Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 1.23M
2: EX-3.2 Articles of Incorporation/Organization or Bylaws HTML 213K
3: EX-31.1 Certification -- §302 - SOA'02 HTML 25K
4: EX-31.2 Certification -- §302 - SOA'02 HTML 25K
5: EX-32.1 Certification -- §906 - SOA'02 HTML 22K
6: EX-32.2 Certification -- §906 - SOA'02 HTML 22K
12: R1 Cover HTML 76K
13: R2 Unaudited Condensed Consolidated Balance Sheets HTML 139K
14: R3 Unaudited Condensed Consolidated Balance Sheets HTML 44K
(Parenthetical)
15: R4 Unaudited Condensed Consolidated Statements of HTML 123K
Operations and Comprehensive Income (Loss)
16: R5 Unaudited Condensed Consolidated Statements of HTML 94K
Stockholders' Deficit
17: R6 Unaudited Condensed Consolidated Statements of HTML 107K
Cash Flows
18: R7 Nature of Business and Basis of Presentation HTML 27K
19: R8 Liquidity and Significant Accounting Policies HTML 29K
20: R9 Deferred Contract Costs and Deferred Revenue HTML 50K
21: R10 Other Financial Information HTML 34K
22: R11 Debt HTML 51K
23: R12 Common Stock Offering, Restricted Stock Units, HTML 70K
Stock Options and Warrants
24: R13 Income Taxes HTML 26K
25: R14 Commitments and Contingencies HTML 48K
26: R15 Related Party Transactions HTML 26K
27: R16 Earnings Per Share HTML 59K
28: R17 Financial Instruments and Significant HTML 68K
Concentrations
29: R18 Leases HTML 54K
30: R19 Pay vs Performance Disclosure HTML 33K
31: R20 Insider Trading Arrangements HTML 27K
32: R21 Liquidity and Significant Accounting Policies HTML 40K
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34: R23 Other Financial Information (Tables) HTML 33K
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36: R25 Common Stock Offering, Restricted Stock Units, HTML 64K
Stock Options and Warrants (Tables)
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40: R29 Liquidity and Significant Accounting Policies HTML 63K
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41: R30 DEFERRED CONTRACT COSTS AND DEFERRED REVENUE - HTML 36K
Schedule of Deferred Revenue (Details)
42: R31 DEFERRED CONTRACT COSTS AND DEFERRED REVENUE- HTML 28K
Narrative (Details)
43: R32 Other Financial Information (Details) HTML 41K
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45: R34 DEBT - Narrative (Details) HTML 149K
46: R35 DEBT - Schedule of Interest Expense (Details) HTML 41K
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STOCK OPTIONS AND WARRANTS - Narrative (Details)
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STOCK OPTIONS AND WARRANTS - Schedule of Stock
Option Activity (Details)
49: R38 COMMON STOCK OFFERING, RESTRICTED STOCK UNITS, HTML 45K
STOCK OPTIONS AND WARRANTS - Schedule of
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STOCK OPTIONS AND WARRANTS - Schedule of
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Share, Basic and Diluted (Details)
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Securities Excluded from Computation of Earnings
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CONCENTRATIONS - Narrative (Details)
58: R47 FINANCIAL INSTRUMENTS AND SIGNIFICANT HTML 50K
CONCENTRATIONS - Schedule of Cash Equivalent And
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59: R48 FINANCIAL INSTRUMENTS AND SIGNIFICANT HTML 34K
CONCENTRATIONS - Schedule of Amounts Recorded For
Interest Rate Swap Agreement (Details)
60: R49 FINANCIAL INSTRUMENTS AND SIGNIFICANT HTML 33K
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Registrant's telephone number, including area code:
i(702)i839-9671
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class:
Trading Symbol(s)
Name of each exchange on which registered:
iCommon
Stock, par value $0.0001 per share
iRMNI
iThe Nasdaq Global Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYesþ No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYesþ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting
company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨
iAccelerated filerþ
Non-accelerated filer ¨
Smaller
reporting company i☐
Emerging growth company i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No iþ
The
registrant had approximately i89,389,000 shares of its $0.0001 par value common stock outstanding as of October 30, 2023.
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Increase (decrease) in payables for capital expenditures
$
i669
$
(i2)
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
RIMINI STREET, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — iNATURE
OF BUSINESS AND BASIS OF PRESENTATION
i
Nature of Business
Rimini Street, Inc. (the “Company”) is a global provider of end-to-end enterprise software support, products and services.The Company offers a comprehensive family of unified solutions to run, manage, support, customize, configure, connect, protect, monitor, and optimize clients’ enterprise application,
database, and technology software platforms.
i
Basis of Presentation and Consolidation
The Unaudited Condensed Consolidated Financial Statements, which include the accounts of the Company and its wholly-owned subsidiaries, are prepared in conformity with generally accepted accounting principles in the United States of America (“U.S. GAAP”). All significant intercompany
balances and transactions have been eliminated. The accompanying Unaudited Condensed Consolidated Financial Statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Accordingly, certain information and footnote disclosures required by U.S. GAAP for complete financial statements have been condensed or omitted in accordance with such rules and regulations. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the Unaudited Condensed Consolidated Financial Statements have been included. These Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Company’s
Audited Consolidated Financial Statements for the year ended December 31, 2022, included in the Company’s 2022 Annual Report on Form 10-K as filed with the SEC on March 1, 2023 (the “2022 Form 10-K”).
The accompanying Unaudited Condensed Consolidated Balance Sheet and related disclosures as of December 31, 2022 have been derived from the Company’s audited financial statements. The Company’s financial condition as of September 30, 2023, and
operating results for the three and nine months ended September 30, 2023, are not necessarily indicative of the financial condition and results of operations that may be expected for any future interim period or for the year ending December 31, 2023.
NOTE 2 — iLIQUIDITY AND SIGNIFICANT ACCOUNTING POLICIES
Liquidity
As
of September 30, 2023, the Company’s current liabilities exceeded its current assets by $i56.7 million, and the Company recorded net income of $i6.8
million for the three months ended September 30, 2023. As of September 30, 2023, the Company had available cash, cash equivalents and restricted cash of $i108.7 million and short-term investments of $i19.9
million. As of September 30, 2023, the Company’s current liabilities included $i214.1 million of deferred revenue whereby the historical costs of fulfilling the Company's commitments to provide services to its clients was approximately i37%
of the related deferred revenue for the three months ended September 30, 2023.
On July 20, 2021, the Company entered into a ifive-year term loan of $i90 million
(the “Credit Facility”). Annual minimum principal payments over the ifive-year term for the Credit Facility are i5%, i5%,
i7.5%, i7.5% and i10%,
respectively, with the remaining balance due at the end of the term. See Note 5 for further information regarding the Company's Credit Facility.
Additionally, the Company is obligated to make operating and financing lease payments that are due within the next 12 months in the aggregate amount of $i5.6 million. During the third
quarter of 2023, the global economy continued to experience interest rate and inflationary pressures, geopolitical conflicts, global supply chain issues, a rise in energy prices and the continuing effects of fiscal and monetary policies adopted by governments in response to and following the global outbreak of the coronavirus (“COVID-19”). Assuming the Company’s ability to operate continues not to be significantly adversely impacted by the related changes in the macroeconomic environment, geopolitical pressures, or the litigation matters described in Note 8, the Company believes that current cash, cash equivalents, restricted cash, and future cash flow from operating activities will be sufficient to meet the
Company’s anticipated cash needs, including Credit Facility repayments, working capital needs, capital expenditures and other contractual obligations for at least 12 months from the issuance date of these financial statements.
i
Use of Estimates
The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires the Company to make judgments, assumptions, and estimates that affect the amounts reported in its consolidated financial statements
and
7
RIMINI STREET, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
accompanying notes. The Company bases its estimates and assumptions on current facts, historical experience, and various other factors that it believes are reasonable under the circumstances to determine the carrying values of assets and liabilities that are not readily apparent from other sources. The Company’s accounting estimates include, but
are not necessarily limited to, valuation of accounts receivable, valuation assumptions for stock options and leases, deferred income taxes and the related valuation allowances, and the evaluation and measurement of contingencies. To the extent there are material differences between the Company’s estimates and actual results, the Company’s future consolidated results of operations may be affected.
i
Recent Accounting
Pronouncements
Recently Adopted Standards. The following accounting standards were adopted during fiscal year 2023:
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, and amended in December 2022 with ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848. ASU 2020-04 provides guidance to alleviate the burden in accounting for reference rate reform by allowing certain expedients and exceptions in applying U.S. GAAP to contracts, hedging relationships and other transactions impacted by reference rate reform. The provisions apply only to those transactions that reference the London Interbank
Offered Rate (“LIBOR”) or another reference rate expected to be discontinued due to reference rate reform. Adoption of the provisions of ASU 2020-04 are optional and are effective from March 12, 2020 through December 31, 2024, as amended by ASU 2022-06. During the three months ended March 31, 2023, the Company adopted the optional relief guidance provided under ASU 2020-04 after modifying its interest rate swap agreement in connection with the amendment of the Credit Facility to implement certain changes in the reference rate from LIBOR to the Secured Overnight Financing Rate (“SOFR”). The application of this expedient preserves the presentation of the derivative consistent with past presentation and did not have a material
impact on our Unaudited Condensed Consolidated Financial Statements.
NOTE 3 - iDEFERRED CONTRACT COSTS AND DEFERRED REVENUE
i
Activity
for deferred contract costs consisted of the following (in thousands):
Deferred
revenue, current and noncurrent, as of the beginning of period
$
i285,324
$
i300,387
$
i299,921
$
i300,268
Billings,
net
i60,528
i49,731
i257,864
i248,960
Revenue
recognized
(i107,453)
(i101,931)
(i319,386)
(i301,041)
Deferred
revenue, current and noncurrent, as of the end of period
$
i238,399
$
i248,187
$
i238,399
$
i248,187
/
The
Company’s remaining performance obligations represent all future non-cancellable revenue under contract that has not yet been recognized as revenue and includes deferred revenue and unbilled amounts. As of September 30, 2023, remaining performance obligations amounted to $i550.1 million, of which $i238.4 million
was billed and recorded as deferred revenue. As of September 30, 2022, remaining performance obligations amounted to $i532.3 million, of which $i248.2 million was billed and recorded
as deferred revenue.
8
RIMINI STREET, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Deferred revenue is a contract liability that consists of billings issued that are non-cancellable and payments received in advance of revenue recognition. The Company typically invoices its customers at the beginning of the contract
term, in annual and multi-year installments. Deferred revenue is recognized as the Company satisfies its performance obligations over the term of the contracted service period. The Company expects to recognize revenue on approximately $i214.1 million of the billed remaining performance obligations over the next 12 months, with the remaining deferred revenue balance recognized thereafter.
NOTE
4 — iOTHER FINANCIAL INFORMATION
Other Accrued Liabilities
i
Other accrued liabilities consisted of the following (in thousands):
On February 22, 2023, the Company amended its Credit Facility. The amendment implemented, among other things, certain changes in the reference rate from LIBOR to the SOFR. Effective February 28, 2023, the Company has a choice of interest rates between (a) Adjusted Term SOFR and (b) Base Rate (as defined in the Credit Facility), in each case plus an applicable margin. The applicable margin remains the same as the existing Credit Agreement and is based on the Company’s Consolidated Leverage Ratio (as defined in the Credit Agreement) and whether the
Company elects Adjusted Term SOFR (ranging from i1.75 to i2.50%) or Base Rate (ranging from i0.75
to i1.50%).
In addition, the amendment adjusted the definition of Consolidated EBITDA to provide an addback solely for the fourth fiscal quarter of 2022, and any period including such quarter, that costs and legal fees and expenses incurred by the Company in connection with its ongoing litigation with Oracle up to $i10.0 million
can be added back and included in the applicable calculation of Consolidated EBITDA.
Based on voluntary prepayments made to date under the Credit Facility, the Company currently has available $i40.0 million in incremental borrowings available for future use, subject to the terms of the Credit Facility.
On May 31, 2022,
the Company amended the Credit Facility to increase the aggregate value of the shares of Common Stock that can be repurchased by the Company to $i50 million during the term of the Credit Facility.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
31,
2022, the Company also made its required iiithree//
principal payments of $iii1.1// million,
respectively. On May 31, 2022, the Company prepaid $i5.0 million of indebtedness outstanding under its Credit Facility with ino prepayment penalty.
Effective
July 20, 2021, the Company received $i89.3 million of net proceeds pursuant to the Credit Facility. The borrowings under the Credit Facility were incurred with an original discount of i0.375%.
As part of the transaction, the Company incurred issuance costs of $i4.2 million, which were capitalized and are being amortized over the term of the Credit Facility.
The Credit Facility originally bore interest at LIBOR, plus a margin ranging from i1.75%
to i2.50% through February 28, 2023. Subsequently, the Credit Facility was amended to bear interest at SOFR as noted above. For the three months ended September 30, 2023 and 2022, the average interest rate on the Credit Facility was i7.12%
and i3.94%, respectively. For the nine months ended September 30, 2023 and 2022, the average interest rate on the Credit Facility was i6.76% and
i3.06%, respectively.
On May 18, 2022, the Company entered into an interest rate swap agreement with a notional value of $i40.0 million,
with a fixed payer LIBOR rate of i2.9935% and an initial floating LIBOR rate of i0.93557%. The floating rate is reset at each month end and had an embedded floor rate of i0.0%.
The term of the interest rate swap agreement coincides with that of the Credit Facility. See Note 11 for further information regarding the fair value accounting for the interest rate swap agreement. Effective February 28, 2023, the interest rate swap agreement was amended in connection with the amendment of the Credit Facility to implement certain changes in the reference rate from LIBOR to SOFR.
The fair value of the Credit Facility was $i74.9 million
(Level 2 inputs) as of September 30, 2023 compared to the carrying value of $i73.9 million as of September 30, 2023. The fair value of the Credit Facility was $i78.8
million (Level 2 inputs) as of December 31, 2022 compared to the carrying value of $i77.8 million as of December 31, 2022.
The Credit Facility contains certain financial covenants, including a minimum fixed charge coverage ratio greater than i1.25,
a total leverage ratio less than i3.75, and a minimum liquidity balance of at least $i20 million in U.S. cash. Annual minimum principal payments over the ifive-year
term for the Credit Facility are i5%, i5%, i7.5%,
i7.5%, and i10%, respectively, with the remaining balance due at the end of the term.
