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 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;
•expectations of client savings;
•the occurrence of catastrophic events, including terrorism and geopolitical
actions specific to an international region, that may disrupt our business or
that of our current and prospective clients;
•our ability to maintain an adequate rate of revenue growth;
•our ability to maintain sufficient cash flow and capital;
•the impact of our Credit Facility's debt service obligations and financial and
operational covenants on our business and related interest rate risk;
•our business plan and our ability to effectively manage our growth and
associated investments;
•the impact of any recessionary economic trends, including inflation, rising
interest rates and changes in foreign exchange rates;
•beliefs and objectives for future operations;
•our ability to expand our leadership position in independent enterprise
software support and sell our application management services ("AMS");
•our ability to attract and retain clients and 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;
•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 need and ability to raise equity or debt financing on favorable terms and
our ability to generate cash flows from operations to help fund increased
investment in our growth initiatives;
•the effects of increased competition in our market and our ability to compete
effectively;
•our intentions with respect to our pricing model;
•cost of revenue, including changes in costs associated with production and
client support;
•changes in laws or regulations, including tax laws or unfavorable outcomes of
tax positions we take, or a failure by us to establish adequate reserves for tax
events;
•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 "Legal Proceedings" in Part II,
Item 1 of this Report and our expectations with respect to such litigation;
•our expectations concerning relationships with third parties, including channel
partners and logistics providers;
•economic and industry trends or trend analysis;
•our ability to prevent unauthorized access to our information technology
systems and other cybersecurity threats, protect the confidential information of
our employees and clients and comply with privacy and data protection
regulations;
•the amount and timing of repurchases, if any, under our stock repurchase
program and our ability to enhance stockholder value through such program;
24
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•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 discontinuance of LIBOR and transition to other interest
rate benchmarks;
•the effects of seasonal trends on our results of operations, including the
contract renewal cycles for vendor-supplied software support and managed
services;
•our ability to maintain an effective system of internal control over financial
reporting and our ability to remediate any identified material weaknesses in our
internal controls; and
•other risks and uncertainties, including those discussed under "Risk Factors"
in Part II, Item 1A of this Report.
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 under "Risk
Factors" in 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 endedDecember 31, 2021 , included in Part II, Item 8 of our 2021 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. 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 25 --------------------------------------------------------------------------------
have achieved and sustained our leadership position in independent enterprise
software support by delivering on our mission to provide extraordinary
technology solutions that achieve each client’s strategic, operational, and
financial goals.
InJuly 2022 , we announced the global availability of Rimini Protect™, our innovative suite of security solutions providing "zero-day" proactive security protection for Oracle and SAP environments, including applications, middleware and databases. We believe the suite of offerings in our Rimini Protect™ security solutions provide a faster and more comprehensive layer of security surrounding enterprise IT infrastructure and applications than traditional, dated software vendor patching models by using active security controls that monitor activities in real-time to identify malicious actions and proactively block processes that attempt to exploit known and new "zero-day" vulnerabilities. InSeptember 2020 , we announced the global availability of our award-winning, mission-critical, 24x7x365 support, application management, security and migration services beyond proprietary databases to leading open source database platforms, including MySQL, MariaDB, PostgreSQL and MongoDB. 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 people, 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. InAugust 2019 , we announced plans to globally offer AMS for SAP enterprise software, expanding the scope of support services we 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 support for Software as a Service ("SaaS") solutions beginning withSalesforce products. As a partner ofSalesforce , we provide our award-winning service and support for custom code, release updates and application integrations in addition to ongoing administrative, configuration and enhancement ofSalesforce's industry leading cloud solutions. We also provide support to clients for additional SaaS solutions that we will formally announce in the future. By providing support for SaaS as well as traditionally licensed enterprise software,Rimini Street unifies support for its clients across applications and software delivery models from one trusted provider, creating efficiencies and savings, simplifying support processes and enabling improved support outcomes. 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 2021, SAP reported that support revenue represented approximately 41% of its total revenue. For fiscal year 2022, Oracle reported a margin of 83% 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 budgets are spent operating and maintaining existing infrastructure and systems, in part as a result of software vendor policies and support models that are designed to benefit the vendor and force organizations to follow a vendor-dictated roadmap. As a result, we believe organizations are increasingly seeking ways to create competitive advantage and growth by redirecting budgets from expensive maintenance programs and costs to new technology investments that provide greater strategic value. We believe our software products and services help clients achieve these objectives by reducing the total cost of support. 