Rimini Street Inc

Previous wording

•the impact of the debt service obligations and financial and operational covenants under both our Original Credit Facility and our 2024 Credit Facility on our business and related interest rate risk;

Current wording

•the impact of the debt service obligations and financial and operational covenants under our 2024 Credit Facility on our business and related interest rate risk;

Previous wording

•beliefs and objectives for future operations;

Current wording

•expected results and objectives for future operations;

Previous wording

As of March 31, 2024, we employed over 2,130 professionals and supported approximately 3,040 active clients globally, including 70 Fortune 500 companies and 18 Fortune Global 100 companies across a broad range of industries. We define an active client as a distinct entity, such as a company, an educational or government institution, or a business unit of a company that purchases our services to support a specific product. For example, we count as two separate active clients instances where we provide support for two different products to the same entity.

Current wording

As of June 30, 2024, we employed over 2,140 professionals and supported over 3,000 active clients globally, including 74 Fortune 500 companies and 17 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 clients instances where we provide support for two different products to the same entity.

Previous wording

Our subscription-based revenue provides a strong foundation for, and visibility into, future period results. For the three months ended March 31, 2024 and 2023, we generated revenue of $106.7 million and $105.5 million, respectively, representing an increase of 1%. During the three months ended March 31, 2024, we recorded net income of $1.3 million, and as of March 31, 2024, we had an accumulated deficit of $200.9 million. Approximately 50% and 51% of our revenue was generated in the United States for the three months ended March 31, 2024 and 2023, respectively. Approximately 50% and 49% of our revenue was generated in foreign jurisdictions for the three months ended March 31, 2024 and 2023, respectively.

Current wording

Our subscription-based revenue provides a foundation for, and visibility into, future period results. For the three months ended June 30, 2024 and 2023, we generated revenue of $103.1 million and $106.4 million, respectively, representing a decrease of 3%. During the three months ended June 30, 2024, we recorded a net loss of $1.1 million, and as of June 30, 2024, we had an accumulated deficit of $202.0 million. Approximately 50% and 51% of our revenue was generated in the United States for the three months ended June 30, 2024 and 2023, respectively. Approximately 50% and 49% of our revenue was generated in foreign jurisdictions for the three months ended June 30, 2024 and 2023, respectively.

Previous wording

We have experienced some clients not renewing our services due to the adverse impact on their businesses from current global economic uncertainty, as well as by the economic disruption continuing to be caused by the Israel-Hamas conflict, the Russian invasion of Ukraine in early 2022 and recent political and trade turmoil with China, amongst other global challenges. While we do not physically operate in Russia, the Ukraine or in mainland China, we do have operations in Israel. These global events, together with inflationary pressures, have negatively impacted the global economy, causing the U.S. Federal Reserve to raise interest rates in 2022. 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 the impacts of economic disruptions described above had a significant net impact on our revenue or results of operations during the three months ended March 31, 2024.

Current wording

We have experienced some clients not renewing our services due to the adverse impact on their businesses from current global economic uncertainty, as well as by the economic disruption continuing to be caused by the Israel-Hamas conflict, the Russian invasion of Ukraine in early 2022 and recent political and trade turmoil with China, amongst other global challenges. While we do not physically operate in Russia, the Ukraine or in mainland China, we do have operations in Israel. These global events, together with inflationary pressures, have negatively impacted the global economy, causing the U.S. Federal Reserve to raise interest rates in 2022. 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 the impacts of economic disruptions described above had a significant net impact on our revenue or results of operations during the three and six months ended June 30, 2024.

Previous wording

Reference is made to Notes 5 and 8 to our Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Report for a discussion of recent developments regarding our 2024 Credit Facility and litigation with Oracle.

Current wording

Reference is made to Notes 5 and 8 to our Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Report for a discussion of recent developments regarding our 2024 Credit Facility and litigation with Oracle, including the Rimini II Injunction appeal referenced above.

Previous wording

Since we founded our company, we have made the expansion of our client base a priority. We believe that our ability to expand our client base is an indicator of the growth of our business, the success of our sales and marketing activities, and the value that our services bring to our clients. We define an active client as a distinct entity, such as a company, an educational or government institution, or a business unit of a company that purchases our services to support a specific product. For example, we count as two separate active clients when support for two different products is being provided to the same entity. As of March 31, 2024 and 2023, we had approximately 3,040 and 3,000 active clients, respectively.

Current wording

Since we founded our company, we have made the expansion of our client base a priority. We believe that our ability to expand our client base is an indicator of the growth of our business, the success of our sales and marketing activities, and the value that our services bring to our clients. We define an active client as a distinct entity, such as a company, an educational or government institution, or a business unit of a company that purchases our services to support a specific product. For example, we count as two separate active clients when support for two different products is being provided to the same entity. As of June 30, 2024 and 2023, we had over 3,000 and 3,020 active clients, respectively.