Pursuant to a Guaranty
and Security Agreement, dated July 2, 2021 (the “Guaranty and Security Agreement”), among the Credit Parties and Capital One, National Association, as agent, the obligations under the Credit Facility are guaranteed by certain of the Company’s subsidiaries (the Company and the guarantors, collectively, the “Credit Parties”) and are secured, subject to customary permitted liens and exceptions, by a lien on substantially all assets of the Credit Parties.
i
The
components of interest expense are presented below (in thousands):
Accretion
expense related to discount and issuance costs
i245
i245
i728
i728
Interest
on finance leases
i21
i25
i60
i72
$
i1,413
$
i1,167
$
i4,139
$
i2,974
/
For
the three and nine months ended September 30, 2023, interest expense included a reduction related to interest rate swap payments received of $i0.2 million and $i0.6 million, respectively.
On May 28, 2022, the Board of Directors authorized an increase to the Company’s previously announced Common Stock repurchase program to increase the value of the shares that could be acquired by the
Company from up to $i15.0 million over itwo years to up to $i50.0 million
over ifour years, subject to compliance with the Company’s Credit Facility, provided that all other applicable conditions and legal requirements are satisfied.
10
RIMINI STREET, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On
February 27, 2022, the Board of Directors approved the adoption of a stock repurchase program to acquire up to $i15.0 million of the Company’s Common Stock both on the open market and in privately negotiated transactions, including through Rule 10b5-1 plans, through March 4, 2024, subject to compliance with the Company's
Credit Facility, which was amended effective January 14, 2022 to increase the aggregate value of the shares of Common Stock that could be acquired by the Company to no greater than $i15.0 million during the term of the Credit Facility, provided that all other applicable conditions and legal requirements are satisfied.
During the three months ended September
30, 2023, the Company did inot acquire any shares of its Common Stock on the open market. For the nine months ended September 30, 2023, the Company acquired i0.2 million
shares of its Common Stock on the open market at a cost of $i1.0 million. For the three months ended September 30, 2022, the Company acquired i0.2 million
shares of its Common Stock on the open market at a cost of $i1.0 million. For the nine months ended September 30, 2022, the Company acquired an aggregate i0.9 million
shares of Common Stock on the open market at a total cost of $i4.7 million. Upon completion of all repurchase transactions, the associated shares of Common Stock were retired.
Stock Plans
The Company’s stock plans consist of the 2007 Stock Plan (the “2007 Plan”) and the 2013 Equity Incentive Plan, as amended and restated in July 2017 (the “2013 Plan”). The
2007 Plan and the 2013 Plan are collectively referred to as the “Stock Plans”. On February 23, 2023, pursuant to the “evergreen” provisions of the 2013 Plan, the Board of Directors authorized an increase of approximately i3.5 million shares available for grant under the 2013 Plan. For additional information about the Stock Plans, please refer to Note 8 to the
Company’s Consolidated Financial Statements for the year ended December 31, 2022, included in Part II, Item 8 of the 2022 Form 10-K. The information presented below provides an update for activity under the Stock Plans for the three and nine months ended September 30, 2023.
On March 31, 2023, the Company’s Board of Directors, approved the Company’s 2023 Long-Term Incentive Plan (the “2023 LTI Plan”), consisting of awards of performance units (“PSUs”), restricted stock units (“RSUs”) and stock options to purchase shares of the
Company’s Common Stock under the terms of the Company’s 2013 Equity Incentive Plan (the “2013 Equity Plan”), as amended, effective as of April 3, 2023.
Performance Units
The PSUs awarded under the 2023 LTI Plan (the “Target PSUs”) will be measured over a performance period beginning on January 1, 2023 and ending on December 31, 2023 (the “Performance Period”), but will remain subject to a continued service-based vesting requirement. Half of the PSUs awarded will be eligible to vest based on the Company’s
achievement against a target adjusted EBITDA goal for fiscal year 2023, and the remaining half of the PSUs awarded will be eligible to vest based on the Company’s achievement against a target total revenue goal for fiscal year 2023. The ultimate number of PSUs that may vest (as calculated, the “Earned PSUs”) range from izero to i200%
of the Target PSUs. Under the terms of the 2023 LTI Plan, the Earned PSUs will vest in equal annual installments on the first, second and third anniversaries of the Date of Grant, generally subject to the awardee continuing to be a Service Provider through the applicable vesting date.
The Company granted i0.6
million PSUs on April 3, 2023 at a grant price of $i3.93. The Company recognized compensation expense related to PSUs of $i0.4
million and $i0.7 million for the three and nine ended September 30, 2023, respectively.
Restricted Stock Units
For the nine months ended September 30, 2023, the Board of Directors granted RSUs under the 2013 Plan to employees and to non-employee members of the Board of Directors for an aggregate of approximately i1.4
million shares of Common Stock. RSU grants vest over periods generally ranging from i12 to i36 months from the respective grant dates and the awards are subject to forfeiture
upon termination of employment or service on the Board of Directors, as applicable. Based on the weighted average fair market value of the Common Stock on the date of grant of $i4.16 per share, the aggregate fair value for the shares underlying the RSUs amounted to $i5.6
million as of the grant date that will be recognized as compensation cost over the vesting period. For the three months ended September 30, 2023 and 2022, the Company recognized compensation expense related to RSUs of approximately $i1.8 million and $i1.8
million, respectively. For the nine months ended September 30, 2023 and 2022, the Company recognized expense of $i5.7 million and $i6.6
million, respectively. As of September 30, 2023, the unrecognized expense of $i7.0 million net of forfeitures is expected to be charged to expense on a straight-line basis as the RSUs vest over a weighted-average period of approximately i1.6
years.
11
RIMINI STREET, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Stock Options
For the nine months ended September 30, 2023, the Board of Directors granted stock options for the purchase of an aggregate of approximately i1.9
million shares of Common Stock at exercise prices that were equal to the fair market value of the Common Stock on the date of grant. Options granted to employees generally vest as to one-third of the shares subject to the award on each anniversary of the designated vesting commencement date, which may precede the grant date of such award, and expire iten years after the grant date.
i
The
following table sets forth a summary of stock option activity under the Stock Plans for the nine months ended September 30, 2023 (shares in thousands):
(1)Represents
the weighted average exercise price.
(2)Represents the weighted average remaining contractual term until the stock options expire in years.
(3)As of September 30, 2023, there was ino aggregate intrinsic value of all stock options outstanding. As of September
30, 2023, there was ino aggregate intrinsic value of vested stock options.
(4)The number of outstanding stock options that are not expected to ultimately vest due to forfeiture amounted to i0.4
million shares as of September 30, 2023.
/
i
The following table presents activity affecting the total number of shares available for grant under the Stock Plans for the nine months ended September 30, 2023 (in thousands):
The
aggregate fair value of approximately i1.9 million stock options granted for the nine months ended September 30, 2023 amounted to $i4.5
million, or $i2.33 per stock option as of the grant date utilizing the Black-Scholes-Merton (“BSM”) method. The fair valued derived under the BSM method will result in the recognition of compensation cost over the vesting period of the stock options. iFor
the nine months ended September 30, 2023, the fair value of each stock option grant under the Stock Plans was estimated on the date of grant using the BSM option-pricing model, with the following weighted-average assumptions:
12
RIMINI STREET, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Expected life (in years)
i6.0
Volatility
i55%
Dividend
yield
i0%
Risk-free interest rate
i3.75%
Fair
value per share of Common Stock on date of grant
$i4.20
As of September 30, 2023 and December 31, 2022, total unrecognized compensation costs related to unvested stock options, net of estimated forfeitures, was $i5.3
million and $i4.1 million, respectively. As of September 30, 2023, the unrecognized costs are expected to be charged to expense on a straight-line basis over a weighted-average vesting period of approximately i2.0
years.
Stock-Based Compensation Expense
iStock-based compensation expense attributable to RSUs and stock options is classified as follows (in thousands):
As
of September 30, 2023, warrants were outstanding for an aggregate of i3.4 million shares of Common Stock exercisable at $i5.64
per share. For additional information about these warrants, please refer to Note 8 to the Company’s Consolidated Financial Statements for the year ended December 31, 2022, included in Part II, Item 8 of the 2022 Form 10-K.
NOTE 7 — iINCOME TAXES
On August
16, 2022, the Inflation Reduction Act of 2022 (the “IRA”) was signed into law. The IRA includes a 15% corporate alternative minimum tax for companies that report over $1 billion in U.S. profits to shareholders and a 1% excise tax on stock buy backs. The Company does not expect the IRA to have a material tax impact.
For the three months ended September 30, 2023 and 2022, the Company’s effective tax rate was i37.1%
and i12.1%, respectively. For the nine months ended September 30, 2023 and 2022, the Company’s effective tax rate was i44.1%
and i65.1%, respectively. The Company’s income tax expense was primarily attributable to earnings in the United States and foreign jurisdictions subject to income taxes and foreign withholding taxes. The Company did not have any material changes to its conclusions regarding valuation allowances for deferred income tax assets or uncertain tax positions for the three and nine months ended September 30,
2023 and 2022.
For additional information about income taxes, please refer to Note 9 to the Company’s Consolidated Financial Statements for the year ended December 31, 2022, included in Part II, Item 8 of the 2022 Form 10-K.
NOTE 8 — iCOMMITMENTS
AND CONTINGENCIES
Retirement Plan
The Company has defined contribution plans for both its U.S. and foreign employees. For certain of these plans, employees may contribute up to the statutory maximum, which is set by law each year. The plans also provide for employer contributions. For the three months ended September 30, 2023 and 2022, the Company’s matching contributions to these plans totaled $i1.0 million
and $i0.8 million, respectively. For the nine months ended September 30, 2023 and 2022, the Company’s matching contributions to these plans totaled $i2.6
million and $i2.7 million, respectively.
13
RIMINI STREET, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Rimini I Litigation
In
January 2010, certain subsidiaries of Oracle Corporation (together with its subsidiaries individually and collectively, “Oracle”) filed a lawsuit, Oracle USA, Inc. et al. v. Rimini Street, Inc. et al. (United States District Court for the District of Nevada) (the “District Court”) (“Rimini I”), against the Company and its Chief Executive Officer, Chairman of the Board and President, Seth Ravin, alleging that certain of the Company’s processes (Process 1.0) violated Oracle’s license agreements with its customers and that the
Company committed acts of copyright infringement and violated other federal and state laws. The litigation involved the Company’s business processes and the manner in which the Company provided services to its clients.
After completion of a jury trial in 2015 and subsequent appeals, the final outcome of Rimini I was that Mr. Ravin was found not liable for any claims and the Company was found liable for only ione
claim: “innocent infringement,” a jury finding that the Company did not know and had no reason to know that its former support processes were infringing. The jury also found that the infringement did not cause Oracle to suffer lost profits. The Company was ordered to pay a judgment of $i124.4 million in 2016, which the Company promptly
paid and then pursued appeals. With interest, attorneys’ fees and costs, the total judgment paid by the Company to Oracle after the completion of all appeals was approximately $i89.9 million. A portion of such judgment was paid by the Company’s insurance carriers.
Rimini I Injunction Proceedings
Since November 2018,
the Company has been subject to a permanent injunction (the “Rimini I Injunction”) prohibiting it from using certain support processes that had been found in Rimini I to “innocently” infringe certain Oracle copyrights. The Rimini I Injunction does not prohibit the Company’s provision of support services for any Oracle product lines, but rather defines the manner in which the Company can provide support services for certain Oracle product lines.
In July 2020, Oracle filed a motion to show cause contending that the Company was in violation of the Rimini
I Injunction, and the Company opposed this motion, disputing Oracle’s claims. In January 2022, the District Court issued its findings and order following an evidentiary hearing held in September 2021 regarding whether the Company (i) violated the Rimini I Injunction for certain accused conduct and (ii) should be held in contempt in those instances where the District Court found a violation of the Rimini I Injunction, and what sanctions, if any, were appropriate.
In the order, the District Court ruled in favor of the Company with respect to ifive
of the items. With respect to the other ifive items, the District Court found the Company violated the Rimini I Injunction, awarded sanctions to Oracle of $i0.6 million
and ordered that certain computer files be quarantined from use and notice and proof of such quarantining be provided to Oracle. The District Court also ruled that Oracle may recover its reasonable attorneys’ fees and costs. The Company reserved all rights, including appellate rights, with respect to the District Court rulings.
In February 2022, the Company filed a notice of appeal in the District Court, commencing an appeal of the District Court’s January 2022 decision to the Ninth Circuit Court of Appeals (“Court of Appeals”). Shortly thereafter, the District Court stayed the briefing on Oracle’s bill of attorneys’ fees and costs until the Company’s
appeal was resolved.
Following oral argument on the appeal held in February 2023, on August 24, 2023, the Court of Appeals issued its decision on the Company’s appeal of the five items for which the District Court held the Company in contempt. The Court of Appeals affirmed the District Court’s contempt findings on ifour
of the ifive items and reversed the District Court’s finding of contempt on the fifth item, holding that the District Court had abused its discretion in holding the Company in contempt. In addition, the Court of Appeals vacated the District Court’s order to the extent that it read the Rimini I Injunction to prohibit “de minimis” copying, as well as vacated and remanded the sanctions award to the District Court for recalculation in light of its reversal of the contempt
finding on the fifth item.
On September 6, 2023, the Company filed a petition for panel rehearing and rehearing en banc of the Court of Appeals’ ruling that the District Court was permitted to use the Copyright Act’s damages framework to measure the original award of $i0.6 million in sanctions to Oracle. On October
12, 2023, the Court of Appeals denied the Company’s petition. On October 25, 2023, the District Court filed an order imposing a recalculated award against the Company, reducing the sanctions originally awarded to Oracle by $i0.1 million and reimposing the remaining $i0.5 million
sanctions award, which amount was previously paid by the Company to Oracle, as described below.
At this time, the Company believes that it is in substantial compliance with the Rimini I Injunction and has complied with the order regarding the quarantining of certain computer files. As of September 30, 2023 and December 31, 2022, the Company
14
RIMINI STREET,
INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
had accrued $ii6.9/ million,
respectively, as an estimate related to Oracle’s reasonable attorneys’ fees and costs relating to this matter. During the nine months ended September 30, 2022, the Company paid $i0.6 million to Oracle for the sanctions award. Regarding the Company’s estimate for reasonable attorneys’ fees and costs, significant judgment is required to determine the
amount of loss related to this matter as the outcome is inherently unpredictable and subject to uncertainties. Per order of the District Court, the deadline for Oracle to file its proposed bill of reasonable fees and costs is November 24, 2023. The Company’s response is due sixty (60) days after Oracle’s filing, and Oracle’s reply is due twenty (20) days after the Company’s response. The Company reserves all rights, including appellate rights, with respect to the District Court’s rulings in the contempt matter, including any award of attorneys’ fees and costs. An adverse outcome regarding Oracle’s motion for attorneys’ fees and costs could have a material adverse
impact on the Company’s financial position, results of operations and cash flows.