26 -------------------------------------------------------------------------------- We believe that AMS for enterprise software is a large market with significant unmet needs in client satisfaction and value. Traditional AMS providers compete on price, but the traditional AMS model is broken with a focus on a "land and expand" model based on initial cheaper, less-skilled workers but higher costs over time and frequently poor client satisfaction or degradation in service over time. Providers usually contract for lower-cost services with a goal to grow revenue through scope creep by adding hours to open tickets or selling new project work. These lower-cost AMS support models sound cost-effective, but their contractual structures can both enable and incent traditional AMS providers to maximize their own revenue at the expense of their clients by "addressing" issues (sometimes neither quickly nor efficiently), but not necessarily resolving them or their root causes. In addition, traditional AMS offerings are disparate and separate from software vendor support, with inherent inefficiencies and gaps that further limit responsiveness, root cause analysis and business value. We believe organizations are realizing the value of an integrated, expert-led Support and AMS offering that eliminates inefficiencies, realizes joint value from the resolution of root causes that reduce issue volumes over time, and improves client satisfaction. Through our solution offerings,Rimini Street provides expert, ultra-responsive support and AMS, functioning as an extension of IT teams, with engineers available 24x7x365 around the globe for all AMS and enterprise software projects, and to fill skill gaps or help with rightsizing enterprise teams.Rimini Street teams deliver a wide variety of desired outcomes for a broad range of use cases such as supporting entire enterprise software systems, reducing costs, clearing backlogs, or facilitating the redeployment of IT teams for more strategic initiatives. As ofJune 30, 2022 , we employed over 1,830 professionals and supported over 2,900 active clients globally, including 71 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 endedJune 30, 2022 and 2021, we generated revenue of$101.2 million and$91.6 million , respectively, representing an increase of 10%. During the three months endedJune 30, 2022 , we had net income of$0.1 million , and as ofJune 30, 2022 , we had an accumulated deficit of$222.6 million . Approximately 53% and 54% of our revenue was generated inthe United States for the three months endedJune 30, 2022 and 2021, respectively. Approximately 47% and 46% of our revenue was generated in foreign jurisdictions for the three months endedJune 30, 2022 and 2021, respectively.
Since our inception, we have financed our operations through cash collected
from clients and net proceeds from equity financings and borrowings.
Impact of the COVID-19 Pandemic and Current Economic Conditions
Near the end of the first quarter of 2020, the emergence of the COVID-19 pandemic created rapidly evolving and unpredictable impacts on global society, economies, financial markets and business practices. These rapidly evolving and unpredictable impacts continue as virus variants have resulted in additional outbreaks during fiscal year 2021 and 2022 to date. In response to the COVID-19 pandemic, federal and state governments implemented multiple measures aiming to contain the spread of the virus, including social distancing, travel restrictions, border closures, quarantine guidance following travel to certain jurisdictions, limitations on public gatherings and continued closures of certain non-essential businesses, vaccination mandates or requirements for businesses to confirm employees' vaccination status, and other restrictions. While many of the governmental restrictions implemented to contain the COVID-19 pandemic have been fully lifted as of the date of this filing, there can be no assurances that additional restrictions will not be implemented again in the future. We have implemented business continuity measures and will continue to respond to the COVID-19 pandemic as circumstances dictate while continuing to prioritize employee and community health and safety. We have reopened our offices located inthe United States to verified vaccinated employees and guests and we have begun permitting travel and in-person marketing, sales and employee appreciation events in accordance with applicable regional guidance. As a result of certain measures that we have taken in response to the COVID-19 pandemic since its inception, 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. As many of the governmental restrictions implemented to contain the COVID-19 pandemic have been fully lifted, we expect that our travel and entertainment costs will continue to increase. However, there can be no assurances that additional restrictions will not be implemented again in the future, which we would expect to decrease travel and entertainment costs. While some of our offices have re-opened to verified vaccinated employees and guests, 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 27 -------------------------------------------------------------------------------- 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, which bonuses have been paid from 2020 through the six months endedJune 30, 2022 . 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 three months and six months endedJune 30, 2022 , 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 where they are located throughout the world. However, the COVID-19 pandemic has impacted business markets worldwide, leading to global supply chain interruptions and capital markets disruptions, primarily due to the uncertainty relating to the continued effects and duration 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 and the resulting global economic uncertainty. In addition, the Russian invasion ofUkraine in early fiscal 2022 has led to further economic disruption. While we do not operate inRussia or theUkraine , the conflict, together with fiscal and monetary policy adopted during the pandemic, has increased inflationary cost pressures, negatively impacting the global economy. In response to concerns over inflation risk, theU.S. Federal Reserve began to raise interest rates inMarch 2022 and we expect