Previous wording

We define a unique client as a distinct entity, such as a company, an educational or government institution or a subsidiary, division or business unit of a company that purchases one or more of our products or services. We count as two separate unique clients when two separate subsidiaries, divisions or business units of an entity purchase our products or services. As of March 31, 2024 and 2023, we had over 1,530 and 1,500 unique clients, respectively.

Current wording

We define a unique client as a distinct entity, such as a company, an educational or government institution or a subsidiary, division or business unit of a company that purchases one or more of our products or services. We count as two separate unique clients when two separate subsidiaries, divisions or business units of an entity purchase our products or services. As of June 30, 2024 and 2023, we had over 1,530 and 1,510 unique clients, respectively.

Previous wording

The increases in both our active and unique client counts have been a combination of new unique client wins as well as cross-sales of new support, products and services to existing clients. 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.

Current wording

The increase in our unique client count was due to obtaining new unique client contracts. In contrast, our active client count has declined as the number of specific products and services which we are supporting for our unique clients has decreased as clients are retaining fewer of their respective products and services. In addition, we intend to focus future growth on both new and existing clients. We believe that the growth in our number of our unique clients is an indication that we can grow our enterprise software products and services in the future.

Previous wording

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 89% and 92% for the 12 months ended March 31, 2024 and 2023, respectively. The decline in our revenue retention rate for the 12 months ended March 31, 2024 was due to attrition during the trailing twelve months, as certain clients did not renew specific subscriptions; however, in some cases these clients maintained or added subscriptions for other products and services. Our net billings during the three months ended March 31, 2024 declined $18.9 million compared to the three months ended March 31, 2023 primarily because we were unable to increase new client invoicing to offset the loss of some larger contracts.

Current wording

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 88% and 94% for the 12 months ended June 30, 2024 and 2023, respectively. The decline in our revenue retention rate for the 12 months ended June 30, 2024 was due to attrition during the trailing twelve months, as certain clients did not renew specific subscriptions; however, in some cases these clients maintained or added subscriptions for other products and services due to a variety of reasons. Our net billings during the three months ended June 30, 2024 increased $7.2 million compared to the three months ended June 30, 2023 primarily because we were able to increase client invoicing during the current period. However, our net billing for the six months ended June 30, 2023 decreased $11.6 million compared to the six months ended June 30, 2023 as a result of client terminations.

Previous wording

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 59.8% and 62.7% for the three months ended March 31, 2024 and 2023, respectively. While the gross profit margin declined for the three months ended March 31, 2024 compared to the three months ended March 31, 2023 due to our investments, we continue to drive efficiency and effectiveness while supporting our clients.

Current wording

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 59.1% and 63.0% for the three months ended June 30, 2024 and 2023, respectively. Our gross profit margin declined for the three months ended June 30, 2024 compared to the three months ended June 30, 2023 due to our continued investments in delivery of our products and services, larger contribution from lower margin products and services, as well as an overall decline in revenue.

Previous wording

Revenue. Revenue increased from $105.5 million for the three months ended March 31, 2023 to $106.7 million for the three months ended March 31, 2024, an increase of $1.2 million or 1%. The increase was driven by an 2% increase in the average number of unique clients from 1,509 for the three months ended March 31, 2023 to 1,535 for the three months ended March 31, 2024. On a geographic basis, United States revenue grew from $53.4 million for the three months ended March 31, 2023 to $53.8 million for the three months ended March 31, 2024, an increase of $0.4 million or 1%. Our international revenue grew from $52.1 million for the three months ended March 31, 2023 to $52.9 million for the three months ended March 31, 2024, an increase of $0.9 million or 2%.

Current wording

Revenue. Revenue declined from $106.4 million for the three months ended June 30, 2023 to $103.1 million for the three months ended June 30, 2024, a decrease of $3.3 million or 3%. Although there was an increase in the average number of unique clients from 1,510 for the three months ended June 30, 2023 to 1,534 for the three months ended June 30, 2024, revenue declined primarily due to the attrition of some large client contracts as certain clients did not renew specific subscriptions in prior periods due to varying reasons, which is now being reflected in our revenue within the current period. On a geographic basis, United States revenue declined from $54.0 million for the three months ended June 30, 2023 to $51.5 million for the three months ended June 30, 2024, a decrease of $2.5 million or 5%. Our international revenue declined from $52.4 million for the three months ended June 30, 2023 to $51.7 million for the three months ended June 30, 2024, a decrease of $0.8 million or 1%.