Rimini II Litigation
In October 2014, the Company filed a separate lawsuit, Rimini Street Inc. v. Oracle Int’l Corp., in the District Court against Oracle seeking a declaratory judgment that the Company’s revised “Process 2.0” support practices, in use since at least July 2014, did not infringe certain Oracle copyrights (“Rimini II”). The Company’s operative
complaint asserted declaratory judgment, tort, and statutory claims, including a request for injunctive relief against Oracle for unfair competition in violation of the California Unfair Competition Law. Oracle asserted counterclaims including copyright infringement claims, violations of the Digital Millennium Copyright Act (“DMCA”) and Lanham Act, breach of contract and business tort violations with respect to PeopleSoft and other Oracle-branded products, including J.D. Edwards, Siebel, Oracle Database and Oracle E-Business Suite (“EBS”).
In mid-October 2022, on the eve of the Rimini II jury trial, Oracle withdrew all of its monetary damages claims against the Company and the
Company’s Chief Executive Officer, Chairman of the Board and President, Mr. Ravin in Rimini II and moved to proceed with a bench trial instead of a jury trial for its claims for equitable relief.
The District Court entered an order on October 24, 2022, dismissing with prejudice Oracle’s claims in Rimini II “for monetary relief of any kind under any legal theory[,] including but not limited to claims for damages, restitution, unjust enrichment, and engorgement. . . .” In addition, Oracle’s claims for breach of contract, inducing breach of contract and an accounting, were dismissed with prejudice, meaning that the claims (including for monetary damages) have been dismissed
on their merits and that the judgment rendered is final. Prior to the date of the District Court’s order dismissing with prejudice all of Oracle’s claims for monetary relief, no damages of any kind were awarded by the District Court in Rimini II. The parties each reserved the right to seek or object to any attorneys’ fees and/or costs to the extent permissible by law.
The Rimini II bench trial began in Las Vegas on November 29, 2022 and concluded on December 15, 2022. The parties submitted their proposed findings of fact and conclusions of law to the District Court in February 2023.
On July 24, 2023, the District Court issued its findings of fact and conclusions of law in Rimini II, accompanied by
a permanent injunction against the Company (the “Rimini II Injunction”) which, as set forth in detail below, is subject to an administrative stay and is not currently effective. The District Court found infringement as to Oracle’s PeopleSoft and Oracle Database products but did not find infringement as to Oracle’s EBS, Siebel and J.D. Edwards products, further ordering that the Company was entitled to a declaration of non-infringement for Oracle’s EBS product. The District Court also found in favor of Oracle on its DMCA and Lanham Act claims, enjoining the Company from making certain statements and prohibiting certain actions in connection with the manner of marketing, selling and providing services to clients
of the Oracle products in question as further described below, and on indirect and vicarious copyright infringement claims against the Company’s Chief Executive Officer, Chairman of the Board and President, Mr. Ravin. The District Court denied the Company’s California Unfair Competition Law claim and other declaratory judgment claims.
On July 25, 2023, the Company filed a notice of appeal in the District Court, commencing an appeal of the District Court’s July 24, 2023 Rimini II judgment and Injunction.
On
July 28, 2023, the Company filed an emergency motion with the District Court to stay enforcement of the Rimini II Injunction pending the Company’s appeal of the Rimini II judgment and Injunction.
On August 15, 2023, the District Court issued an order denying the Company’s emergency motion to stay the Rimini II Injunction pending the Company’s appeal with the Court of Appeals, but it granted an administrative stay of the Rimini II Injunction pending the outcome of a
motion to stay to be filed by the Company with the Court of Appeals.
15
RIMINI STREET, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On August 22, 2023, the Company filed the separate motion to stay the Rimini II Injunction with the Court of Appeals, asserting that certain provisions of the Rimini II Injunction are vague and overbroad, that
the District Court committed legal error, that certain provisions would require the Company to commit criminal acts to comply with its terms, and that the Rimini II Injunction would cause the Company and third parties “irreparable harm,” among other grounds. As of the date of this Report, the Court of Appeals has not issued a decision on the Company’s motion to stay the Rimini II Injunction.
As of the date of this Report, the Rimini II Injunction, as issued by the District Court, is currently stayed by the District Court, meaning that it is not currently effective. The Rimini II Injunction is primarily directed at Oracle’s PeopleSoft software
product and, if effective, would limit, but not fully prohibit, the support services the Company can provide its clients using Oracle’s PeopleSoft software product.
Among other things, the Rimini II Injunction requires the Company to immediately and permanently delete certain PeopleSoft software environments, files and updates identified in the Rimini II Injunction, as well as to delete and immediately and permanently discontinue use of certain Company-created automated tools. The Rimini II Injunction also prohibits using, distributing, copying, or making derivative works from certain files, and it prohibits the transfer or copying of PeopleSoft files, updates, and modifications, and portions of PeopleSoft software that are developed,
tested, or exist in one client’s systems to the Company’s systems or another client’s systems.
The Rimini II Injunction also specifies that the Company shall not remove, alter or omit any Oracle copyright notices or other Oracle copyright management information from any file that contains an Oracle copyright notice and prohibits the Company from publicly making statements or statements substantially similar to those the District Court found to be “false and misleading,” which are listed in the Rimini II Injunction.
On August 21, 2023,
Oracle filed a motion to amend the District Court’s judgment in Rimini II regarding an update, technical specification and tool related to Oracle’s EBS software product. As of the date of this Report, the District Court has not issued a decision on Oracle’s motion to amend.
On September 12, 2023, the Court of Appeals issued an order holding the Company’s appeal of the District Court’s decision in Rimini II in abeyance pending the District Court’s resolution of Oracle’s above-described motion to amend the Rimini II judgment. Accordingly, as of the date of this Report, the briefing schedule for the Company’s appeal of the Rimini II decision has been stayed.
While
the Company plans to continue to vigorously pursue a stay of the Rimini II Injunction pending appeal and its appeal of the Rimini II judgment and Injunction, it is unable to predict the timing or outcome of these matters. No assurance is or can be given that the Company will succeed in its efforts to stay the Rimini II Injunction in full or in part pending appeal or prevail in all or part of its Rimini II appeal.
There were no monetary damages included in the District Court’s judgment in Rimini II. The deadline for the parties to file motions for attorneys’ fees and costs is November 6, 2023, and oppositions to such motions are due February
20, 2024. As of the date of this Report, no party has filed such a motion with the District Court. A decision about whether to award any attorneys’ fees and/or costs, and if so, the amounts, will be made by the District Court. Accordingly, at this time the Company does not believe that any award of attorneys’ fees and costs are probable or estimatable. An adverse outcome regarding any Oracle motion for attorneys’ fees and costs could have a material adverse impact on the Company’s financial position, results of operations and cash flows.
The Rimini II Injunction, if reinstated, would affect certain support services delivered by the Company to clients
receiving support for Oracle’s PeopleSoft products and is expected to result in additional future period costs, among other potential impacts.However, these costs are not currently estimatable and are not required to be recorded as of September 30, 2023. Accordingly, the Company has made no associated accrual as of September 30, 2023. Any required changes to how support services are delivered to the Company’s PeopleSoft clients could have a material adverse impact on the Company’s financial position, results of operations and cash flows. The percentage of revenue derived
from services the Company provides solely for Oracle’s PeopleSoft software product was approximately i8% and i9% of the Company’s total revenue for
the three and nine months ended September 30, 2023, respectively.
The Company reserves all rights, including appellate rights, with respect to the District Court’s rulings in Rimini II and the Rimini II Injunction, including any award of attorneys’ fees and costs to Oracle.
16
RIMINI STREET, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Other Litigation
From
time to time, the Company may be a party to litigation and subject to claims incident to the ordinary course of business. Although the results of litigation and claims cannot be predicted with certainty, the Company currently believes that the final outcome of these ordinary course matters will not have a material adverse effect on its business. Regardless of the outcome, litigation can have an adverse impact on the Company because of judgment, defense and settlement costs, diversion of management resources and other factors. At each reporting period, the Company evaluates whether or not a potential loss amount or a potential
range of loss is probable and reasonably estimatable under ASC 450, Contingencies. Legal fees are expensed as incurred.
Liquidated Damages
The Company enters into agreements with clients that contain provisions related to liquidated damages that would be triggered in the event that the Company is no longer able to provide services to these clients. The maximum cash payments related to these liquidated damages is approximately $i12.6
million and $i8.1 million as of September 30, 2023 and December 31, 2022, respectively. To date, the Company has not incurred any costs as a result of such provisions and has not accrued any liabilities related to such provisions in these Unaudited Condensed Consolidated Financial Statements.
NOTE
9 — iRELATED PARTY TRANSACTIONS
An affiliate of Adams Street Partners and its affiliates (collectively referred to as “ASP”) is a member of the Company’s Board of Directors. As of September 30, 2023, ASP owned approximately i26.4%
of the Company’s issued and outstanding shares of Common Stock.
NOTE 10 —iEARNINGS PER SHARE
iThe
Company computes earnings per share in accordance with ASC Topic 260, Earnings per Share. Basic earnings per share of Common Stock is computed by dividing net income attributable to common stockholders by the weighted average number of shares of basic Common Stock outstanding. Diluted earnings per share of Common Stock is calculated by adjusting the basic earnings per share of Common Stock for the effects of potential dilutive Common Stock shares outstanding such as stock options, restricted stock units and warrants.
For both the three and nine months ended September 30, 2023 and 2022, basic and diluted net earnings per share of Common Stock were computed by dividing the net income attributable to common stockholders by the weighted
average number of common shares outstanding during the respective periods. iThe following tables set forth the computation of basic and diluted net income attributable to common stockholders (in thousands, except per share amounts):
17
RIMINI STREET, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Weighted average number of shares of Common Stock outstanding:
Basic
i89,228
i87,965
i88,942
i87,441
Warrants
i—
i—
i—
i—
Stock
options
i—
i—
i18
i543
RSUs
i129
i—
i362
i1,070
Diluted
i89,357
i87,965
i89,322
i89,054
Net
income (loss) per share attributable to common stockholders:
Basic
$
i0.08
$
i—
$
i0.19
$
i0.03
Diluted
$
i0.08
$
i—
$
i0.19
$
i0.03
i
The
following potential Common Stock equivalents were excluded from the computation of diluted net income per share for the respective periods ending on these dates, since the impact of inclusion was anti-dilutive (in thousands):
NOTE
11 — iFINANCIAL INSTRUMENTS AND SIGNIFICANT CONCENTRATIONS
Fair Value Measurements
Fair value is defined as the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. When determining fair value, the Company considers the principal or most advantageous market in which it transacts and considers assumptions that market
participants would use when pricing the asset or liability. Additional information on fair value measurements is included in Note 13 to the Company’s Consolidated Financial Statements for the year ended December 31, 2022, included in Part II, Item 8 of the 2022 Form 10-K. The Company’s policy is to recognize asset or liability transfers among Level 1, Level 2 and Level 3 as of the actual date of the events or change in circumstances that caused the transfer.
Investments
During September 2022, the Company invested $i20 million
of its cash and cash equivalents into U.S. Federal agency bonds, U.S. government bonds, U.S. treasury notes and other securities. We consider all highly liquid interest-earning investments with a maturity of three months or less at the date of purchase to be cash equivalents. The fair values of these investments approximate their carrying values.
In general, investments with original maturities of greater than three months and remaining maturities of less than one year are classified as short-term investments. Debt investments are classified as available-for-sale and gains and losses are recorded using the specific identification method. Changes in fair value are recorded in the operating statement. Fair value is calculated based on publicly available market information.
18
RIMINI
STREET, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
i
Listed below are the cash equivalent and investment balances as of September 30, 2023 (in thousands):
Fair
Value Level
Cost Basis
Unrealized Gains (Losses)
Recorded Basis
Cash Equivalents
Short-term Investments
Long-term Investments
Federal Agency Bonds
Level 2
$
i14,895
$
i165
$
i15,060
$
i195
$
i14,160
$
i705
US
Treasury notes
Level 2
i5,716
i38
i5,754
i—
i5,754
i—
$
i20,611
$
i203
$
i20,814
$
i195
$
i19,914
$
i705
/
Derivatives
On
May 18, 2022, the Company entered into an interest rate swap agreement for a notional value of $i40.0 million. The derivative was recognized in the accompanying Unaudited Condensed Consolidated Balance Sheets at its estimated fair value as of September 30, 2023. The Company uses derivatives to manage the risk associated with changes in interest rates.
The Company does not enter into derivatives for speculative purposes.
To estimate fair value for the Company's interest rate swap agreement as of September 30, 2023, the Company utilized a present value of future cash flows, leveraging a model-derived valuation that uses Level 2 observable inputs such as interest rate yield curves. The Company estimated the fair value of the interest rate swap agreement to be $1.8 million as of September 30, 2023.
Changes
in the fair value of the derivatives that qualify as cash flow hedges are recorded in Accumulated other comprehensive loss in the accompanying Unaudited Condensed Consolidated Balance Sheets until earnings are affected by the variability of the cash flows.
The Company received interest swap payments of $i0.2 million and $i0.6
million during the three and nine months ended September 30, 2023, respectively, which were recorded as a reduction to interest expense. The Company incurred interest payments of $i0.1 million and $i0.2
million during the three and nine months ended September 30, 2022, respectively, which were recorded as interest expense.
i
The amounts recorded for the interest rate swap agreement are described below (in thousands):
The Company attributes revenues to geographic regions based on the location of its clients’ contracting entities. iThe following table shows revenues by geographic region (in thousands):
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
No clients represented more than 10% of revenue for both the three and nine months ended September 30, 2023 and 2022. As of September 30, 2023 and December 31, 2022, no clients accounted for more than 10% of total net accounts receivable. The Company tracks its assets by physical location. As of September 30, 2023 and December 31, 2022, the net carrying value
of the Company’s property and equipment located outside of the United States amounted to approximately $i2.5 million and $i1.8 million respectively. As of September
30, 2023, the Company had operating lease right-of-use assets of $i3.3 million, $i2.4 million and $i0.7
million in the United States, India and the rest of the world, respectively. As of December 31, 2022, the Company had operating lease right-of-use assets of $i2.6 million, $i3.4
million and $i1.2 million in the United States, India and the rest of the world, respectively.