additional rate increases. Despite these macroeconomic and geopolitical pressures, 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. Further, although our operations are influenced by general economic conditions, we do not believe that inflation had a significant net impact on our revenue or results of operations during the three months and six months endedJune 30, 2022 . The extent to which the COVID-19 pandemic, rising inflation, interest rate increases and continuing global economic and geopolitical uncertainty impact our business going forward, however, 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 increasing global economic uncertainty, 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, rising inflation, interest rate increases and other negative impacts on the global economy 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. OnMarch 27, 2020 , the CARES Act was signed into law inthe United States to address the economic impact of the COVID-19 pandemic. We elected to defer payroll tax payments, which totaled$3.2 million , as permitted by the CARES Act (such deferred payroll taxes are due in two installments: 50% byDecember 31, 2021 and 50% byDecember 31, 2022 ). We paid$1.6 million inDecember 2021 and expect to pay the remaining amount byDecember 31, 2022 , as required under 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 OnMay 28, 2022 , the Board of Directors authorized an increase to our previously announced Common Stock repurchase program to increase the value of the securities that could be acquired by us from up to$15.0 million over two years to up to$50.0 million over the next four years, subject to compliance with our Credit Facility, provided that all other applicable conditions and legal requirements are satisfied. OnFebruary 27, 2022 , the Board of Directors approved the adoption of a stock repurchase program to acquire up to$15.0 million of our Common Stock both on the open market and in privately negotiated transactions, including through Rule 10b5-1 plans, throughMarch 4, 2024 , subject to compliance with our Credit Facility, which was amended effectiveJanuary 14, 2022 to increase the aggregate value of the shares of Common Stock that could be acquired by us to no greater than$15.0 million during the term of the Credit Facility, provided that all other applicable conditions and legal requirements are satisfied. During the three months endedJune 30, 2022 , we acquired 0.1 million shares of Common Stock on the open market at a cost of$0.5 million . For the six months endedJune 30, 2022 , we acquired an aggregate 0.7 million shares of Common Stock on the open market at a total cost of$3.7 million . Upon completion of all repurchase transactions, the associated shares of Common Stock were retired. 28 -------------------------------------------------------------------------------- Reference is made to Note 9 to our Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Report for a discussion of recent 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 ofJune 30, 2022 and 2021, we had over 2,900 and 2,640 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 ofJune 30, 2022 and 2021, we had 1,470 and 1,380 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$397 million and$362 million as ofJune 30, 2022 and 2021, 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 95% and 94% for the 12 months endedJune 30, 2022 and 2021, respectively. Gross profit margin 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 margin is the ratio of gross profit divided by revenue. Our gross profit margin was approximately 63.1% and 62.2% for the three months endedJune 30, 2022 and 2021, respectively. We believe the gross profit margin provides an indication of how efficiently and effectively we are operating our business and serving our clients. 29 --------------------------------------------------------------------------------
Results of Operations
Comparison of Three Months Ended
Our consolidated statements of operations for the three months ended
2022
Three Months Ended
June 30, Variance
2022 2021 Amount Percent
Revenue $ 101,200 $ 91,614 $ 9,586 10.5%
Cost of revenue:
Employee compensation and benefits 25,472 24,689 783 3.2%
Engineering consulting costs 5,423 4,280 1,143 26.7%
Administrative allocations (1) 3,962 3,718 244 6.6%
All other costs 2,487 1,908 579 30.3%
Total cost of revenue 37,344 34,595 2,749 7.9%
Gross profit 63,856 57,019 6,837 12.0%
Gross margin 63.1 % 62.2 %
Operating expenses:
Sales and marketing 36,205 33,157 3,048 9.2%
General and administrative 18,862 16,494 2,368 14.4%
Litigation costs and related recoveries, net 3,101 2,786 315 11.3%
Total operating expenses 58,168 52,437 5,731 10.9%
Operating income 5,688 4,582 1,106 24.1%
Non-operating income and (expenses):
Interest expense (999) (38) (961) 2,528.9%
Gain on change in fair value of redeemable
warrants - 3,698 (3,698) (100.0)%
Other income (expenses), net (1,577) (496) (1,081) 217.9%
Income before income taxes 3,112 7,746 (4,634) (59.8)%
Income tax expense (3,002) (939) (2,063) 219.7%
Net income $ 110 $ 6,807 $ (6,697) (98.4)%
(1)Includes the portion of costs for IT, 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 $91.6 million for the three months ended June
30, 2021 to $101.2 million for the three months ended June 30, 2022 , an increase
of $9.6 million or 10%. The increase was driven by an 8% increase in the average
number of unique clients from 1,369 for the three months ended June 30, 2021 to
1,474 for the three months ended June 30, 2022 . On a geographic basis, United
States revenue grew from $49.6 million for the three months ended June 30, 2021
to $53.9 million for the three months ended June 30, 2022 , an increase of $4.3
million or 9%. Our international revenue grew from $42.1 million for the three
months ended June 30, 2021 to $47.3 million for the three months ended June 30,
2022 , an increase of $5.2 million or 12%.
Cost of revenue. Cost of revenue increased from $34.6 million for the three
months ended June 30, 2021 to $37.3 million for the three months ended June 30,
2022 , an increase of $2.7 million or 8%. The key drivers related to the cost of
revenue increase were a $1.1 million in engineering consulting costs, a $0.8
million increase in employee compensation costs and a $0.8 million increase in
administrative allocations and all other costs. The compensation cost increase
was attributable to an increase of 19% in the average number of employees
required to support our revenue growth.