Previous wording

Cost of revenue. Cost of revenue increased from $39.3 million for the three months ended March 31, 2023 to $42.9 million for the three months ended March 31, 2024, an increase of $3.6 million or 9%. The key drivers related to the cost of revenue increase were a $2.6 million increase in employee compensation and benefits to support an average headcount increase of 22%, a $0.3 million increase in administrative allocations and a $0.8 million increase in all other costs. These cost increases were offset by a $0.2 million decrease in engineering consulting costs.

Current wording

Cost of revenue. Cost of revenue increased from $39.3 million for the three months ended June 30, 2023 to $42.2 million for the three months ended June 30, 2024, an increase of $2.8 million or 7%. The key drivers related to the cost of revenue increase were a $2.0 million increase in employee compensation and benefits to support an average headcount increase of 19%, a $0.8 million increase in administrative allocations and a $0.4 million increase in all other costs. These cost increases were offset by a $0.3 million decrease in engineering consulting costs.

Previous wording

Injunction” on July 24, 2023. The District Court found infringement as to Oracle’s PeopleSoft and Oracle Database products. As a result of the findings, we are likely to incur additional expenses for incremental labor costs in order to comply with the District Court’s Rimini II Injunction. At this time, we have yet to determine the impact on future period costs. Any adverse outcome in our ongoing judicial proceedings could have a material adverse effect on our results of operations.

Current wording

As discussed in Note 8 to our Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Report, the District Court issued its findings of fact and conclusions of law in Rimini II, accompanied by the “Rimini II Injunction” on July 24, 2023. The District Court found infringement as to Oracle’s PeopleSoft and Oracle Database products. As a result of the findings, we are likely to incur additional expenses for incremental labor costs in order to comply with the District Court’s Rimini II Injunction. Due to the large number of uncertainties surrounding the outcome of the appeal, we are unable to determine the final impact on future period costs until a decision is rendered. Any adverse outcome in our ongoing judicial proceedings could have a material adverse effect on our results of operations.

Previous wording

Gross profit. Gross profit decreased from $66.2 million for the three months ended March 31, 2023 to $63.8 million for the three months ended March 31, 2024, a decrease of $2.3 million or 4%. Gross profit margin for the three months ended March 31, 2023 was 62.7% compared to 59.8% for the three months ended March 31, 2024. For the three months ended March 31, 2024, the total cost of revenue increased by 9%, primarily due to an increase in average headcount of 22% compared to an increase in revenue of 1% for the three months ended March 31, 2024. As a result, our gross profit margin declined by 290 basis points period over period. We expect margin pressures in the short-term as we invest in our new offerings.

Current wording

Gross profit. Gross profit decreased from $67.1 million for the three months ended June 30, 2023 to $60.9 million for the three months ended June 30, 2024, a decrease of $6.1 million or 9%. Gross profit margin for the three months ended June 30, 2023 was 63.0% compared to 59.1% for the three months ended June 30, 2024. For the three months ended June 30, 2024, the total cost of revenue increased by 7%, primarily due to an increase in average headcount of 19% compared to a decline in revenue of 3% for the three months ended June 30, 2024. As a result, our gross profit margin declined by 390 basis points period over period. We expect margin pressures in the short-term as our ability to increase revenue remains challenged by a lack of new client contracts combined with unfavorable mix and continued investment in our new products and services.

Previous wording

Looking forward on a quarter-over-quarter basis, we are monitoring the demand for our services in light of 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. 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, we expect our general and administrative expenses to increase in dollar terms in future periods.

Current wording

Looking forward on a quarter-over-quarter basis, we are monitoring the demand for our services in light of current global economic conditions and competitive pressures 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. 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, we expect continued pressure on our general and administrative expenses in future periods.

Previous wording

Professional fees and other costs associated with litigation increased from $2.7 million for the three months ended March 31, 2023 to $2.9 million for the three months ended March 31, 2024, an increase of $0.2 million. This increase was primarily due to costs incurred for our appeal preparation of the Rimini II decision with the Ninth Circuit on June 5, 2024.

Current wording

Professional fees and other costs associated with litigation increased from $0.6 million for the three months ended June 30, 2023 to $1.6 million for the three months ended June 30, 2024, an increase of $1.0 million. This increase was primarily due to costs incurred relating to our appeal of the Rimini II decision with the Ninth Circuit on June 5, 2024.

Previous wording

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 ended March 31, 2024, net other income of approximately $1.0 million was comprised primarily of gains from cash equivalents and investments. For the three months ended March 31, 2023, net other expenses of approximately $0.5 million was comprised primarily of gains from cash equivalents and investments of $0.9 million which were offset, in part, by foreign exchange losses of approximately $0.4 million.