Financial instruments that subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, restricted cash, and accounts receivable. The Company maintains its cash, cash equivalents and restricted cash at high-quality financial institutions,
primarily in the United States. Deposits, including those held in foreign branches of global banks, may exceed the amount of insurance provided on such deposits. As of September 30, 2023 and December 31, 2022, the Company had cash, cash equivalents and restricted cash with a single financial institution for an aggregate of $i32.5 million and $i44.9
million, respectively. In addition, as of September 30, 2023, the Company had cash and cash equivalents with ithree other single financial institutions of $i61.2
million. As of September 30, 2023 and December 31, 2022, the Company had restricted cash of $ii0.4/
million. The Company has never experienced any losses related to these balances.
Generally, credit risk with respect to accounts receivable is diversified due to the number of entities comprising the Company’s client base and their dispersion across different geographies and industries. The Company performs ongoing credit evaluations on certain clients and generally does not require collateral on accounts receivable. The Company maintains reserves for potential bad debts and historically such losses are generally not significant.
NOTE
12 - iLEASES
Effective at the start of fiscal 2020, the Company adopted the provisions and expanded disclosure requirements described in Accounting Standards Codification (ASC) Topic 842, Leases. The Company adopted the standard using the prospective method. The Company has operating leases
for real estate and equipment with an option to renew the leases for up to ione month to ifive years. Some of the leases include the option to terminate the leases upon i30-days’
notice with a penalty. The Company’s leases have various remaining lease terms ranging from July 2023 to December 2028. The Company’s lease agreements may include renewal or termination options for varying periods that are generally at the Company's discretion. The Company’s lease terms only include those periods related to renewal options the Company believes are reasonably certain to exercise. The Company generally does not include these renewal options
as it is not reasonably certain to renew at the lease commencement date. This determination is based on consideration of certain economic, strategic and other factors that the Company evaluates at lease commencement date and reevaluates throughout the lease term. Some leases also include options to terminate the leases and the Company only includes those periods beyond the termination date if it is reasonably certain not to exercise the termination option.
The Company uses a discount rate to calculate the right of use (“ROU”) asset and lease liability. When the implicit rate is known or provided in the lease documents, the
Company is required to use this rate. In cases in which the implicit rate is not known, the Company uses an estimated incremental borrowing rate.
Some leasing arrangements require variable payments that are dependent on usage or may vary for other reasons, such as payments for insurance and tax payments. The variable portion of lease payments is not included in the Company’s ROU assets or lease liabilities. Rather, variable payments, other than those dependent upon an index or rate, are expensed when the obligation for those payments is incurred and are included in lease expenses recorded in selling and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income.
The
Company has lease agreements with both lease and non-lease components that are treated as a single lease component for all underlying asset classes. Accordingly, all expenses associated with a lease contract are accounted for as lease expenses.
The Company has elected to apply the short-term lease exception for all underlying asset classes. That is, leases with a term of 12 months or less are not recognized on the balance sheet, but rather expensed on a straight-line basis over the lease term. The Company’s leases do not include significant restrictions or covenants, and residual value guarantees are generally not included within its operating
leases. As of September 30, 2023, the Company has ione additional operating lease with a net present value of $i0.5 million
in Tokyo, Japan that will commence on October 1, 2023.
20
RIMINI STREET, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
i
The components of lease expense and supplemental balance sheet information were as follows (in thousands):
For
the three months ended September 30, 2023 and 2022, the Company paid $i1.3 million and $i1.4 million,
respectively, for operating lease liabilities. For the nine months ended September 30, 2023 and 2022, the Company paid $i4.2 million and $i4.1
million, respectively, for operating lease liabilities.
21
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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,”“currently,”“estimate,”“expect,”“future,”“intend,”“may,”“might,”“outlook,”“plan,”“possible,”“potential,”“predict,”“project,”“seem,”“seek,”“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
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;
•costs, including attorneys’ fees, 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, including the disposition of pending motions to appeal, and any new claims;
•any additional expenses to be incurred in order to comply with the Rimini II Injunction and the impact on future period revenue and costs;
•estimates
of our total addressable market;
•expectations of client savings relative to use of other providers;
•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 or raise additional capital necessary to fund our operations and invest in new services and products;
•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 to sell our application management services (“AMS”) and Rimini ONE™ integrated services;
•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;
•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;
22
•the
amount and timing of repurchases, if any, under our stock repurchase program and our ability to enhance stockholder value through such program or any other actions to provide value to stockholders;
•the attraction and retention of additional qualified personnel, including sales personnel, and the retention of key personnel;
•future acquisitions of or investments in complementary companies, products, subscriptions or technologies;
•uncertainty from the discontinuance of LIBOR and the transition to SOFR or 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 ended December 31, 2022, included in Part II, Item 8 of our 2022 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.
Rimini Street, Inc. was formed in the State of Nevada in 2005 and, through a merger in 2017 with a public company, became Rimini Street, Inc., a Delaware corporation, trading on the Nasdaq Global Market under the ticker symbol “RMNI.”
Rimini Street, Inc. and its subsidiaries (referred to as “Rimini Street”, the “Company”, “we” and “us”) are global providers of end-to-end enterprise software support, products and services. The Company offers a comprehensive
family of unified solutions to run, manage, support, customize, configure, connect, protect, monitor, and optimize clients’ enterprise application, database, and technology software platforms.
Over the years, as our reputation for technical capability, value, innovation, responsiveness and trusted reliability grew, clients and prospects began asking us to expand the scope of our support, product and service offerings to meet other current and evolving needs and opportunities related to their enterprise software. We also heard from prospects and clients that their goals include reducing the number of IT vendors to more manageable numbers from a governance perspective, with a desire to select vendors who can provide a wider scope of IT services and become true trusted partners.
23
To
meet the needs of our clients and prospects and to service what we believe is a significantly expanded addressable market opportunity, we designed, developed and are now delivering a new, expanded solutions portfolio (our “Solutions Portfolio”) for a wider array of enterprise software – including an expanded list of supported software; managed services for Oracle, SAP, IBM, Salesforce and open-source database software; and new solutions for security, interoperability, observability and consulting. We also now offer an integrated package of our services as Rimini ONE™, a unique end-to-end, “turnkey” outsourcing option for Oracle and SAP landscapes designed to optimize our clients’ existing technologies with a minimum of 15 extended years of operating lifespan and enable our clients to focus their IT talent and budget on potentially higher-value, innovative projects that will support competitive advantage and growth.
Enterprise
software support, products and services is one of the largest categories of overall global information technology (“IT”) spending. We believe enterprise resource planning (“ERP”), customer relationship management (“CRM”), product lifecycle management (“PLM”) database and technology software systems have become increasingly important in the operation of mission-critical business processes over the last 30 years. Also the costs associated with running and supporting these systems, system failure and downtime, security exposure, system integration and monitoring, and maintaining the tax, legal and regulatory compliance of these software systems have each contributed to increases in both actual spend and as a percentage of the typical full IT budget. As a result, we believe that licensees often view enterprise software support, products and services as a mandatory cost of doing business. The majority of our revenue through September
30, 2023, was generated from our support solutions.
In a traditional licensing model, the customer typically procures a perpetual software license and pays for the license in a single upfront fee (“perpetual license”), and base software support services can be optionally procured from the software vendor for an annual fee that is typically 20-23% of the total cost of the software license. In a newer subscription-based licensing model, such as software as a service (“SaaS”), the customer generally pays for the usage of the software on a monthly or annual basis (“subscription license”). Under a subscription license, the product license and a base level of software support are generally bundled together as a single purchase, and the base level of software support is not procured separately nor is it an optional purchase.
When
we provide our support solutions for a perpetual software license, we generally offer our clients service for a fee that is equal to approximately 50% of the annual fees charged by the software vendor for their base support. When providing supplemental software support for a perpetual license, where the client procures our support service in addition to retaining the software vendor’s base support, we generally offer our clients service for a fee that is equal to approximately 25% of the annual fees charged by the software vendor for their base support. We also offer a special support service, Rimini Street Extra Secure Support, available to clients that require a more rigorous level of security background checks and/or government security clearance for engineers accessing a client’s system than our standard employment security background check and requirements. Clients may incur an additional fee for Rimini Street Extra Secure Support.
In
addition to our support services, we also offer a breadth of enterprise software support, products and services through our full portfolio of solutions at an additional fee that is calculated based on a variety of factors and metrics. Our solutions are designed to meet specific client needs and are designed to provide what we believe is exceptional value and return for the fees charged. For more details about our Solutions Portfolio, please see Item 1 “Business” included in Part I of our 2022 Form 10-K.
As of September 30, 2023, we employed over 2,050 professionals and supported over 3,090 active clients globally, including 66 Fortune 500 companies and 15 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.
Our subscription-based revenue provides a strong foundation for, and visibility into, future period results. For the three months ended September 30, 2023 and 2022, we generated revenue of $107.5 million and $101.9 million, respectively, representing an increase of 5%. During the three months ended September 30, 2023, we recorded net income of $6.8 million, and as of September 30, 2023, we had an accumulated deficit of $211.6 million. Approximately 52% of our revenue was generated in
the United States for both the three months ended September 30, 2023 and 2022, respectively. Approximately 48% of our revenue was generated in foreign jurisdictions for both the three months ended September 30, 2023 and 2022, respectively.
24
Since our inception, we have financed our operations through cash collected from clients and net proceeds from equity financings and borrowings.
Global Economic Uncertainty
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 fiscal 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 fiscal and monetary policy adopted during and after the COVID-19 pandemic, have had adverse macroeconomic impacts and increased inflationary cost pressures, causing the U.S. Federal Reserve to repeatedly raise rates. We expect additional rate increases in the future. 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 nine months ended September 30, 2023.
The extent to which rising inflation, interest rate increases, continuing global economic and geopolitical uncertainty, and any lingering impacts of the COVID-19 pandemic impact our business going forward, however, will depend on numerous evolving factors we cannot reliably predict, including continued governmental and business actions in response to increasing global economic uncertainty, including the possibility of recession or financial market instability.
As such, the effects of 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.
Recent Developments
Reference is made to Note 8 to our Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Report for a discussion of 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 of September 30, 2023 and 2022,
we had over 3,090 and 3,000 active clients, respectively.
We define a unique client as a distinct entity, such as a company, an educational or government institution or a subsidiary, division or business unit of a company that purchases one or more of our products or services. We count as two separate unique clients when two separate subsidiaries, divisions or business units of an entity purchase our products or services. As of September 30, 2023 and 2022, we had over 1,540 and 1,510 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.
25
Our
annualized recurring revenue was $416 million and $400 million as of September 30, 2023 and 2022, 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 94% for both the 12 months ended September 30, 2023 and 2022, 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 62.7% and 61.5% for the three months ended September 30, 2023 and 2022, respectively. We believe the gross profit margin provides an indication of how efficiently and effectively we are operating our business and serving our clients.
Our consolidated statements of operations for the three months ended September 30, 2023 and 2022, are presented below (in thousands):
Three
Months Ended September 30,
Variance
2023
2022
Amount
Percent
Revenue
$
107,453
$
101,931
$
5,522
5.4%
Cost
of revenue:
Employee compensation and benefits
25,904
25,493
411
1.6%
Engineering consulting costs
6,192
6,252
(60)
(1.0)%
Administrative
allocations (1)
3,520
3,970
(450)
(11.3)%
All other costs
4,494
3,556
938
26.4%
Total cost of revenue
40,110
39,271
839
2.1%
Gross
profit
67,343
62,660
4,683
7.5%
Gross profit margin
62.7
%
61.5
%
Operating expenses:
Sales
and marketing
35,593
35,934
(341)
(0.9)%
General and administrative
18,384
18,454
(70)
(0.4)%
Litigation costs and related recoveries, net
2,127
6,237
(4,110)
(65.9)%
Total
operating expenses
56,104
60,625
(4,521)
(7.5)%
Operating income
11,239
2,035
9,204
452.3%
Non-operating income and (expenses):
Interest
expense
(1,413)
(1,167)
(246)
21.1%
Other income (expenses), net
990
(1,329)
2,319
(174.5)%
Income (loss) before income taxes
10,816
(461)
11,277
(2,446.2)%
Income
taxes
(4,015)
56
(4,071)
(7,269.6)%
Net income (loss)
$
6,801
$
(405)
$
7,206
(1,779.3)%
-
(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 $101.9 million for the three months ended September 30, 2022 to $107.5 million for the three months ended September 30, 2023, an increase of $5.5 million or 5%. The increase was driven by an 3% increase in the average number of unique clients from 1,491 for the three months ended September 30, 2022 to 1,532 for the
three months ended September 30, 2023. On a geographic basis, United States revenue grew from $53.4 million for the three months ended September 30, 2022 to $55.7 million for the three months ended September 30, 2023, an increase of $2.3 million or 4%. Our international revenue grew from $48.5 million for the three months ended September 30, 2022 to $51.7 million for the three months ended September 30, 2023, an increase of $3.2 million or 7%.
Cost of revenue. Cost of revenue increased from $39.3 million for the three months ended September 30, 2022 to $40.1 million for the three
months ended September 30, 2023, an increase of $0.8 million or 2%. The key drivers related to the cost of revenue increase were a $0.4 million increase in employee compensation and benefits and a $0.9 million increase in all other costs, which was driven primarily by a $0.9 million increase in outside services. These increases were offset, in part, by a decrease in administrative allocations.
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.
27
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.
Gross profit. Gross profit increased from $62.7 million for the three months ended September 30, 2022 compared to $67.3 million for the three months ended September 30, 2023, an increase of $4.7 million or 7%. Gross profit margin for the three months ended September 30, 2022 was 61.5% compared to 62.7% for the three months ended September
30, 2023. For the three months ended September 30, 2023, the total cost of revenue increased by 2% compared to an increase in revenue of 5% for the three months ended September 30, 2023. As a result, our gross profit margin improved by 120 basis points period over period.
Sales and marketing expenses. As a percentage of our revenue, sales and marketing expenses were 33% and 35% for the three months ended September 30, 2023 and 2022, respectively. In dollar terms, sales and marketing expenses decreased from $35.9 million for the three months ended September 30, 2022 to $35.6 million for the three months ended September
30, 2023, a decrease of $0.3 million or 1%. This decrease was primarily due to a decrease in employee compensation and benefits of $0.5 million and a decrease in recruitment costs of $0.3 million offset by an increase in marketing and advertising of $0.5 million. We will continue to seek to accelerate our future revenue growth by investing in more resources.
The $0.5 million decrease in sales and marketing expense attributable to employee compensation and benefits for the three months ended September 30, 2023 was primarily due to a decrease in salaries, wages and benefits of $0.9 million offset by an increase in commissions of $0.3 million and bonuses of $0.1 million.