As discussed in Note 9 to our Unaudited Condensed 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
30 -------------------------------------------------------------------------------- processes, including processes adjudicated as infringing at trial, that we ceased using no later thanJuly 2014 , which we subsequently appealed to theCourt of Appeals . InAugust 2019 , theCourt of Appeals affirmed the permanent injunction issued by the District Court, while also correcting certain legal errors that narrowed the scope of the injunction. As a result of the injunction, we have incurred and 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. Gross profit. Gross profit increased from$57.0 million for the three months endedJune 30, 2021 compared to$63.9 million for the three months endedJune 30, 2022 , an increase of$6.8 million or 12%. Gross profit margin for the three months endedJune 30, 2021 was 62.2% compared to 63.1% for the three months endedJune 30, 2022 . For the three months endedJune 30, 2022 , the total cost of revenue increased by 8% compared to an increase in revenue of 10% for the three months endedJune 30, 2022 . As a result, our gross profit margin improved by 90 basis points period over period. Sales and marketing expenses. As a percentage of our revenue, sales and marketing expenses were essentially flat at 36% for both the three months endedJune 30, 2022 and 2021. In dollar terms, sales and marketing expenses increased from$33.2 million for the three months endedJune 30, 2021 to$36.2 million for the three months endedJune 30, 2022 , an increase of$3.0 million or 9%. This increase was primarily due to (i) an increase in employee compensation and benefits of$1.4 million , (ii) an increase in travel and entertainment costs of$1.6 million and (iii) an increase in administrative allocations and all other costs of$0.6 million . These increases were offset, in part, by a decrease in marketing promotional expenses and trade show expenses of$0.6 million . We will continue to accelerate our future revenue growth by investing in more resources. The$1.4 million increase in sales and marketing expense attributable to employee compensation and benefits for the three months endedJune 30, 2022 , was primarily due to an increase in salaries, wages, commissions and benefit costs of$1.7 million resulting primarily from an increase in commissions. These increases were offset, in part, by lower bonuses and other benefits of$0.3 million for the three months endedJune 30, 2022 . General and administrative expenses. General and administrative expenses increased from$16.5 million for the three months endedJune 30, 2021 to$18.9 million for the three months endedJune 30, 2022 , an increase of$2.4 million or 14%. This increase was comprised of several items, which included (i) increased costs in salaries, wages and benefits of$1.3 million as the average number of employees increased by 23%, (ii) an increase of our computer software and license costs of$0.9 million and (iii) an increase in travel and entertainment expenses of$0.5 million for the three months endedJune 30, 2022 . These unfavorable variances were offset, in part, by favorable variance due to an increase in administrative allocations of$0.3 million . Looking forward on a quarter-over-quarter basis, we are monitoring the demand for our services in light of any potential future lingering impacts of the COVID-19 pandemic and the current global economic conditions and will adjust our expenditures 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" or "smaller reporting company" for purposes ofSEC reporting. Our company costs that are expected to increase in the future include costs relating to 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, consist of the following (in thousands):
Three Months Ended
June 30,
2022 2021 Change
Professional fees and other costs of litigation $ 3,193 $ 2,786 $ 407
Insurance costs and recoveries, net (92)
– (92)
Litigation costs and related recoveries, net
Professional fees and other costs associated with litigation increased from$2.8 million for the three months endedJune 30, 2021 to$3.2 million for the three months endedJune 30, 2022 , an increase of$0.4 million . This increase was primarily due to timing of the costs associated with the upcomingOctober 31, 2022 trial related to Rimini II. Based on the trial calendar being set, we anticipate that our litigation related expenses will exceed$20 million for 2022. 31 -------------------------------------------------------------------------------- Insurance costs and related recoveries, net increased from no activity for the three months endedJune 30, 2021 to a net benefit of$0.1 million for the three months endedJune 30, 2022 . For the three months endedJune 30, 2022 , we received insurance proceeds of$0.1 million related to our litigation costs incurred. 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 our ongoing attorneys' fees and related costs, such as travel, hotels and consultants, associated with ongoing litigation, including Rimini II. Interest expense. Interest expense increased from$38 thousand for the three months endedJune 30, 2021 to$1.0 million for the three months endedJune 30, 2022 , an increase of$1.0 million . Interest expense increased primarily due to us entering into a five-year Credit Facility for$90 million onJuly 20, 2021 . In addition, we incurred$0.1 million of interest costs related to payments associated with our interest rate swap, which was entered into onMay 18, 2022 . Gain on change in fair value of redeemable warrants. Gain on change in fair value of redeemable warrants amounted to a gain of$3.7 million for the three months endedJune 30, 2021 as the fair value per warrant changed from$1.12 per warrant as ofMarch 31, 2021 to$0.51 per warrant as ofJune 30, 2021 . OnOctober 29, 2021 , the GP Sponsor Private Placement Warrants were sold by the original holder to unaffiliated parties. As a result, the GP Sponsor Private Placement Warrants were determined to be no longer treated as a liability. Hence, there is no longer any mark to market activity recorded for each period related to these warrants. 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 endedJune 30, 2022 , net other expenses of approximately$1.6 million was comprised primarily of foreign exchange losses of approximately$1.4 million . For the three months endedJune 30, 2022 , we experienced a significant change in foreign currency exchange rates as theU.S. dollar strengthened against the majority of foreign currencies where our foreign entities operate. These transactions are designated in foreign currencies and impacted us unfavorably during the three months endedJune 30, 2022 . For the three months endedJune 30, 2021 , net other expense of$0.5 million was also comprised primarily of foreign exchange gains of approximately$0.4 million . Income tax expense. We had income tax expense of$0.9 million for the three months endedJune 30, 2021 compared to$3.0 million for the three months endedJune 30, 2022 . At the end of fiscal year 2021, we determined that it was more likely than not that we could benefit from our deferred tax assets based on all of the available evidence, resulting in a significant reduction in our valuation allowance. For the three months endedJune 30, 2022 , ourUnited States operations were subject to income taxes, which is the primary reason for the increase in income tax expense. For the three months endedJune 30, 2021 , our income taxes were primarily attributable to income taxes on our foreign operations and foreign withholding taxes.