Current wording

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 ended June 30, 2024, net other income of approximately $1.5 million was comprised primarily of gains from foreign exchanges of $0.9 million and interest income from cash and cash equivalents of $0.9 million. These items were offset by other expenses of approximately $0.3 million. For the three months ended June 30, 2023, net other expenses of approximately $0.3 million was comprised primarily of gains from cash equivalents and investments of $0.7 million which were offset, in part, by foreign exchange losses of approximately $0.3 million and other expenses of $0.1 million.

Previous wording

Income tax expense. We had an income tax expense of $4.2 million for the three months ended March 31, 2023 compared to an income tax expense of $1.7 million for the three months ended March 31, 2024. For the three months ended March 31, 2024, the primary reason for the decrease in income tax expense was due to a decrease of income before taxes of $6.9 million in the current year period compared to the prior year period as well as a decrease in foreign withholding taxes.

Current wording

Income tax expense. We had an income tax expense of $4.9 million for the three months ended June 30, 2023 compared to an income tax expense of $0.4 million for the three months ended June 30, 2024. For the three months ended June 30, 2024, the primary reason for the decrease in income tax expense was due to a decrease of income before taxes of $10.0 million in the current year period compared to the prior year period.

Previous wording

Sales and marketing expenses. As a percentage of our revenue, sales and marketing expenses were 37% and 33% for the three months ended March 31, 2024 and 2023, respectively. In dollar terms, sales and marketing expenses increased from $34.5 million for the three months ended March 31, 2023 to $39.1 million for the three months ended March 31, 2024, an increase of $4.7 million or 14%. This increase was primarily due to an increase in travel and entertainment costs of $4.4 million, primarily related to a sales training event held in January 2024. In addition, we incurred an increase in employee compensation and benefits of $0.7 million and an increase of administrative allocations and all other costs of $0.6 million. These increases were offset by declines in marketing and advertising costs of $0.7 million and contract labor of $0.5 million. We will continue to seek to accelerate our future revenue growth by investing in more resources.

Current wording

Sales and marketing expenses. As a percentage of our revenue, sales and marketing expenses were 36% and 34% for the six months ended June 30, 2024 and 2023, respectively. In dollar terms, sales and marketing expenses increased from $71.8 million for the six months ended June 30, 2023 to $76.5 million for the six months ended June 30, 2024, an increase of $4.8 million or 7%. This increase was primarily due to an increase in travel and entertainment costs of $5.3 million, primarily related to a sales training event held in January 2024. In addition, we incurred an increase in employee compensation and benefits of $0.2 million and an increase of administrative allocations and all other costs of $1.2 million. These increases were offset by declines in marketing and advertising costs of $1.2 million and contract labor of $0.7 million. We will continue to seek additional revenue growth by selectively investing in resources and marketing programs that we believe will be scalable and help drive revenue growth.

Previous wording

General and administrative expenses. General and administrative expenses increased from $18.2 million for the three months ended March 31, 2023 to $18.4 million for the three months ended March 31, 2024, an increase of $0.2 million or 1%. This increase was comprised of several items, which included an increase in salaries, wages, bonuses and benefits of $0.6 million, an increase in computer supplies and licenses of $0.4 million and an increase in travel and entertainment costs of $0.3 million. These incremental expenses were offset by a decline in other tax costs of $0.5 million, a decline in professional service costs of $0.5 million and a decline of recruitment costs of $0.3 million.

Current wording

General and administrative expenses. General and administrative expenses increased from $37.1 million for the six months ended June 30, 2023 to $37.9 million for the six months ended June 30, 2024, an increase of $0.8 million or 2%. This increase was comprised of several items, which included an increase in computer supplies and licenses of $1.5 million, an increase in contract labor of $0.6 million, an increase in all other costs of $0.6 million and an increase in employee compensation and benefits of $0.1 million. These incremental expenses were offset by an increase in administrative allocations of $1.5 million, a decline in other tax costs of $0.3 million, and a decline in recruitment costs of $0.2 million.

Previous wording

Interest expense. Interest expense was $1.3 million for both the three months ended March 31, 2023 and the three months ended March 31, 2024. Interest expense slightly increased primarily due to rising interest rates on our five-year Original Credit Facility, which increased from an average interest rate of 6.3% for the three months ended March 31, 2023 to an average interest rate of 7.2% for the three months ended March 31, 2024. These rising interest rates were offset, in part, by a reduction of interest costs during the three months ended March 31, 2024, due to a net year over year increase in payments received from our interest rate swap of $0.1 million.