General and administrative expenses. General and administrative expenses decreased from $18.5
million for the three months ended September 30, 2022 to $18.4 million for the three months ended September 30, 2023, a decrease of $0.1 million. This decrease was comprised of several items, which included a decrease in professional fees of $0.6 million, a decrease in computer supplies and licenses of $0.6 million, a decrease in contract labor of $0.5 million. and a decrease in rent and facilities costs of $0.4 million. These decreases were offset, in part, by an increase bonus expense of $1.5 million, and we allocated $0.8 million less expense related to administrative costs.
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, not taking into account temporary reductions in certain expenses resulting from the COVID-19 pandemic in prior periods, 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):
Professional
fees and other costs associated with litigation decreased from $6.1 million for the three months ended September 30, 2022 to $2.1 million for the three months ended September 30, 2023, a decrease of $4.0 million. This decrease was primarily due to the timing of trial costs that occurred during the three months ended September 30, 2022.
Insurance costs and related recoveries, net decreased from $0.1 million for the three months ended September 30, 2022 compared to no activity for the three months ended September 30, 2023. 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. However, please refer to the litigation matters as disclosed in Note 8 to our Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Report for further information.
28
Interest expense. Interest expense increased from $1.2 million for the three months ended September 30, 2022 to $1.4 million for the three months ended September 30, 2023,
an increase of $0.2 million. Interest expense increased primarily due to rising interest rates on our five-year Credit Facility. These rising interest rates were offset, in part, by a reduction of interest costs of $0.2 million related to payments associated with our interest rate swap, which was entered into on May 18, 2022.
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 September 30, 2023, net other income of approximately $1.0 million was comprised of gains from cash equivalents and investments of $1.1 million which were offset by foreign exchange losses of approximately $0.1 million. For the three months ended
September 30, 2022, net other expenses of approximately $1.3 million was comprised primarily of foreign exchange losses of approximately $1.4 million. For the three months ended September 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.
Income tax expense. We had an income tax benefit of $0.1 million for the three months ended September 30, 2022 compared to an income tax expense of $4.0 million for the three months ended September 30, 2023. For the three months ended September 30, 2023,
the primary reason for the increase in income tax expense was due to an increase of income before taxes of $11.3 million in the current year period compared to the prior year period as well as an increase in foreign withholding taxes.
Our consolidated statements of operations for the nine months ended September 30, 2023 and 2022, are presented below (in thousands):
Nine
Months Ended September 30,
Variance
2023
2022
Amount
Percent
Revenue
$
319,386
$
301,041
$
18,345
6.1%
Cost
of revenue:
Employee compensation and benefits
76,478
77,562
(1,084)
(1.4)%
Engineering consulting costs
19,269
16,397
2,872
17.5%
Administrative
allocations (1)
10,659
11,693
(1,034)
(8.8)%
All other costs
12,396
8,170
4,226
51.7%
Total cost of revenue
118,802
113,822
4,980
4.4%
Gross
profit
200,584
187,219
13,365
7.1%
Gross profit margin
62.8
%
62.2
%
Operating expenses:
Sales
and marketing
107,356
103,840
3,516
3.4%
General and administrative
55,475
57,267
(1,792)
(3.1)%
Reorganization costs
59
—
59
100.0%
Litigation
costs and related recoveries, net
5,475
12,448
(6,973)
(56.0)%
Total operating expenses
168,365
173,555
(5,190)
(3.0)%
Operating income
32,219
13,664
18,555
135.8%
Non-operating
income and (expenses):
Interest expense
(4,139)
(2,974)
(1,165)
39.2%
Other income (expenses), net
1,799
(2,696)
4,495
(166.7)%
Income
before income taxes
29,879
7,994
21,885
273.8%
Income taxes
(13,171)
(5,202)
(7,969)
153.2%
Net income
$
16,708
$
2,792
$
13,916
498.4%
(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.
29
Revenue. Revenue increased from $301.0 million for the nine months ended September 30, 2022 to $319.4 million for the nine months ended September 30, 2023, an increase of $18.3 million or 6%. The increase was driven by an 2% increase
in the average number of unique clients from 1,483 for the nine months ended September 30, 2022 to 1,520 for the nine months ended September 30, 2023. On a geographic basis, United States revenue grew from $159.6 million for the nine months ended September 30, 2022 to $163.1 million for the nine months ended September 30, 2023, an increase of $3.5 million or 2%. Our international revenue grew from $141.4 million for the nine months ended September 30, 2022 to $156.2 million for the nine months ended September 30, 2023, an increase of $14.8 million or 10%, driven primarily by Japan and Australia, with increases of $5.5 million and $2.4 million, respectively.
Cost
of revenue. Cost of revenue increased from $113.8 million for the nine months ended September 30, 2022 to $118.8 million for the nine months ended September 30, 2023, an increase of $5.0 million or 4%. The key drivers related to the cost of revenue increase were a $2.9 million increase in engineering consulting costs and a $4.2 million increase in all other costs driven primarily by a $3.3 million increase in outside services and a $1.0 million increase in computer software and licenses. These cost increases were offset, in part, by a reduction of administrative allocations of $1.0 million and a decrease of employee compensation and benefits of $1.0 million.
Gross profit. Gross profit increased from $187.2 million for the nine months ended September
30, 2022 to $200.6 million for the nine months ended September 30, 2023, an increase of $13.4 million or 7%. Gross profit margin for the nine months ended September 30, 2022 was 62.2% compared to 62.8% for the nine months ended September 30, 2023. For the nine months ended September 30, 2023, the total cost of revenue increased by 4% compared to an increase in revenue of 6% for the nine months ended September 30, 2023. As a result, our gross profit margin improved by 60 basis points period over period.
Sales and marketing expenses. As a percentage of our revenue, sales and marketing expenses were 34% for both the nine months ended
September 30, 2023 and 2022, respectively. In dollar terms, sales and marketing expenses increased from $103.8 million for the nine months ended September 30, 2022 to $107.4 million for the nine months ended September 30, 2023, an increase of $3.5 million or 3%. This increase was primarily due to an increase in employee compensation and benefits of $0.9 million, an increase in advertising, trade show expenses and marketing costs of $3.8 million, an increase in travel and entertainment costs of $0.6 million and an increase in contract labor of $0.3 million. These increases were offset, in part, by a decrease in administrative allocations and all other costs of $1.3 million and a decrease
in recruitment costs of $0.8 million. We will continue to seek to accelerate our future revenue growth by investing in more resources.
The $0.9 million increase in sales and marketing expense attributable to employee compensation and benefits for the nine months ended September 30, 2023 was primarily due to an increase in commissions of $1.3 million and bonuses of $0.4 million offset by a decrease in salaries, wages, and benefits of $0.8 million.
General and administrative expenses. General and administrative expenses decreased from $57.3 million for the nine months ended September 30, 2022 to $55.5 million for the nine months ended September 30, 2023, a
decline of $1.8 million or 3%. This was primarily due to a decrease in computer software and licenses of $1.8 million, a decrease of contract labor of $1.5 million, a decrease in rent and facilities costs of $0.8 million and a reduction of professional services fees of $0.3 million. These decreases were offset by lower administrative costs being allocated of $2.0 million, an increase in employee compensation and benefits of $0.3 million, and an increase of travel and entertainment expenses of $0.3 million.
Litigation costs, net of related insurance recoveries. Litigation costs, net of related insurance recoveries, consist of the following (in thousands):
Professional fees and other costs associated with litigation decreased
from $12.8 million for the nine months ended September 30, 2022 to $5.5 million for the nine months ended September 30, 2023, a decrease of $7.4 million. This decrease was primarily due to the timing of trial costs during the nine months ended September 30, 2022.
30
Insurance costs and related recoveries, net increased from a net benefit of $0.4 million for the nine months ended September 30, 2022 compared to no activity for the nine months ended September 30, 2023. 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. However, please refer to the litigation matters as disclosed in Note 8 to our Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Report for further information.
Interest expense. Interest expense increased from $3.0 million for the nine months ended September 30, 2022 to $4.1 million for the nine months ended September 30, 2023, an increase of $1.2 million. Interest expense increased primarily
due to rising interest rates on our five-year Credit Facility. These rising interest rates were offset, in part, by a reduction of interest costs of $0.6 million related to payments associated with our interest rate swap, which was entered into on May 18, 2022.
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 nine months ended September 30, 2023, net other income of approximately $1.8 million was comprised of gains from cash equivalents and investments of $2.8 million which were offset, in part, by foreign exchange losses of approximately $0.7 million and other costs of $0.3 million. For the nine months ended September
30, 2022, net other expenses of approximately $2.7 million was comprised primarily of foreign exchange losses of approximately $2.4 million.
Income tax expense. We had income tax expense of $5.2 million for the nine months ended September 30, 2022 compared to an income tax expense of $13.2 million for the nine months ended September 30, 2023. For the nine months ended September 30, 2023, the primary reason for the increase in income tax expense was due to an increase of income before taxes of $21.9 million in the current year period compared to the prior year period as well as an increase in foreign withholding taxes.
Liquidity
and Capital Resources
Overview
As of September 30, 2023, we had a working capital deficit of $56.7 million and an accumulated deficit of $211.6 million. For the three months ended September 30, 2023, we recorded net income of $6.8 million. As of September 30, 2023, we had available cash, cash equivalents and restricted cash of $108.7 million and short-term investments of $19.9 million.
Effective July 20, 2021, we received $89.3 million of net proceeds from our Credit Facility, which previously bore interest at LIBOR plus a margin ranging from 1.75% to 2.50%. On
February 22, 2023, we amended our Credit Facility to implement certain changes in the reference rate from LIBOR to SOFR. As of February 28, 2023, we have a choice of interest rates between (a) Adjusted Term SOFR and (b) Base Rate, in each case plus an applicable margin. The applicable margin remains the same as the existing Credit Agreement and is based on our Consolidated Leverage Ratio (as defined in the Credit Agreement) and whether we elect an Adjusted Term SOFR (ranging from 1.75 to 2.50%) or a Base Rate (ranging from 0.75 to 1.50%). 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.
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 Credit Facility.
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 $214.1 million that is included in current liabilities as of September 30, 2023. 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 ended September
30, 2023.
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 $108.7 million as of September 30, 2023, 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,
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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 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 nine months ended September 30, 2023, we generated cash flows from our operating activities of approximately $13.6 million, which was derived from net income of $16.7 million as well as adjustments to reconcile net income to net cash of approximately $21.4 million and an unfavorable change in operating assets and liabilities of approximately $24.5 million. We believe that our operating cash flows for the year ending December
31, 2023 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):
The
effect of foreign currency translation was unfavorable by $5.1 million and $11.1 million for the nine months ended September 30, 2023 and 2022, respectively, due to unfavorable foreign exchange impacts related to foreign cash. For the nine months ended September 30, 2023, 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 during the nine months ended September 30, 2023. For the nine months ended September 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 nine months ended and as of September 30, 2022.
Cash Flows Provided by Operating Activities
As clients typically prepay us annually for the services which we will provide over the following year or longer, we typically collect cash in advance of the date when the vast majority of the related services are provided.
For the nine months ended September 30, 2023, cash flows provided by operating activities amounted to approximately $13.6 million.
The key drivers resulting in our cash provided by operating activities for the nine months ended September 30, 2023, included net income of $16.7 million and adjustments to reconcile net income to net cash totaling $21.4 million, as well as unfavorable changes in operating assets and liabilities of $24.5 million, resulting in net cash provided by operating activities of $13.6 million.
For the nine months ended September 30, 2023, adjustments to reconcile net income to net cash consisted primarily of stock-based compensation expense of $9.1 million, amortization and accretion related to operating lease ROU assets of $3.3 million, depreciation and amortization expense of $2.0 million and accretion, amortization of debt discount and issuance costs of $0.7 million and deferred income taxes
of $6.3 million. For the nine months ended September 30, 2023, the changes in operating assets and liabilities, net consisted of favorable changes to accounts receivable of $54.1 million and deferred contract costs of $0.7 million. The favorable change to accounts receivable was a result of collecting $314.2 million during the nine
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months ended September 30, 2023 which was offset by billings, net of $257.9 million during the nine months ended September 30, 2023. As a result, our days sales outstanding for accounts receivable was 101
days as of September 30, 2023. The favorable change in deferred contract costs was due to capitalizing $13.6 million of commissions and amortizing $14.3 million of deferred contract costs during the nine months ended September 30, 2023.
Offsetting these favorable changes were unfavorable changes to accrued liabilities of $14.7 million, deferred revenue of $57.7 million, accounts payable of $2.6 million and prepaid expenses, deposits and other assets of $4.3 million. The unfavorable use of cash for accrued liabilities was due to payments of $2.5 million related to our reorganization plan, incremental professional
fee payments of $5.1 million and incremental compensation related primarily to bonuses and commissions of $1.7 million during the current period. Regarding the use of cash for deferred revenue, it was due to recognizing $319.4 million in revenue for the current period, which was offset by recording billings, net of $257.9 million during the current period.
For the nine months ended September 30, 2022, cash flows provided by operating activities amounted to approximately $36.8 million. The key drivers resulting in our cash provided by operating activities for the nine months ended September 30, 2022 included net income of $2.8 million, as well as adjustments to reconcile net income to net cash totaling $15.7 million and favorable changes in operating assets and liabilities of $18.2 million. These items
resulted in net cash provided by operating activities of $36.8 million.
For the nine months ended September 30, 2022, adjustments to reconcile net income to net cash consisted primarily of stock-based compensation expense of $8.7 million, amortization and accretion related to operating lease ROU assets of $4.1 million, depreciation and amortization expense of $1.9 million, accretion and amortization of debt discount and issuance costs of $0.7 million and deferred income taxes of $0.3 million. For the nine months ended September 30, 2022, the changes in operating assets and liabilities, net primarily consisted of favorable changes to accounts receivable of $75.1 million and accounts payable of $2.7 million. The favorable change to accounts receivable was a result of collecting $328.1 million during
the nine months ended September 30, 2022 compared to billings, net of $249.0 million during the nine months ended September 30, 2022. As a result, our days sales outstanding for accounts receivable was 120 days as of September 30, 2022.
The favorable cash sources noted above were offset by unfavorable uses of cash related to deferred revenue of $46.9 million, prepaid expenses, deposits and other assets of $6.4 million, accrued liabilities of $3.8 million, and deferred contract costs of $2.4 million. The unfavorable use of cash related deferred revenue was because we recognized $301.0 million of revenue during the period, which was offset by recording
billings, net of $249.0 million during the nine months ended September 30, 2022.
Cash Flows Used in Investing Activities
Cash used in investing activities was primarily driven by investment purchases and capital expenditures for leasehold improvements, software development costs, and computer equipment. Cash used in investing activities totaled $4.2 million and $14.3 million for the nine months ended September 30, 2023 and 2022, respectively.