Comparison of Six Months Ended
Our consolidated statements of operations for the six months ended
and 2021, are presented below (in thousands):
32 --------------------------------------------------------------------------------
Six Months Ended June 30, Variance
2022 2021 Amount Percent
Revenue $ 199,110 $ 179,509 $ 19,601 10.9%
Cost of revenue:
Employee compensation and benefits 52,068 48,349 3,719 7.7%
Engineering consulting costs 10,145 9,015 1,130 12.5%
Administrative allocations (1) 7,723 7,308 415 5.7%
All other costs 4,615 3,759 856 22.8%
Total cost of revenue 74,551 68,431 6,120 8.9%
Gross profit 124,559 111,078 13,481 12.1%
Gross margin 62.6% 61.9%
Operating expenses:
Sales and marketing 67,905 63,540 4,365 6.9%
General and administrative 38,813 33,097 5,716 17.3%
Impairment charges related to right of use assets - 393 (393) (100.0)%
Litigation costs and related recoveries, net 6,211 7,549 (1,338) (17.7)%
Total operating expenses 112,929 104,579 8,350 8.0%
Operating income 11,630 6,499 5,131 79.0%
Non-operating income and (expenses):
Interest expense (1,807) (85) (1,722) 2025.9% Loss on change in fair value of redeemable warrants - (970) 970 (100.0)% Other income (expenses), net (1,368) 276 (1,644) (595.7)% Income before income taxes 8,455 5,720 2,735 47.8% Income tax expense (5,258) (2,489) (2,769) 111.2% Net income$ 3,197 $ 3,231 $ (34) (1.1)% (1)Includes the portion of costs for IT, 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$179.5 million for the six months endedJune 30, 2021 to$199.1 million for the six months endedJune 30, 2022 , an increase of$19.6 million or 11%. The increase was driven by an 8% increase in the average number of unique clients from 1,351 for the six months endedJune 30, 2021 to 1,473 for the six months endedJune 30, 2022 . On a geographic basis,United States revenue grew from$97.1 million for the six months endedJune 30, 2021 to$106.2 million for the six months endedJune 30, 2022 , an increase of$9.1 million or 9%. Our international revenue grew from$82.4 million for the six months endedJune 30, 2021 to$92.9 million for the six months endedJune 30, 2022 , an increase of$10.5 million or 13%. Cost of revenue. Cost of revenue increased from$68.4 million for the six months endedJune 30, 2021 to$74.6 million for the six months endedJune 30, 2022 , an increase of$6.1 million or 9%. The key drivers related to the cost of revenue increase were a$3.7 million increase in employee compensation and benefits, a$1.1 million in engineering consulting costs, a$0.9 million increase in all other costs and a$0.4 million increase in administrative allocations. The compensation cost increase was attributable to an increase of 19% in the average number of employees required to support our revenue growth. Gross profit. Gross profit increased from$111.1 million for the six months endedJune 30, 2021 compared to$124.6 million for the six months endedJune 30, 2022 , an increase of$13.5 million or 12%. Gross profit margin for the six months endedJune 30, 2021 was 61.9% compared to 62.6% for the six months endedJune 30, 2022 . For the six months endedJune 30, 2022 , the total cost of revenue increased by 9% compared to an increase in revenue of 11% for the six months endedJune 30, 2022 . As a result, our gross profit margin improved by 70 basis points period over period. 33 -------------------------------------------------------------------------------- Sales and marketing expenses. As a percentage of our revenue, sales and marketing expenses slightly decreased from 35% for the six months endedJune 30, 2021 to 34% for the six months endedJune 30, 2022 . In dollar terms, sales and marketing expenses increased from$63.5 million for the six months endedJune 30, 2021 to$67.9 million for the six months endedJune 30, 2022 , an increase of$4.4 million or 7%. This increase was primarily due to (i) an increase in employee compensation and benefits of$2.6 million , (ii) an increase in travel and entertainment costs of$1.7 million and (iii) an increase in administrative allocations and all other costs of$1.2 million . These increases were offset, in part, by a decrease in marketing promotional expenses and trade show expenses of$1.0 million . We will continue to accelerate our future revenue growth by investing in more resources. The$2.6 million increase in sales and marketing expense attributable to employee compensation and benefits for the three months endedJune 30, 2022 , was primarily due to an increase in salaries, wages, commissions and benefit costs of$2.8 million , primarily because of an increase in salary, wages and benefits. These increases were offset, in part, by lower bonuses and other benefits of$0.2 million for the six months endedJune 30, 2022 . General and administrative expenses. General and administrative expenses increased from$33.1 million for the six months endedJune 30, 2021 to$38.8 million for the six months endedJune 30, 2022 , an increase of$5.7 million or 17%. This increase was comprised of several items, which included (i) increased costs in salaries, wages and benefits of$3.8 million as the average number of employees increased by 20%, (ii) an increase of our computer software and license costs of$1.6 million and (iii) an increase in travel and entertainment expenses of$0.9 million for the six months endedJune 30, 2022 . These unfavorable variances were offset, in part, by favorable variance due to an increase in administrative allocations of$0.6 million .
