assets of$4.7 million . These favorable cash sources were offset by unfavorable changes to deferred revenue of$28.8 million , accrued liabilities of$3.6 million and deferred contract costs of$4.9 million . For the nine months endedSeptember 30, 2019 , cash flows provided by operating activities amounted to$21.0 million . The key drivers resulting in our cash provided by operating activities for the nine months endedSeptember 30, 2019 , included our net income of$17.7 million , as adjusted for non-cash and non-operating expenses totaling$5.6 million and unfavorable changes in operating assets and liabilities of$2.4 million , resulting in net cash provided by operating activities of$21.0 million . For the nine months endedSeptember 30, 2019 , non-cash expenses, net consisted primarily of stock-based compensation of$3.8 million , depreciation and amortization expense of$1.5 million and accretion related to our GP Sponsor note payable of$0.2 million . For the nine months endedSeptember 30, 2019 , the changes in operating assets and liabilities, net 39 -------------------------------------------------------------------------------- consisted of primarily of favorable changes to accounts receivable of$18.5 million , accrued liabilities of$1.8 million and deferred contract costs of$1.2 million . These favorable changes were partially offset by unfavorable changes in accounts payable of$10.2 million , deferred revenue of$9.4 million and prepaid expenses and other assets of$4.3 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$1.2 million and$1.4 million for the nine months endedSeptember 30, 2020 and 2019, respectively.
For the nine months ended
For the nine months ended
Cash Flows from Financing Activities
For the nine months endedSeptember 30, 2020 , cash provided by financing activities of$15.1 million was attributable to net proceeds of$25.7 million generated from ourAugust 2020 Offering and proceeds of$1.6 million received from stock option exercises. These cash proceeds were offset, in part, by dividend payments of$11.8 million , payments for professional fees associated with ourAugust 2020 Offering of$0.3 million and capital lease payments of$0.2 million . For the nine months endedSeptember 30, 2019 , cash utilized in financing activities of$2.3 million was primarily attributable to dividend payments of$10.9 million , payments of$2.6 million on our GP Sponsor loan, payments of$0.5 million related to transaction costs for both theJune 2019 SPA andMarch 2019 SPA and capital lease payments of$0.4 million , which were offset, in part, by proceeds of$9.1 million received from both theJune 2019 SPA andMarch 2019 SPA transactions and proceeds of$2.9 million received from stock option exercises.
Foreign Subsidiaries
Our foreign subsidiaries and branches are dependent on ourU.S. -based parent for continued funding. We currently do not intend to repatriate any amounts that have been invested overseas back to theU.S. -based parent. 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 ofSeptember 30, 2020 , we had cash and cash equivalents of$23.6 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 inthe 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 nine months endedSeptember 30, 2020 , see Note 2 to our unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report for changes to the critical accounting policies.
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by theFinancial 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 40 --------------------------------------------------------------------------------September 30, 2020 , we adopted ASU 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. InAugust 2020 , the FASB issued ASU 2020-6, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40). The guidance eliminates the beneficial conversion and cash conversion accounting for convertible instruments. The new guidance also modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation. The new guidance is effective for us as ofJanuary 1, 2022 . We are assessing the impact of the adoption of this guidance on our Consolidated Financial Statements.
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