For the nine months ended September 30, 2023, cash used in investing activities of $4.2 million consisted of investment purchases
of $24.1 million and capital expenditures of $3.7 million, which were both offset by proceeds from sales of investments of $23.6 million. The capital expenditures consisted of $2.3 million primarily for capitalized software development costs, new computer equipment, and furniture and fixtures in our U.S. entity and $1.4 million for computer equipment at our foreign locations, primarily in Brazil of $0.3 million and in India of $0.9 million.
For the nine months ended September 30, 2022, cash used in investing activities of $14.3 million consisted of investment purchases of $11.1 million and capital expenditures of $3.1 million. The capital expenditures consisted of $2.1 million primarily for new computer equipment and capitalized development costs for a new payroll system in our U.S. facilities and $1.0 million for computer equipment at our foreign
locations, primarily in India of $0.5 million and Brazil of $0.3 million.
Cash Flows from Financing Activities
For the nine months ended September 30, 2023, cash utilized in financing activities of $5.1 million was attributable to principal payments related to the Credit Facility of $3.9 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.
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For the nine months ended September
30, 2022, cash utilized in financing activities of $12.4 million was attributable to principal payment related to the Credit Facility of $8.4 million, payments to repurchase shares of Common Stock totaling $4.7 million, and capital lease payments of $0.2 million. These cash uses were offset by proceeds of $1.0 million received from stock option exercises.
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 September 30, 2023, we had cash and cash equivalents of $41.6 million held by our foreign subsidiaries.
Critical Accounting Estimates
Our management’s discussion and analysis of financial condition and results of operations is based on our Unaudited Condensed Consolidated
Financial Statements, which have been prepared in accordance with U.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 ended December 31, 2022, included in Part II, Item 8 of our 2022 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 2022 Form 10-K. Since the filing of our 2022 Form 10-K, there have been no material changes in our critical accounting policies and estimates from those disclosed therein.
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.
ITEM
3. Quantitative and Qualitative Disclosures About Market Risk.
Foreign Currency Exchange Risk
We have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the U.S. Dollar, primarily the Euro, British Pound Sterling, Brazilian Real, Australian Dollar, Indian Rupee and Japanese Yen. For each of the three months ended September 30, 2023 and 2022, we generated approximately 48% of our revenue from our international business, respectively. Increases in the relative value of the U.S. Dollar to other currencies may negatively affect our revenue, partially offset by a positive impact to operating expenses in other currencies as expressed in U.S. Dollars. We have experienced and will continue
to experience fluctuations in our net income (loss) as a result of transaction gains or losses related to revaluing certain current asset and current liability balances, including intercompany receivables and payables, which are denominated in currencies other than the functional currency of the entities in which they are recorded. While we have not engaged in the hedging of our foreign currency transactions to date, we are evaluating the costs and benefits of initiating such a program and we may in the future hedge selected significant transactions denominated in currencies other than the U.S. Dollar.
As of September 30, 2023, the effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business would have impacted our income before income taxes by a plus or minus of $2.0 million in our Consolidated
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Statements
of Operations and Comprehensive Income and would have impacted the effect of foreign currency changes on cash by a plus or minus $4.2 million in our Consolidated Statement of Cash Flows.
Interest Rate Risk
Risk with Respect to Investments
We hold cash and cash equivalents for working capital purposes. We do not have material exposure to market risk with respect to investments, as any investments we enter into are primarily highly liquid investments.
Variable Rate Debt
In July 2021, we entered into the Credit Facility, which originally bore interest at LIBOR plus a margin. ranging from 1.75% to 2.50% and now bears interest at SOFR plus a margin
ranging from 1.75% to 2.50% as a result of the amendment to our Credit Facility described above. Accordingly, we are exposed to market risk due to variable interest rates based on SOFR.As of September 30, 2023, we had $74.3 million outstanding debt under the Credit Facility. As of this date, a hypothetical adverse change of 100 basis points in SOFR would have resulted in an increase of approximately $0.7 million in annual interest expense. On May 18, 2022, we entered into an interest rate swap for a notional value of $40.0 million.See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2 as well as Note 5 and Note 11 to our Unaudited Condensed Consolidated Financial Statements included
in Part I, Item 1 of this Report for more information related to the Credit Facility.
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain a system of disclosure controls and procedures that are designed to reasonably ensure that information required to be disclosed in our SEC reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and to reasonably ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate,
to allow for timely decisions regarding required disclosure.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) (“Disclosure Controls”) will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the
Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. We monitor our Disclosure Controls and make modifications as necessary; our intent in this regard is that the Disclosure Controls will be modified as systems change and conditions warrant.
In
connection with the preparation of this Report, as of September 30, 2023, an evaluation of the effectiveness of the design and operation of our Disclosure Controls was performed. This evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based on this evaluation, we concluded that our disclosure controls and procedures were effective to provide reasonable assurance that
information required to be disclosed in our SEC reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and to reasonably ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.
Changes
in Internal Control over Financial Reporting
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There were no changes in our internal control over financial reporting during the fiscal quarter ended September 30, 2023 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM
1. Legal Proceedings.
The legal proceedings described in Note 8 to our Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Report are incorporated herein by reference. In addition, from time to time, we may be a party to litigation and subject to claims incident to the ordinary course of business. Although the results of litigation and claims cannot be predicted with certainty, we currently believe that the final outcome of these ordinary course matters will not have a material adverse effect on our business. Regardless of the outcome, litigation can have an adverse impact on us because of judgment, defense and settlement costs, diversion of management resources and other factors.
ITEM
1A. Risk Factors.
Factors that could cause our actual results to differ materially from those in this Report are any of the risks described in this Item 1A. Any of these factors could result in a significant or material adverse effect on our business, financial condition, results of operations and cash flows. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations. In addition, risk factors relating to economic uncertainties and downturns in the general economy or the industries in which our clients operate should be interpreted as heightened risks in the current macroeconomic global environment.
Our business operations are subject to a number of risk factors that may adversely affect our business, financial condition, results of
operations or cash flows. If any significant adverse developments resulting from these risk factors should occur, the trading price of our securities could decline, and moreover, investors in our securities could lose all or part of their investment in our securities.
You should refer to the explanation of the qualifications and limitations on forward-looking statements under the section titled “Cautionary Note About Forward-Looking Statements” set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2 of this Report. All forward-looking statements made by us are qualified by the risk factors described below.
The following is a summary of some of the principal risk factors which are more fully described below.
Risks
Related to Our Business, Operations and Industry
•Since 2010, we and our Chief Executive Officer, Chairman of the Board and President have been involved in continuing litigation with Oracle. Adverse outcomes and future adverse outcomes in the litigation could result in the payment of substantial attorneys’ fees and/or costs and/or injunctions against certain of our business practices.
•The Oracle software products that are part of our ongoing Rimini I Injunction compliance and that are the subject of the Rimini II litigation with Oracle and the Rimini II Injunction represent a significant portion of our revenue.
•Our ongoing litigation with Oracle presents challenges for growing our business.
•Oracle
has a history of litigation against companies offering alternative support programs for Oracle products.
•Economic uncertainties, changes in economic conditions, including rising inflation, or downturns in the general economy or the industries in which our clients operate could disproportionately affect the demand for our products and services and may have a material adverse effect on our business.
•The market for independent software support services is relatively undeveloped and may not grow.
•We face significant competition for all components of our Solutions Portfolio.
•We have had a history of losses and may not achieve or sustain revenue growth or profitability in the future.
•If
our retention rates decrease or we fail to accurately predict retention rates, our future revenue and results of operations may be harmed.
•If we are unable to attract new clients or retain and sell additional products or services to existing clients, our revenue growth will be adversely affected.
•Because we recognize revenue from subscriptions over the term of the relevant contract, downturns or upturns in sales are not immediately reflected in full in our results of operations.
•The variability of timing in our sales cycle or our failure to accurately forecast revenue could affect our results of operations and liquidity
•Our
future liquidity and results of operations may be adversely affected by the timing of new orders, the level of client renewals and cash receipts from clients.
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•The loss of one or more key employees could harm our business.
•The failure to attract and retain additional qualified personnel, including sales personnel, or to expand our marketing and sales capacities could prevent us from executing our business strategy.
•Our past growth is not indicative of future growth, and, if we grow rapidly, we may not be able to manage our growth effectively.
•Our
failure to generate significant capital or raise additional capital necessary to fund our operations and invest in new services and products could reduce our ability to compete and could harm our business.
•Our business may suffer if it is alleged or determined that our technology infringes others’ intellectual property rights.
•Interruptions to or degraded performance of our services, including as a result of interruptions or performance problems with technologies provided by third parties, could result in client dissatisfaction, damage to our reputation, loss of clients, limited growth and reduction in revenue.
•We may experience fluctuations in our results of operations due to the sales cycles for our products and services, which makes our future results difficult
to predict and could cause our results of operations to fall below expectations or our guidance.
•Our reputation and/or business could be negatively impacted by ESG matters and/or our reporting of such matters.
•We may need to change our pricing to compete successfully.
•If we are not able to scale our business quickly and grow efficiently, our results of operations could be harmed.
•Our business will be susceptible to risks associated with global operations asour growth strategy involves further expansion of our sales to clients outside the United States.
•Consolidation
in our target sales markets is continuing at a rapid pace, which could harm our business.
•If there is a widespread shift by clients or potential clients to enterprise software vendors, products and releases for which we do not provide software products or services, our business would be adversely impacted.
•Cybersecurity threats continue to increase in frequency and sophistication; if our data security measures are compromised or our services are perceived as not being secure, clients may curtail or cease their use of our services, our reputation may be harmed, and we may incur significant liabilities.
•We are subject to governmental and other legal obligations related to privacy, and our actual or perceived failure to comply with such obligations could harm our business.
•If
our products and services fail due to defects or other similar problems, and if we fail to correct any defect or other software problems, we could lose clients, become subject to service performance or warranty claims or incur significant costs.
•If we are not able to maintain an effective system of internal control over financial reporting, investors could lose confidence in our financial reporting, which could harm our business and have an adverse effect on our stock price.
•If we fail to enhance our brand, our ability to expand our client base will be impaired.
•If we fail to adequately protect our proprietary rights, our competitive position could be impaired and we may lose valuable assets, experience reduced revenue and incur costly litigation to protect our rights.
•We
may be subject to additional obligations to collect and remit sales tax and other taxes, and we may be subject to tax liability, interest and/or penalties for past sales, which could adversely harm our business.
•The amount of and ultimate realization of the benefits from the net operating loss carryforwards for income tax purposes is dependent, in part, upon future events, the effects of which cannot be determined; if we are not able to use a significant portion of our net operating loss carryforwards, our profitability could be adversely affected.
•We are a multinational organization, and we could be obligated to pay additional taxes in various jurisdictions.
Risks Related to our Indebtedness, Capitalization Matters and Corporate Governance
•Our
level of indebtedness and any future indebtedness we may incur may limit our operational and financing flexibility.
•The terms of our Credit Facility impose operating and financial restrictions on us.
•Our variable rate indebtedness subjects us to interest rate risk, which, along with the phase-out of LIBOR and transition to SOFR, could cause our indebtedness service obligations to increase significantly.
•Our stock repurchase program could affect the price of our Common Stock and increase volatility and may be suspended or terminated at any time, which may result in a decrease in the trading price of our Common Stock.
•We do not currently intend to pay dividends on our Common Stock.
•The
price of our Common Stock may be volatile.
•Any issuance of Common Stock upon the exercise of remaining warrants will cause dilution to existing stockholders and may depress the market price of our Common Stock.
•Certain of our common stockholders can exercise significant control, which could limit our stockholders’ ability to influence the outcome of key transactions, including a change of control.
•Future resales of our Common Stock held by significant stockholders may cause the market price of our Common Stock to drop significantly.
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•The
DGCL and our organizational documents contain provisions that limit the ability of stockholders to take certain actions and could delay or discourage takeover attempts that stockholders may consider favorable.
•Our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, stockholders or employees could be limited by our choice of forum in our bylaws.
Risks Related to Our Business, Operations and Industry
Risks Related to Litigation
We and our Chief Executive Officer, Chairman of Board and President have been involved in continuing litigation with Oracle since 2010. Adverse
outcomes and future adverse outcomes in the ongoing litigation could result in the payment of substantial attorneys’ fees and/or costs and/or injunctions against certain of our business practices, which could have a material adverse effect on our business and financial results.
In January 2010, certain subsidiaries of Oracle Corporation (together with its subsidiaries individually and collectively, “Oracle”) filed a lawsuit, Oracle USA, Inc. et al v. Rimini Street, Inc. et al (United States District Court for the District of Nevada) (the “District Court”) (“Rimini I”), against us and our ChiefExecutive
Officer, Chairman of the Board and President, Seth Ravin, alleging that certain of our processes (Process 1.0) violated Oracle’s license agreements with its customers and that we committed acts of copyright infringement and violated other federal and state laws. The litigation involved our business processes and the manner in which we provided our services to our clients.
After completion of a jury trial in 2015 and subsequent appeals, the final outcome of Rimini I was that Mr. Ravin was found not liable for any claims and we were found liable for only one claim: “innocent infringement,” a jury finding that we did not know and had no reason to know that our former support processes were infringing. The jury also found that the infringement did not cause Oracle to suffer lost profits. We were ordered to pay a judgment of $124.4 million in 2016, which we promptly paid and then pursued appeals.
With interest, attorneys’ fees and costs, the total judgment paid by us to Oracle after the completion of all appeals was approximately $89.9 million. A portion of such judgment was paid by our insurance carriers (for additional information on this topic, see Note 8 to our Consolidated Financial Statements included in Part I, Item 1 of this Report).
Since November 2018, we have been subject to a permanent injunction (the “Rimini I Injunction”) prohibiting us from using certain support processes that had been found in Rimini I to “innocently” infringe certain Oracle copyrights. The Rimini I Injunction does not prohibit our provision of support services for any Oracle product lines, but rather defines the manner in which we can provide support services for certain Oracle product lines.
In July 2020, Oracle filed
a motion to show cause contending that we were in violation of the Rimini I Injunction, and we opposed this motion, disputing Oracle’s claims. In January 2022, the District Court issued its findings and order following an evidentiary hearing held in September 2021 regarding whether we (i) violated the Rimini I Injunction for certain accused conduct and (ii) should be held in contempt in those instances where the District Court found a violation of the Rimini I Injunction, and what sanctions, if any, were appropriate.