Litigation costs, net of related insurance recoveries. Litigation costs, net of
related insurance recoveries, consist of the following (in thousands):
Six
Months Ended
2022 2021 Change
Professional fees and other costs of litigation $ 6,692 7,549 $ (857)
Insurance costs and recoveries, net (481) - (481)
Litigation costs and related recoveries, net $
6,211
Professional fees and other costs associated with litigation decreased from$7.5 million for the six months endedJune 30, 2021 to$6.7 million for the six months endedJune 30, 2022 , a decrease of$0.9 million . This decrease was primarily due to timing of the costs associated with theSeptember 2021 hearing related to the contempt of the permanent injunction offset by, in part, an increase spend related to the upcomingOctober 31, 2022 trial related to Rimini II during the second quarter of 2022. Based on the trial calendar being set, we anticipate that our litigation related expenses will exceed$20 million for 2022. Insurance costs and related recoveries, net increased from no activity for the six months endedJune 30, 2021 to a net benefit of$0.5 million for the six months endedJune 30, 2022 . For the six months endedJune 30, 2022 , we received insurance proceeds of$0.5 million related to our litigation costs incurred. 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 our ongoing attorneys' fees and related costs, such as travel, hotels and consultants, associated with ongoing litigation, including Rimini II. Interest expense. Interest expense increased from$85 thousand for the six months endedJune 30, 2021 to$1.8 million for the six months endedJune 30, 2022 , an increase of$1.7 million . Interest expense increased primarily due to us entering into a five-year Credit Facility for$90 million onJuly 20, 2021 . In addition, we incurred$0.1 million of interest costs related to payments associated with our interest rate swap, which was entered into onMay 18, 2022 . Loss on change in fair value of redeemable warrants. Loss on change in fair value of redeemable warrants amounted to a loss of$1.0 million for the six months endedJune 30, 2021 as the fair value per warrant changed from$0.35 per warrant as ofDecember 31, 2020 to$0.51 per warrant as ofJune 30, 2021 . OnOctober 29, 2021 , the GP Sponsor Private Placement Warrants were sold by the original holder to unaffiliated parties. As a result, the GP Sponsor Private Placement Warrants were determined to be no longer treated as a liability. Hence, there is no longer any mark to market activity recorded for each period related to these warrants. 34 -------------------------------------------------------------------------------- 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 six months endedJune 30, 2022 , net other expenses of approximately$1.4 million was comprised primarily of foreign exchange losses of approximately$1.0 million . For the six months endedJune 30, 2022 , we experienced a significant change in foreign currency exchange rates as theU.S. dollar strengthened against the majority of foreign currencies where our foreign entities operate. These transactions are designated in foreign currencies and impacted us unfavorably during the six months endedJune 30, 2022 . For the six months endedJune 30, 2021 , net other income of$0.3 million was also comprised primarily of foreign exchange gains of approximately$0.4 million . Income tax expense. We had income tax expense of$2.5 million for the six months endedJune 30, 2021 compared to$5.3 million for the six months endedJune 30, 2022 . At the end of fiscal year 2021, we determined that it was more likely than not that we could benefit from our deferred tax assets based on all of the available evidence, resulting in a significant reduction in our valuation allowance. For the six months endedJune 30, 2022 , ourUnited States operations were subject to income taxes, which is the primary reason for the increase in income tax expense. For the six months endedJune 30, 2021 , our income taxes were primarily attributable to income taxes on our foreign operations and foreign withholding taxes.