Current wording

Interest expense. Interest expense increased from $2.7 million for the six months ended June 30, 2023 to $2.8 million for the six months ended June 30, 2024. Interest expense slightly increased primarily due to rising interest rates on our Credit Facilities, which increased from an average interest rate of 6.6% for the six months ended June 30, 2023 to an average interest rate of 7.5% for the six months ended June 30, 2024. These rising interest rates were offset, in part, by a reduction of interest costs during the six months ended June 30, 2024 and 2023, respectively.

Previous wording

As of March 31, 2024, we had a working capital deficit of $44.5 million and an accumulated deficit of $200.9 million. For the three months ended March 31, 2024, we recorded net income of $1.3 million. As of March 31, 2024, we had available cash, cash equivalents and restricted cash of $129.4 million.

Current wording

As of June 30, 2024, we had a working capital deficit of $40.3 million and an accumulated deficit of $202.0 million. For the three months ended June 30, 2024, we recorded a net loss of $1.1 million. As of June 30, 2024, we had available cash, cash equivalents and restricted cash of $134.6 million.

Previous wording

On April 30, 2024, we refinanced our Original Credit Facility, which had an outstanding principal balance of $70.9 million, with a new five-year senior secured credit facility (“2024 Credit Facility”) consisting of a $75.0 million term loan and a $35.0 million revolving line of credit. On that date, we had outstanding term loan borrowings under our 2024 Credit Facility of $75.0 million. In addition, we had availability of $35.0 million under our new revolving line of credit. We have a choice of interest rates under the 2024 Credit Facility between (a) SOFR and (b) Base Rate, in each case plus an applicable margin. The applicable margin remains the same as the Original Credit Facility and is based on our Consolidated Total Leverage Ratio (as defined in the 2024 Credit Facility) and whether we elect SOFR (ranging from 2.75% to 3.50%) or a Base Rate (ranging from 1.75% to 2.5%). Interest on the unused portion of the revolving credit line is at rates of between 25 to 40 basis points, depending on our Consolidated Total Leverage Ratio. Annual minimum principal payments over the five-year term for the 2024 Credit Facility are 5%, 5%, 7.5%, 7.5%, and 10%, respectively, with the remaining balance due at the end of the original term.

Current wording

On April 30, 2024, we refinanced our Original Credit Facility, which had an outstanding principal balance of $70.9 million, with a new five-year senior secured credit facility (“2024 Credit Facility”) consisting of a $75.0 million term loan and a $35.0 million revolving line of credit. As of June 30, 2024, we had outstanding term loan borrowings under our 2024 Credit Facility of $75.0 million. In addition, we had availability of $35.0 million under our new revolving line of credit. We have a choice of interest rates under the 2024 Credit Facility between (a) SOFR and (b) Base Rate, in each case plus an applicable margin. The applicable margin remains the same as the Original Credit Facility and is based on our Consolidated Total Leverage Ratio (as defined in the 2024 Credit Facility) and whether we elect SOFR (ranging from 2.75% to 3.50%) or a Base Rate (ranging from 1.75% to 2.5%). Interest on the unused portion of the revolving credit line is at rates of between 25 to 40 basis points, depending on our Consolidated Total Leverage Ratio. Annual minimum principal payments over the five-year term for the 2024 Credit Facility are 5%, 5%, 7.5%, 7.5%, and 10%, respectively, with the remaining balance due at the end of the original term.

Previous wording

Please refer to Note 5 to the Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Report for information regarding our Original Credit Facility.

Current wording

Please refer to Note 5 to the Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Report for information regarding our 2024 Credit Facility.

Previous wording

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 $230.0 million that is included in current liabilities as of March 31, 2024. 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 40% of the related deferred revenue based on our gross profit percentage of 60% for the three months ended March 31, 2024.

Current wording

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 $240.4 million that is included in current liabilities as of June 30, 2024. 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 41% of the related deferred revenue based on our gross profit percentage of 59% for the three months ended June 30, 2024.

Previous wording

Alternatively, we may also consider reducing amounts outstanding under our 2024 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 2024 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.

Current wording

For the next year, assuming that our operations are not significantly impacted by rising inflation, interest rate increases, other global economic or geopolitical uncertainties, or the litigation matters as disclosed in Note 8 to our Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Report, we believe that cash, cash equivalents and restricted cash of $134.6 million as of June 30, 2024, 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 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 support these long-term capital requirements. Alternatively, we may also consider reducing amounts outstanding under our 2024 Credit Facility to minimize our exposure to rising interest rates. If interest rates continue to increase 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 2024 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.