In the order, the District Court ruled in favor of us with respect to five out of ten items. With respect to the other five items, the District Court found that we violated the Rimini I Injunction, awarded sanctions to Oracle of $0.6 million and ordered that certain computer files be quarantined from use and notice and proof of such quarantining be provided
to Oracle. The District Court also ruled that Oracle may recover its reasonable attorneys’ fees and costs. We reserved all rights, including appellate rights, with respect to the District Court rulings.
In February 2022, we filed a notice of appeal in the District Court, commencing an appeal of the District Court’s January 2022 decision to the Ninth Circuit Court of Appeals (“Court of Appeals”). Shortly thereafter, the District Court stayed the briefing on Oracle’s bill of attorneys’ fees and costs until our appeal was resolved.
Following oral argument on the appeal held in February 2023, on August 24, 2023, the Court of Appeals issued its decision on our appeal of the five items for which the District Court held us in contempt. The Court of Appeals
affirmed the District Court’s contempt findings on four of the five items and reversed the District Court’s finding of contempt on the fifth item, holding that the District Court had abused its discretion in holding us in contempt. In addition, the Court of Appeals vacated the District Court’s order to the extent that it read the Rimini I Injunction to prohibit “de minimis” copying, as well as vacated and remanded the sanctions award to the District Court for recalculation in light of its reversal of the contempt finding on the fifth item.
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On September 6, 2023, we filed a petition for panel rehearing and rehearing en banc of the
Court of Appeals’ ruling that the District Court was permitted to use the Copyright Act’s damages framework to measure the original award of $0.6 million in sanctions to Oracle. On October 12, 2023, the Court of Appeals denied our petition. On October 25, 2023, the District Court filed an order imposing a recalculated award against us, reducing the sanctions originally awarded to Oracle by $0.1 million and reimposing the remaining $0.5 million sanctions award, which amount was previously paid by us to Oracle, as described below.
At this time, we believe that we are in substantial compliance with the Rimini I Injunction and have complied with the order regarding the quarantining of certain computer files. As of September 30, 2023 and December
31, 2022, we have accrued $6.9 million for an estimate related to Oracle’s reasonable attorneys’ fees and costs for this matter. During the nine months ended September 30, 2022, we paid $0.6 million to Oracle for the sanctions award. Regarding our estimate for reasonable attorneys’ fees and costs, significant judgment is required to determine the amount of loss related to this matter as the outcome is inherently unpredictable and subject to uncertainties. Per order of the District Court, the deadline for Oracle to file its proposed bill of reasonable fees and costs is November 24, 2023. Our response is due sixty (60) days after Oracle’s filing, and Oracle’s reply is due twenty (20) days after our response. We reserve all rights, including appellate rights, with respect to the District Court’s rulings in the contempt matter, including any award of attorneys’ fees and
costs. An adverse outcome regarding Oracle’s motion for attorneys’ fees and costs could have a material adverse impact on our financial position, results of operations and cash flows.
In October 2014, we filed a separate lawsuit, Rimini Street Inc. v. Oracle Int’l Corp., in the District Court against Oracle seeking a declaratory judgment that our revised “Process 2.0” support practices, in use since at least July 2014, did not infringe certain Oracle copyrights (“Rimini II”). Our operative complaint asserted declaratory judgment, tort, and statutory claims, including a request for injunctive relief against Oracle for unfair competition in violation of the California Unfair Competition Law. Oracle asserted counterclaims including copyright infringement claims, violations of the Digital Millennium Copyright Act (“DMCA”) and Lanham
Act, breach of contract and business tort violations with respect to PeopleSoft and other Oracle-branded products, including J.D. Edwards, Siebel, Oracle Database and Oracle E-Business Suite (“EBS”).
In mid-October 2022, on the eve of the Rimini II jury trial, Oracle withdrew all of its monetary damages claims against us and our Chief Executive Officer, Chairman of the Board and President, Mr. Ravin in Rimini II and moved to proceed with a bench trial instead of a jury trial for its claims for equitable relief.
The District Court entered an order on October 24, 2022, dismissing with prejudice Oracle’s claims in Rimini II “for monetary relief of any kind under any legal theory[,]
including but not limited to claims for damages, restitution, unjust enrichment, and engorgement. . . .” In addition, Oracle’s claims for breach of contract, inducing breach of contract and an accounting were dismissed with prejudice, meaning that the claims (including for monetary damages) have been dismissed on their merits and that the judgment rendered is final. Prior to the date of the District Court’s order dismissing with prejudice all of Oracle’s claims for monetary relief, no damages of any kind were awarded by the District Court in Rimini II. The parties each reserved the right to seek or object to any attorneys’ fees and/or costs to the extent permissible by law.
The Rimini II bench trial
began in Las Vegas on November 29, 2022 and concluded on December 15, 2022. The parties submitted their proposed findings of fact and conclusions of law to the District Court in February 2023.
On July 24, 2023, the District Court issued its findings of fact and conclusions of law in Rimini II, accompanied by a permanent injunction against us (the “Rimini II Injunction”) which, as set forth in detail below, is subject to an administrative stay and is not currently effective. The District Court found infringement as to Oracle’s PeopleSoft and Oracle Database products but did not find infringement as to Oracle’s EBS, Siebel and J.D. Edwards products, further ordering that we were entitled to a declaration of non-infringement for Oracle’s EBS product.
The District Court also found in favor of Oracle on its DMCA and Lanham Act claims, enjoining us from making certain statements and prohibiting certain actions in connection with the manner of marketing, selling and providing services to clients of the Oracle products in question as further described below, and on indirect and vicarious copyright infringement claims against our Chief Executive Officer, Chairman of the Board and President, Mr. Ravin. The District Court denied our California Unfair Competition Law claim and other declaratory judgment claims.
On July 25, 2023, we filed a notice of appeal in the District Court, commencing an appeal of the District Court’s July 24, 2023 Rimini II judgment and Injunction.
On July
28, 2023, we filed an emergency motion with the District Court to stay enforcement of the Rimini II Injunction pending our appeal of the Rimini II judgment and Injunction.
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On August 15, 2023, the District Court issued an order denying our emergency motion to stay the Rimini II Injunction pending our appeal with the Court of Appeals, but it granted an administrative stay of the Rimini II Injunction pending the outcome of a motion to stay to be filed by us with the Court of Appeals.
On August 22, 2023, we filed the separate motion to stay
the Rimini II Injunction with the Court of Appeals, asserting that certain provisions of the Rimini II Injunction are vague and overbroad, that the District Court committed legal error, that certain provisions would require us to commit criminal acts to comply with its terms, and that the Rimini II Injunction would cause us and third parties “irreparable harm,” among other grounds. As of the date of this Report, the Court of Appeals has not issued a decision on our motion to stay the Rimini II Injunction.
As of the date of this Report, the Rimini II Injunction, as issued by the District Court, is currently stayed by the District Court, meaning that it is not currently effective. The Rimini II Injunction is primarily directed at Oracle’s PeopleSoft software product and, if effective, would limit, but not fully prohibit, the support services we can provide our clients using Oracle’s
PeopleSoft software product.
Among other things, the Rimini II Injunction requires us to immediately and permanently delete certain PeopleSoft software environments, files and updates identified in the Rimini II Injunction, as well as to delete and immediately and permanently discontinue use of certain Company-created automated tools. The Rimini II Injunction also prohibits using, distributing, copying, or making derivative works from certain files, and it prohibits the transfer or copying of PeopleSoft files, updates, and modifications, and portions of PeopleSoft software that are developed, tested, or exist in one client’s systems to our systems or another client’s systems.
The Rimini II Injunction also specifies that we shall not remove, alter or omit any Oracle copyright notices or other Oracle copyright management
information from any file that contains an Oracle copyright notice and prohibits us from publicly making statements or statements substantially similar to those the District Court found to be “false and misleading,” which are listed in the Rimini II Injunction.
On August 21, 2023, Oracle filed a motion to amend the District Court’s judgment in Rimini II regarding an update, technical specification and tool related to Oracle’s EBS software product. As of the date of this Report, the District Court has not issued a decision on Oracle’s motion to amend.
On September 12, 2023, the Court of Appeals issued an order holding our appeal of the District Court’s decision in Rimini II in abeyance pending the District Court’s
resolution of Oracle’s above-described motion to amend the Rimini II judgment. Accordingly, as of the date of this Report, the briefing schedule for our appeal of the Rimini II decision has been stayed.
While we plan to continue to vigorously pursue a stay of the Rimini II Injunction pending appeal and our appeal of the Rimini II judgment and Injunction, we are unable to predict the timing or outcome of these matters. No assurance is or can be given that we will succeed in our efforts to stay the Rimini II Injunction in full or in part pending appeal or that we will prevail in all or part of our Rimini II appeal.
There were no monetary damages included in the District Court’s judgment in Rimini II. The deadline for the parties to file motions for attorneys’ fees and costs is November
6, 2023, and oppositions to such motions are due February 20, 2024. As of the date of this Report, no party has filed such a motion with the District Court. A decision about whether to award any attorneys’ fees and/or costs, and if so, the amounts, will be made by the District Court. Accordingly, at this time we do not believe that any award of attorneys’ fees and costs are probable or estimatable. An adverse outcome regarding any Oracle motion for attorneys’ fees and costs could have a material adverse impact on our financial position, results of operations and cash flows.
The Rimini II Injunction, if reinstated, would affect certain support services delivered by us to clients receiving support for Oracle’s PeopleSoft products and is expected to result in additional future period costs, among other potential impacts. However, these costs are
not currently estimatable and are not required to be recorded as of September 30, 2023. Accordingly, we have made no associated accrual as of September 30, 2023. Any required changes to how support services are delivered to our PeopleSoft clients could have a material adverse impact on our financial position, results of operations and cash flows. The percentage of revenue derived from services we provide solely for Oracle’s PeopleSoft software product was approximately 8% and 9% of our total revenue for the three and nine months ended September 30, 2023, respectively.
We reserve all rights, including appellate rights, with respect to the District Court’s rulings in Rimini II and the Rimini II Injunction, including any award of attorneys’ fees and costs
to Oracle.
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Oracle may file additional contempt motions against us at any time to attempt to enforce its interpretation of the Rimini I Injunction and/or the Rimini II Injunction or if it has reason to believe we are not in compliance with the express terms of the Rimini I Injunction and/or the Rimini II Injunction. Such contempt proceedings or any judicial finding of contempt could result in a material adverse effect on our business and financial condition. In addition, the existence of the Rimini I Injunction, the Rimini II Injunction, the District Court’s January 2022 order and/or the District Court’s July 2023 order could dissuade clients from purchasing or continuing to purchase our services. If we are obligated to
pay substantial civil assessments arising from any finding of contempt, this could reduce the amount of cash flows available to pay principal, interest, fees and other amounts due under our Credit Facility, which could result in an event of default, in which case the lenders could demand accelerated payment of principal, accrued and unpaid interest, and other fees. We cannot provide assurances that we will have sufficient assets which would allow us to repay such indebtedness in full at such time. As a result, we could be forced into bankruptcy or liquidation.
We could be required to pay substantial attorneys’ fees and/or costs in connection with litigation relating to our current or past business activities and/or be enjoined from certain business practices. Any of these outcomes could result in a material adverse effect on our business and financial condition, and the pendency of the
litigation alone could dissuade clients from purchasing or continuing to purchase our services. If we are obligated to pay substantial attorneys’ fees and/or costs to Oracle, including as a result of the District Court’s rulings in Rimini II, or are enjoined from certain business practices, this could reduce the amount of cash flows available to pay principal, interest, fees and other amounts due under our Credit Facility, which could result in an event of default, in which case the lenders could demand accelerated payment of principal, accrued and unpaid interest, and other fees. If we default in our payment obligations under the Credit Facility and the indebtedness under the Credit Facility were to be accelerated, there can be no assurance that our assets would be sufficient to repay such indebtedness in full, and we could be forced into bankruptcy or liquidation.
Our business has been
and may continue to be materially harmed by this litigation and Oracle’s conduct. During the course of these cases, we anticipate there will be additional rulings by the District Court in Rimini II with respect to attorneys’ fees and costs and our support processes relating to EBS, the District Court in the contempt proceedings, and the Court of Appeals in both the contempt proceedings and in Rimini II in connection with hearings, motions, decisions, and other matters, as well as other interim developments related to the litigation. If securities analysts or investors regard these rulings as negative, the market price of our Common Stock may continue to decline, which stock price volatility may result in other legal claims against us. If current or prospective clients regard these rulings as negative, it could negatively impact our new client sales or renewal sales.
While we plan to continue to
vigorously litigate the pending matters in the contempt proceedings and in our Rimini II appeal, we are unable to predict the timing or outcome of these matters. No assurance is or can be given that we will prevail on any appeal, contempt proceeding, claim, or counterclaim.
See the section titled “Legal Proceedings” in Part II, Item 1 and Note 8 to our Unaudited, Condensed Consolidated Financial Statements included in Part I, Item 1 of this Report for more information related to this litigation.
The Oracle software products that are part of our ongoing Rimini I Injunction compliance and that are the subject of the Rimini II litigation with Oracle and the Rimini II Injunction represent a significant portion of our current revenue.
In
addition to the ongoing litigation with Oracle over compliance with the Rimini I Injunction, Oracle filed counterclaims in Rimini II relating to our support services for Oracle’s PeopleSoft, J.D. Edwards, Siebel, E-Business Suite, and Database software products, prevailing only on its copyright infringement claims relating to PeopleSoft and Oracle Database and only obtaining injunctive relief relating to its PeopleSoft product line. The Rimini II Injunction currently limits, but does not fully prohibit, the support services we can provide clients using Oracle’s PeopleSoft software product. The percentage of revenue derived from services we provide solely for Oracle’s PeopleSoft software product was approximately 9% of our total revenue for the nine months ended September 30, 2023. For the nine months ended September 30, 2023, approximately 64% of our total revenue was
derived from services provided to our clients using Oracle software products. Although we provide support services for additional Oracle product lines that are not subject to the Rimini I Injunction or the Rimini II Injunction, as well as for software products provided by companies other than Oracle, our current revenue depends significantly on the product lines that are the subject of the Rimini I Injunction and Rimini II Injunction. Should we not obtain a stay of the Rimini II Injunction pending our appeal of the District Court’s ruling, should our appeal in Rimini II fail or should a contempt proceeding on the Rimini I Injunction result in a final order holding us in contempt, implicating processes for which we have not previously modified the way we provide our support services, we could be required to change the way we provide support services to some of our clients, which could result in the loss of clients and revenue, and may also give rise to claims for
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compensation
from our clients, and require us to incur additional costs in order to comply with a final Rimini II injunction, any of which could have a material adverse effect on our business, financial condition and results of operations.
Our ongoing litigation with Oracle presents challenges for growing our business.