Liquidity and Capital Resources
Overview
As ofJune 30, 2022 , we had a working capital deficit of$49.8 million and an accumulated deficit of$222.6 million . For the three months endedJune 30, 2022 , we had net income of$0.1 million . As ofJune 30, 2022 , we had available cash, cash equivalents and restricted cash of$160.6 million . OnJuly 20, 2021 , we redeemed the remaining 87,802 shares of our Series A Preferred Stock at an aggregate total redemption price of$88.4 million . The total redemption price consisted of$87.8 million related to the outstanding shares of Series A Preferred Stock with a face value of$1,000 per share and$0.6 million or$6.86 per share of Series A Preferred Stock related to the dividends earned for the period fromJuly 1, 2021 throughJuly 19, 2021 . The redeemed shares of the Series A Preferred Stock, along with the dividends, were recorded on the redemption date ofJuly 20, 2021 . We funded theJuly 20, 2021 redemption with borrowings from our Credit Facility. The Credit Facility bears interest at LIBOR plus a margin ranging from 1.75% to 2.50% and contains certain financial covenants, including a minimum fixed charge coverage ratio, a total leverage ratio, and a minimum liquidity of at least$20 million inU.S. cash. Annual minimum principal payments over the five year term for the Credit Facility are 5%, 5%, 7.5%, 7.5%, and 10%, respectively, with the remaining balance due at the end of the term. OnMarch 11, 2021 , we completed theMarch 2021 Offering of 7.8 million shares of our Common Stock at a price of$7.75 per share for total gross proceeds of$57.0 million . Net proceeds from theMarch 2021 Offering were$55.6 million after underwriter discounts and offering expenses. We used the net proceeds from theMarch 2021 Offering to redeem 60,000 shares of Series A Preferred Stock. Please refer to Notes 5 through 7 to the Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Report for information regarding our Credit Facility, our Series A Preferred Stock and our Common Stock Offerings. 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$255.4 million that is included in current liabilities as ofJune 30, 2022 . 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 37% of the related deferred revenue based on our gross profit percentage of 63% for the three months endedJune 30, 2022 . For the next year, assuming that our operations are not significantly impacted by any lingering effects of the COVID-19 pandemic, rising inflation, interest rate increases or other global economic uncertainties, we believe that cash, cash equivalents and restricted cash of$160.6 million as ofJune 30, 2022 , 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. Our future capital requirements depend on many factors, including any lingering impact of the COVID-19 pandemic, client growth, number of employees, expansion of sales and marketing activities, and the introduction of new and enhanced services offerings. We may also enter into arrangements to acquire or invest in complementary businesses, services, technologies, or intellectual property rights in the future. We may choose to seek additional debt or equity financing to 35 -------------------------------------------------------------------------------- support these long-term capital requirements. Alternatively, we may also consider reducing amounts outstanding under our Credit Facility to minimize our exposure to rising interest rates. If interest rates continue to increase as expected and adverse economic changes occur, we may not be able to access credit on terms favorable to us, impacting our ability to support these long-term capital requirements. In an economic downturn, we may also be unable to raise capital through debt or equity financings on terms acceptable to us or at all. Covenants in our Credit Facility could also have consequences on our operations, including restricting or delaying our ability to obtain additional financing, potentially limiting our ability to adjust to rapidly changing market conditions or respond to business opportunities. Additionally, in challenging and uncertain economic environments, we cannot predict when macroeconomic uncertainty may arise, whether or when such circumstances may improve or worsen or what impact such circumstances could have on our business and our liquidity requirements. For the six months endedJune 30, 2022 , we generated cash flows from our operating activities of approximately$60.8 million , which was derived from our cash earnings of approximately$14.4 million and by favorable changes in operating assets and liabilities of approximately$46.4 million . We believe that our operating cash flows for the year endingDecember 31, 2022 will be sufficient to fund the portion of our contractual obligations that is not funded with existing capital resources.
Cash Flows Summary
Presented below is a summary of our operating, investing and financing cash
flows (in thousands):
Six Months Ended
June 30,
2022 2021
Net cash provided by (used in):
Operating activities $ 60,773 $ 47,162
Investing activities (1,722) (832)
Financing activities (10,731) (20,226)
The effect of foreign currency translation was unfavorable for $3.3 million for
the six months ended June 30, 2021 compared to an unfavorable change of $7.7
million for the six months ended June 30, 2022 due to unfavorable foreign
exchange impacts related to foreign cash. For the six months ended June 30,
2022 , we experienced a significant change in foreign currency exchange rates as
the U.S. dollar strengthened against the majority of foreign currencies where
our foreign entities operate. The strengthening of the U.S. dollar reduced the
reported amount of our foreign-denominated cash and cash equivalents which are
translated into U.S. dollars and reported in our Unaudited Condensed
Consolidated Financial Statements for the six months ended and as of June 30,
2022 .