Previous wording

For the three months ended March 31, 2024, we generated cash flows from our operating activities of approximately $11.1 million, which was derived from net income of $1.3 million as well as adjustments to reconcile net income to net cash of approximately $4.0 million and a favorable change in operating assets and liabilities of approximately $5.7 million. We believe that our operating cash flows for the year ending December 31, 2024 will be sufficient to fund the portion of our contractual obligations that is not funded with existing capital resources.

Current wording

For the six months ended June 30, 2024, we generated cash flows from our operating activities of approximately $17.3 million, which was derived from a net income of $0.2 million as well as adjustments to reconcile net income to net cash of approximately $6.8 million and a favorable change in operating assets and liabilities of approximately $10.4 million. We believe that our operating cash flows for the year ending December 31, 2024 will be sufficient to fund the portion of our contractual obligations that is not funded with existing capital resources.

Previous wording

The effect of foreign currency translation was unfavorable by $4.4 million and $35 thousand for the three months ended March 31, 2024 and 2023, respectively, due to unfavorable foreign exchange impacts related to foreign cash. For the three months ended March 31, 2024, we experienced a significant change in foreign currency exchange rates as the U.S. dollar strengthened against the majority of foreign currencies where we operate. The unfavorable foreign currency impact was primarily related to our foreign cash held in Japan as the Japanese yen weakened significantly against the U.S. dollar.

Current wording

The effect of foreign currency translation changes was unfavorable by $7.4 million and $2.7 million for the six months ended June 30, 2024 and 2023, respectively, due to unfavorable foreign exchange impacts related to foreign cash. For the six months ended June 30, 2024, we experienced a significant change in foreign currency exchange rates as the U.S. dollar strengthened against the majority of foreign currencies where we operate. The unfavorable foreign currency impact was primarily related to our foreign cash held in Japan and Brazil as those local currencies weakened significantly against the U.S. dollar.

Previous wording

For the three months ended March 31, 2024, cash flows provided by operating activities amounted to approximately $11.1 million. The key drivers resulting in our cash provided by operating activities for the three months ended March 31, 2024, included net income of $1.3 million and adjustments to reconcile net income to net cash totaling $4.0 million, as well as favorable changes in operating assets and liabilities of $5.7 million, resulting in net cash provided by operating activities of $11.1 million.

Current wording

For the six months ended June 30, 2024, cash flows provided by operating activities amounted to approximately $17.3 million. The key drivers resulting in our cash provided by operating activities for the six months ended June 30, 2024, included a net income of $0.2 million and adjustments to reconcile a net loss to net cash totaling $6.8 million, as well as favorable changes in operating assets and liabilities of $10.4 million, resulting in net cash provided by operating activities of $17.3 million.

Previous wording

For the three months ended March 31, 2024, adjustments to reconcile net income to net cash consisted primarily of stock-based compensation expense of $2.6 million, amortization and accretion related to operating lease ROU assets of $1.1 million, depreciation and amortization expense of $0.9 million and accretion and amortization of debt discount and issuance costs of $0.2 million. These favorable items were offset by deferred income taxes of $0.8 million. For the three months ended March 31, 2024, the changes in operating assets and liabilities, net consisted of favorable changes to accounts receivable of $39.8 million, prepaid expenses, deposits and other assets of $3.5 million and deferred contract costs of $2.5 million. The favorable change to accounts receivable was a result of collecting $116.7 million during the three months ended March 31, 2024 which was offset by billings, net of $74.1 million during the three months ended March 31, 2024. As a result, our days sales outstanding for accounts receivable was 97 days as of March 31, 2024. The favorable change in deferred contract costs was due to capitalizing $2.5 million of commissions and amortizing $5.0 million of deferred contract costs during the three months ended March 31, 2024.

Current wording

For the six months ended June 30, 2024, adjustments to reconcile a net loss to net cash consisted primarily of stock-based compensation expense of $5.0 million, amortization and accretion related to operating lease ROU assets of $2.2 million, depreciation and amortization expense of $1.7 million, accretion and amortization of debt discount and issuance costs of $0.4 million and an unfavorable change in deferred income taxes of $2.6 million. For the six months ended June 30, 2024, the changes in operating assets and liabilities, net consisted of favorable changes to accounts receivable of $29.9 million, prepaid expenses, deposits and other assets of $2.1 million and deferred contract costs of $4.2 million. The favorable change to accounts receivable was a result of collecting $222.5 million during the six months ended June 30, 2024 which was offset by billings, net of $185.7 million during the six months ended June 30, 2024. As a result, our days sales outstanding for accounts receivable was 73 days as of June 30, 2024. The favorable change in deferred contract costs was due to capitalizing $5.7 million of commissions and amortizing $9.9 million of deferred contract costs during the six months ended June 30, 2024.