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, are as follows (in
thousands):
Six Months Ended
June 30,
2022 2021
Net income $ 3,197 $ 3,231
Non-cash expenses, net 11,207 10,513
Changes in operating assets and liabilities, net 46,369 33,418
Net cash provided by operating activities
For the six months endedJune 30, 2022 , cash flows provided by operating activities amounted to approximately$60.8 million . The key drivers resulting in our cash provided by operating activities for the six months endedJune 30, 2022 , included net income of$3.2 million , as adjusted for non-cash and non-operating expenses totaling$11.2 million and favorable changes in operating assets and liabilities of$46.4 million , resulting in net cash provided by operating activities of$60.8 million . For the six months endedJune 30, 2022 , the non-cash expenses, net consisted primarily of stock-based compensation expense of$6.2 million , amortization and accretion related to operating lease right of use ("ROU") assets of$2.8 million , 36 -------------------------------------------------------------------------------- depreciation and amortization expense of$1.2 million and accretion and amortization of debt discount and issuance costs of$0.5 million . For the six months endedJune 30, 2022 , the changes in operating assets and liabilities, net consisted of favorable changes to accounts receivable of$47.9 million and deferred revenue of$3.7 million . These favorable cash sources were offset by unfavorable changes to deferred contract costs of$3.2 million , accrued liabilities of$1.5 million and prepaid expenses, deposits and other of$0.5 million . For the six months endedJune 30, 2021 , cash flows provided by operating activities amounted to approximately$47.2 million . The key drivers resulting in our cash provided by operating activities for the six months endedJune 30, 2021 , included net income of$3.2 million , as adjusted for non-cash and non-operating expenses totaling$10.5 million and favorable changes in operating assets and liabilities of$33.4 million , resulting in net cash provided by operating activities of$47.2 million . For the six months endedJune 30, 2021 , the non-cash expenses, net consisted primarily of a loss on change in fair value of redeemable warrants of$1.0 million , stock-based compensation expense of$4.7 million , amortization and accretion related to operating lease ROU assets of$3.1 million , depreciation and amortization expense of$1.2 million , and an impairment charge related to operating lease ROU assets of$0.4 million . For the six months endedJune 30, 2021 , the changes in operating assets and liabilities, net consisted of favorable changes to accounts receivable of$32.0 million and deferred revenue of$9.8 million and accounts payable of$1.2 million . These favorable cash sources were offset by unfavorable changes to accrued liabilities of$5.5 million , prepaid expenses, deposits and other of$2.4 million and deferred contract costs of$1.6 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$1.7 million and$0.8 million for the six months endedJune 30, 2022 and 2021, respectively. For the six months endedJune 30, 2022 , capital expenditures of$1.7 million consisted of$1.1 million primarily for new computer equipment and capitalized development costs for a new payroll system in ourU.S. facilities and$0.6 million for computer equipment at our foreign locations, primarily inIndia of$0.3 million and inBrazil of$0.2 million . For the six months endedJune 30, 2021 , capital expenditures of$0.8 million consisted of$0.6 million primarily for new computer equipment in ourU.S. facilities and$0.2 million for computer equipment at our foreign locations, primarily inIndia .
Cash Flows from Financing Activities
For the six months endedJune 30, 2022 , cash utilized in financing activities of$10.7 million was attributable to principal payments related to the Credit Facility of$7.3 million , payments to repurchase shares of Common Stock totaling$3.7 million , and capital lease payments of$0.2 million . These cash uses were offset by proceeds of$0.5 million received from stock option exercises. For the six months endedJune 30, 2021 , cash utilized in financing activities of$20.2 million was attributable to payments to repurchase shares of Series A Preferred Stock of$60.0 million inApril 2021 and$9.0 million inJanuary 2021 , recurring dividend payments of$7.5 million and a make-whole dividend payment of$2.3 million , payments for professional fees associated with ourMarch 2021 Offering of$1.2 million and capital lease payments of$0.2 million . These cash uses were offset by proceeds of$57.0 million generated from theMarch 2021 Offering and proceeds of$3.1 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 ofJune 30, 2022 , we had cash and cash equivalents of$52.5 million held by our foreign subsidiaries.
Critical Accounting Policies and Significant Judgments and Estimates
37 -------------------------------------------------------------------------------- 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 withU.S. GAAP. 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. We describe our significant accounting policies in Note 2 to our Consolidated Financial Statements for the year endedDecember 31, 2021 , included in Part II, Item 8 of our 2021 Form 10-K, and we discuss our critical accounting policies and estimates in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section included in Part II, Item 7 of our 2021 Form 10-K.
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that are adopted by us as of the specified effective date. 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
The Company believes that no recently issued accounting standards will have a material impact on its Unaudited Condensed Consolidated Financial Statements, or apply to its operations.
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