Previous wording

Offsetting these favorable changes were unfavorable changes to accrued liabilities of $8.4 million, deferred revenue of $29.3 million and accounts payable of $2.3 million. The unfavorable use of cash for accrued liabilities related primarily to paying incremental compensation related to bonuses and commissions of $8.1 million during the current period. Regarding the use of cash for deferred revenue, it was due to recognizing $106.7 million in revenue for the current period, which was offset by recording billings, net of $74.1 million during the current period.

Current wording

Offsetting these favorable changes were unfavorable changes to accrued liabilities of $7.0 million, deferred revenue of $17.3 million and accounts payable of $1.5 million. The unfavorable use of cash for accrued liabilities related primarily to paying incremental compensation related to bonuses and commissions of $6.2 million during the current period. Regarding the use of cash for deferred revenue, it was due to recognizing $209.9 million in revenue for the current period, which was offset by recording billings, net of $185.7 million during the current period.

Previous wording

For the three months ended March 31, 2023, cash flows provided by operating activities amounted to approximately $8.6 million. The key drivers resulting in our cash provided by operating activities for the three months ended March 31, 2023 included net income of $5.6 million, as well as adjustments to reconcile net income to net cash totaling $4.5 million. These two items were offset, in part, by unfavorable changes in operating assets and liabilities of $1.5 million, resulting in net cash provided by operating activities of $8.6 million.

Current wording

For the six months ended June 30, 2023, cash flows provided by operating activities amounted to approximately $21.7 million. The key drivers resulting in our cash provided by operating activities for the six months ended June 30, 2023 included net income of $9.9 million, as well as adjustments to reconcile net income to net cash totaling $14.3 million. These two items were offset, in part, by unfavorable changes in operating assets and liabilities of $2.5 million, resulting in net cash provided by operating activities of $21.7 million.

Previous wording

For the three months ended March 31, 2023, adjustments to reconcile net income to net cash consisted primarily of stock-based compensation expense of $2.0 million, amortization and accretion related to operating lease ROU assets of $1.1 million, depreciation and amortization expense of $0.6 million, accretion and amortization of debt discount and issuance costs of $0.2 million and deferred income taxes of $0.5 million. For the three months ended March 31, 2023, the changes in operating assets and liabilities, net primarily consisted of favorable changes to accounts receivable of $26.9 million and deferred contract costs of $1.4 million. The favorable change to accounts receivable was a result of collecting $121.0 million during the three months ended March 31, 2023 compared to billings, net of $93.0 million during the three months ended March 31, 2023. As a result, our days sales outstanding for accounts receivable was 96 days as of March 31, 2023. The favorable change in deferred contract costs was due to capitalizing $3.2 million of commissions and amortizing $4.6 million of deferred contract costs during the three months ended March 31, 2023.

Current wording

For the six months ended June 30, 2023, adjustments to reconcile net income to net cash consisted primarily of stock-based compensation expense of $5.9 million, amortization and accretion related to operating lease ROU assets of $2.2 million, depreciation and amortization expense of $1.2 million, accretion and amortization of debt discount and issuance costs of $0.5 million and deferred income taxes of $4.4 million. For the six months ended June 30, 2023, the changes in operating assets and liabilities, net primarily consisted of favorable changes to accounts receivable of $31.1 million and deferred contract costs of $0.6 million. The favorable change to accounts receivable was a result of collecting $231.5 million during the six months ended June 30, 2023 compared to billings, net of $197.3 million during the six months ended June 30, 2023. As a result, our days sales outstanding for accounts receivable was 78 days as of June 30, 2023. The favorable change in deferred contract costs was due to capitalizing $8.7 million of commissions and amortizing $9.3 million of deferred contract costs during the six months ended June 30, 2023.

Previous wording

The favorable cash sources noted above were offset by unfavorable uses of cash related to changes to accrued liabilities of $14.8 million, deferred revenue of $12.5 million, accounts payable of $2.1 million and prepaid expenses, deposits and other assets of $0.4 million. The unfavorable use of cash for accrued liabilities was due to making payments of $2.5 million related to our reorganization plan, incurring incremental professional fee payments of $4.4 million, and paying incremental compensation related primarily to bonuses and commissions of $6.6 million during the three months ended March 31, 2023. The related use of cash for deferred revenue was due to recognizing $105.5 million of revenue during the period, which was offset by recording billings, net of $93.0 million during the three months ended March 31, 2023.

Current wording

The favorable cash sources noted above were offset by unfavorable uses of cash related to changes to accrued liabilities of $17.3 million, deferred revenue of $12.2 million, accounts payable of $3.6 million and prepaid expenses, deposits and other assets of $1.1 million. The unfavorable use of cash for accrued liabilities was due to making payments of $2.5 million related to our reorganization plan, incurring incremental professional fee payments of $5.8 million, and paying incremental compensation related primarily to bonuses and commissions of $3.7 million during the six months ended June 30, 2023. The related use of cash for deferred revenue was due to recognizing $211.9 million of revenue during the period, which was offset by recording billings, net of $197.3 million during the six months ended June 30, 2023.

Previous wording

Cash provided by investing activities totaled $8.7 million for the three months ended March 31, 2024 and cash used in investing activities totaled $0.3 million for the three months ended March 31, 2023. For the three months ended March 31, 2024, cash provided by investing activities was primarily driven by proceeds from sales of short-term investments of $17.3 million offset by purchases of short-term investments of $7.5 million and capital expenditures for leasehold improvements, software development costs, and computer equipment of $1.2 million. The capital expenditures consisted primarily of capitalized software development costs, new computer equipment, and furniture and fixtures in our U.S. entity of $0.7 million and $0.4 million for computer equipment at our foreign locations, primarily in Brazil of $0.2 million and in India of $0.2 million.

Current wording

Cash provided by investing activities totaled $7.8 million for the six months ended June 30, 2024 and cash used in investing activities totaled $1.1 million for the six months ended June 30, 2023. For the six months ended June 30, 2024, cash provided by investing activities was primarily driven by proceeds from sales of short-term investments of $6.3 million and maturities of short-term investments of $10.9 million, offset by purchases of short-term investments of $7.5 million and capital expenditures of $2.0 million for leasehold improvements, software development costs, and computer equipment. The capital expenditures of $2.0 million consisted primarily of capitalized software development costs, new computer equipment, and furniture and fixtures in our U.S. entity of $1.4 million and $0.6 million for computer equipment at our foreign locations, primarily in Brazil of $0.2 million and in India of $0.2 million.

Previous wording

For the three months ended March 31, 2023, cash used in investing activities of $0.3 million consisted of investment purchases of $7.7 million, which were offset by proceeds from sales of investments of $8.4 million, as well as capital expenditures of $1.0 million. The capital expenditures consisted of $0.8 million primarily for new computer equipment and capitalized development costs in our U.S. entity and $0.2 million for computer equipment at our foreign locations, primarily in India of $0.1 million and Brazil of $0.1 million.

Current wording

For the six months ended June 30, 2023, cash used in investing activities of $1.1 million consisted of investment purchases of $14.7 million and capital expenditures of $2.1 million, which were offset by proceeds from maturities of short-term investments of $15.6 million. The capital expenditures of $2.1 million consisted primarily of new computer equipment and capitalized development costs in our U.S. entity of $1.7 million and for computer equipment at our foreign locations of $0.4 million, primarily in Brazil of $0.2 million and India of $0.1 million.

Previous wording

For the three months ended March 31, 2024, cash utilized in financing activities of $1.8 million was attributable to principal payments related to the Original Credit Facility of $1.7 million and capital lease payments of $0.1 million.

Current wording

For the six months ended June 30, 2024, cash provided by financing activities of $1.1 million was attributable to proceeds received from the 2024 Credit Facility of $2.9 million, which were offset by principal payments related to the Original Credit Facility of $1.7 million and capital lease payments of $0.2 million.

Previous wording

For the three months ended March 31, 2023, cash utilized in financing activities of $1.1 million was attributable to principal payments related to the Original Credit Facility of $1.1 million and capital lease payments of $47 thousand. These cash uses were offset by proceeds of $0.1 million received from stock option exercises.

Current wording

For the six months ended June 30, 2023, cash utilized in financing activities of $3.3 million was attributable to principal payments related to the Original Credit Facility of $2.3 million, payments to repurchase shares of Common Stock totaling $1.0 million and capital lease payments of $0.2 million. These cash uses were offset by proceeds of $0.1 million received from stock option exercises.

Previous wording

Our foreign subsidiaries and branches are dependent on our U.S.-based parent for continued funding. We currently do not intend to repatriate any amounts that have been invested overseas back to the U.S.-based parent. However, we may still be liable for withholding taxes, state taxes, or other income taxes that might be incurred upon the repatriation of foreign earnings. We have not made any provision for additional income taxes on undistributed earnings of our foreign subsidiaries. As of March 31, 2024, we had cash and cash equivalents of $45.4 million held by our foreign subsidiaries.

Current wording

Our foreign subsidiaries and branches are dependent on our U.S.-based parent for continued funding. We currently do not intend to repatriate any amounts that have been invested overseas back to the U.S.-based parent. 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.