We have experienced challenges growing our business as a result of our ongoing litigation with Oracle. Many of our existing and prospective clients have expressed concerns regarding our ongoing litigation and, in some cases, have been subjected to various negative communications by Oracle in connection with the litigation. We have experienced in the past, and may continue to experience in the future, volatility and slowness in acquiring new clients, as well as clients not renewing their agreements with us, due to these challenges relating
to our ongoing litigation with Oracle. Further, certain of our prospective and existing clients may be subject to additional negative communications from software vendors. We have taken steps to minimize disruptions to our existing and prospective clients regarding the litigation, but we continue to face challenges growing our business while the litigation remains ongoing. In certain cases, we have agreed to pay certain liquidated damages to our clients if we are no longer able to provide services to these clients, and/or reimburse our clients and our former lenders for their reasonable legal fees incurred in connection with any litigation-related subpoenas and depositions or to provide certain client indemnification or termination rights if any outcome of litigation results in our inability to continue providing any of the paid-for services. In addition, we believe the length of our sales cycle is longer than it otherwise would be due to prospective client diligence
on possible effects of the Oracle litigation on our business. We cannot provide assurances that we will continue to overcome the challenges we face as a result of the litigation and continue to renew existing clients or secure new clients.
Additionally, the existence of this ongoing litigation, including the January 2022 District Court order and the July 2023 District Court order, could negatively impact the value of our equity securities, and could negatively impact our ability to raise additional equity or debt financing, as well as resulting in other legal claims against us.
We are self-insured for any costs related to any current or future intellectual property litigation, although we maintain and have tendered our errors and omissions insurance coverage for the wrongful acts alleged in Oracle’s Rimini I Injunction contempt
proceeding in order to seek determinations of a duty to defend. We obtained a determination of a duty to defend with respect to our primary errors and omission insurance carrier and are seeking a determination of a duty to defend by one of our excess errors and omissions insurance carriers. We cannot provide assurances that we will prevail on this claim or any other similar claims that we may tender in the future.
While we currently believe our cash on hand, accounts receivable and contractually committed backlog provides us with liquidity to cover attorneys’ fees and related costs, such as travel, hotels, and consultants, associated with the ongoing litigation with Oracle, we cannot assure our liquidity will be sufficient.
Oracle has a history of litigation against companies offering alternative support programs for Oracle products,
and Oracle could pursue additional litigation with us.
Oracle has been active in litigating against companies that have offered competing maintenance and support services for their products. For example, in March 2007, Oracle filed a lawsuit against SAP and its wholly-owned subsidiary, TomorrowNow, Inc. After a jury verdict awarding Oracle $1.3 billion, the parties stipulated to a final judgment of $306 million subject to appeal. After the appeal, the parties settled the case in November 2014 for $356.7 million. In February 2012, Oracle filed suit against ServiceKey, Inc. and settled the case in October 2013 after the District Court issued an injunction against ServiceKey and its CEO. Oracle also filed suit against CedarCrestone Corporation in September 2012 and settled the case in July 2013. TomorrowNow and CedarCrestone offered maintenance and support for Oracle software products, and Service
Key offered maintenance and support for Oracle technology products. Given Oracle’s history of litigation against companies offering alternative support programs for Oracle products, we can provide no assurance, regardless of the outcome of our current litigations with Oracle, that Oracle will not pursue additional litigation against us. Such additional litigation could be costly, distract our management team from running our business and reduce client interest and our sales revenue.
Other Risks Related to Our Business, Operations and Industry
Economic uncertainties, changes in economic conditions, including rising inflation, or downturns in the general economy or the industries in which our clients operate, may result in increased costs of operations, could disproportionately affect the demand for our products and services and could
negatively impact our results of operations.
General worldwide economic conditions have experienced significant fluctuations in recent years, and market volatility and uncertainty remain widespread, with the expectation that inflation, other economic challenges and possible recession will be exacerbated for an extended period. Inflation has accelerated in the U.S. and globally due in part to global
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supply chain issues, a rise in energy prices, fiscal and monetary policies adopted during and since the COVID-19 pandemic and continued strong consumer demand. An inflationary environment may increase our and our clients’ cost of labor due to higher wages,
as well as result in higher financing costs and/or higher supplier prices for both us and our clients. As a result, we and our clients may find it difficult to accurately forecast and plan future business activities. In addition, these conditions could cause our clients or prospective clients to reduce their IT budgets, which could decrease corporate spending on our products and services, resulting in delayed and lengthened sales cycles, a decrease in new client acquisition and loss of clients. Furthermore, during challenging economic times, our clients may face issues with their cash flows and in gaining timely access to sufficient credit or obtaining credit on reasonable terms, which could impair their ability to make timely payments to us, impact client renewal rates and adversely affect our revenue. In addition, continued disruptions in the U.S. banking sector could impact certain of our clients’ ability to access their existing cash, which
could also impair their ability to make timely payments to us, adversely affecting our revenue. If such conditions occur, we may be required to increase our reserves, allowances for doubtful accounts and write-offs of accounts receivable, and our results of operations would be harmed. We cannot predict the timing, strength or duration of any economic slowdown or recovery, whether global, regional or within specific markets. If the conditions of the general economy or markets in which we operate worsen, our business could be harmed. In addition, even if the overall economy improves, the market for our products and services may not experience growth. Moreover, multiple events, including changes in U.S. trade policies and responsive changes in policy by foreign jurisdictions, geopolitical developments and uncertainty in the European Union, China and elsewhere, and governmental and multinational organizations’ responses to the COVID-19 pandemic have increased levels of political
and economic unpredictability globally, and may increase the volatility of global financial markets and the global and regional economies.
The market for independent software support services is relatively undeveloped and may not grow.
The market for independent enterprise software support services is still relatively undeveloped, has not yet achieved widespread acceptance and may not grow quickly or at all. Our success will depend to a substantial extent on the willingness of companies to engage a third party such as us to provide software support services for their enterprise software. Many enterprise software licensees remain hesitant to use a third party to provide such support services, choosing instead to rely on support services provided by the enterprise software vendor. Other enterprise software licensees have invested substantial
personnel, infrastructure and financial resources in their own organizations with respect to support of their licensed enterprise software products and may choose to self-support with their own internal resources instead of purchasing services from the enterprise software vendor or an independent provider such as ourselves. Particularly because our market is relatively undeveloped, we must address any potential clients’ concerns and explain the benefits of our approach to convince them of the value of our services. If companies are not sufficiently convinced that we can address their concerns and that the benefits of our services are compelling, then the market for our services may not develop as we anticipate, and our business will not grow.
We face significant competition for the services comprising each component of our Solutions Portfolio, from both enterprise software vendors and other companies offering
independent enterprise software support, products and services, as well as from software licensees that attempt to self-support, which may harm our ability to add new clients, retain existing clients and grow our client base across all of our Solutions Portfolio offerings.
Our current and potential competitors across each component of our Solutions Portfolio, which include enterprise software vendors, may have significantly more financial, technical, sales and marketing teams and other resources than we have, may be able to devote greater resources to the development, promotion, sale and support of their products and services, may have more extensive customer bases and broader customer relationships than we have and may have longer operating histories and greater name recognition than we have. Specifically, we face intense competition from enterprise software vendors, such as Oracle and SAP, who
provide software support for their own products, as well as from other competitors who provide independent enterprise software support, products and services. Competitors, including enterprise software vendors, have offered, and may continue to offer, discounts to companies to whom we have marketed our services. In addition, competitors, including enterprise software vendors, may take other actions in an attempt to maintain their business, including changing the terms of their customer agreements, the functionality of their support, products or services, or their pricing terms. For example, starting in the second quarter of 2017 Oracle has prohibited us from accessing its support websites to download software updates on behalf of our clients who are authorized to do so and permitted to authorize a third party to do so on their behalf. In addition, the
support, license or other contractual policies of our future and current competitors, including Oracle and SAP, may include clauses that penalize customers that choose to use our or any independent provider’s services or products. Further, the contractual policies of enterprise software vendors, such as Oracle and SAP, may contain clauses that penalize customers that seek to return to the software vendor to purchase new licenses following a departure from the software vendor’s support program. In addition, our current and potential competitors may develop and market new technologies that render our existing or future enterprise software support, products or services less competitive or obsolete. Finally, we also face competition from software licensees that choose to self-support. Competition could significantly impede our ability to sell our enterprise support, products and services on terms favorable to us, and we may need to decrease the prices for our support,
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products
or services to remain competitive. If we are unable to maintain our current pricing due to competitive pressures, our margins will be reduced and our results of operations will be negatively affected.
There are also several smaller support services vendors in the independent enterprise software support services market with whom we compete with respect to certain of our support services. We expect competition to continue to increase in the future, particularly if we prevail in our appeal of the District Court’s order and injunction in Rimini II, which could harm our ability to increase sales, maintain or increase renewals and maintain our prices. In addition, certain providers of independent enterprise software support, products and services may have or may develop more strategic relationships with enterprise software vendors, which may allow them to compete more effectively than us over the long
term. To the extent any of our competitors have existing relationships with potential clients for any component of our Solutions Portfolio, those potential clients may be unwilling to purchase our services because of those existing relationships, which could cause the demand for our services to be substantially impacted. Further, our competitors may attempt to use the Oracle litigation and the existence of the Rimini I Injunction and the Rimini II Injunction described above under the section titled “Risks Related to Litigation,” to dissuade certain of our prospective or existing clients from purchasing or continuing to purchase any or all of the components of our Solutions Portfolio, including our enterprise software support services.
We have had a history of losses and may not achieve or sustain revenue growth or profitability in the future. Further, if we are unable to attract new clients or retain
and/or sell additional products or services to our existing clients, our revenue growth could be adversely affected.
We recorded a net income of $6.8 million for the three months ended September 30, 2023, and we had an accumulated deficit of $211.6 million as of September 30, 2023. We will need to generate and sustain increased revenue levels in future periods while managing our costs to be profitable, and, even if we do, we may not be able to maintain or increase our level of profitability. To increase our revenue, we must add new clients, secure renewals or service extensions by existing clients on terms favorable to us and sell additional products and services to existing clients. As competitors introduce low-cost and/or differentiated services that are perceived to compete with ours, or as enterprise
software vendors introduce competitive pricing or additional products and services or implement other sales strategies to compete with us, our ability to sell to new clients and renew agreements with existing clients based on pricing, service levels, technology and functionality could be impaired. In addition, certain of our existing clients may choose to license a new or different version of enterprise software from an enterprise software vendor, and such clients’ license agreements with the enterprise software vendor will typically include a minimum one-year mandatory maintenance and support services agreement. In such cases, it is unlikely that these clients would renew their maintenance and support services agreements with us, at least during the early term of the license agreement. In addition, such existing clients could move to another enterprise software vendor, product or release for which we do not offer any products or services. As a result, we may be unable
to renew or extend our agreements with existing clients or attract new clients or new business from existing clients on terms that would be favorable or comparable to prior periods, which could have an adverse effect on our revenue and growth.
Additionally, we intend to continue to expend significant funds to expand our sales and marketing operations, enhance our service offerings, expand into new markets, launch new product offerings and meet the increased compliance requirements associated with our operations as a public company. Our efforts to grow our business may be costlier than we expect, and we may not be able to increase our revenue enough to offset our higher operating expenses. Further, many companies with which we compete have larger and longer-tenured sales and marketing teams, which may impact the ability to grow our business, which could have an adverse effect on our revenue and growth.
If we are unable to achieve and sustain revenue growth or profitability, the market price of our securities may significantly decrease.
If our retention rates decrease, or we do not accurately predict retention rates, our future revenue and results of operations may be harmed.
Our clients have no obligation to renew their product or service subscription agreements with us after the expiration of a non-cancelable agreement term. In addition, the majority of our multi-year, non-cancelable client agreements are not pre-paid other than the first year of the non-cancelable service period. We may not accurately predict retention rates for our clients. Our retention rates may decline or fluctuate as a result of a number of factors, including our clients’ decision to license a new product or release from an enterprise software vendor, our clients’
decision to move to another enterprise software vendor, product or release for which we do not offer products or services, global economic conditions, including rising inflation and interest rates on our clients’ businesses, client satisfaction with our products and services, the acquisition of our clients by other companies and clients going out of business. If our clients do not renew their agreements for our products and services or if our clients decrease the amount they spend with us, our revenue will decline and our business will suffer. In addition, certain of our existing clients may choose to license a new or different version of enterprise software from an enterprise software vendor, and such clients’ license agreements with the enterprise software vendor will typically include a minimum one-year mandatory
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maintenance
and support services agreement. In such cases, it is unlikely that these clients would renew their maintenance and support services agreements with us, at least during the early term of the license agreement. In addition, such existing clients could move to another enterprise software vendor, product or release for which we do not offer any products or services.
Because we recognize revenue from subscriptions over the term of the relevant contract, downturns or upturns in sales are not immediately reflected in full in our results of operations.
As a subscription-based business, we recognize revenue over the service period of our contracts. As a result,
much of our reported revenue each quarter results from contracts entered into during previous quarters. Consequently, while a shortfall in demand for our products and services or a decline in new or renewed contracts in any one quarter may not significantly reduce our revenue for that quarter, it could negatively affect our revenue in future quarters and full year periods. Accordingly, the effect of significant downturns in new sales, renewals or extensions of our service agreements for a quarter will not be reflected in full in our results of operations until future periods. Our revenue recognition model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, as revenue from new clients must be recognized over the applicable service contract
term.
Due to the variability of timing in our sales cycle, if we fail to forecast our revenue accurately, or if we fail to match our expenditures with corresponding revenue, our results of operations and liquidity could be adversely affected.
The variability of the sales cycle for the evaluation and implementation of our products and services, which typically has been six to twelve months once a client is engaged, may cause us to experience a delay between increasing operating expenses for such sales efforts, and the generation of corresponding revenue. Accordingly, we may be unable to prepare accurate internal financial forecasts or replace anticipated revenue that we do not receive as a result of delays arising from these factors. As a result, our results of operations and liquidity in future reporting periods may be significantly
below the expectations of the public market, securities analysts or investors, which could negatively impact the price of our Common Stock.
Our future liquidity and results of operations may be adversely affected by the timing of new orders, the level of client renewals and cash receipts from clients.
Due to the collection of cash from our clients before services are provided, our revenue is recognized over future periods when there are no corresponding cash receipts from such clients. Accordingly, our future liquidity depends upon the ability to continue to attract new clients and to enter into renewal arrangements with existing clients. If we experience a decline in orders from new clients or renewals from existing clients, our revenue may continue to increase while our liquidity and cash levels decline. Any such decline, however,
will negatively affect our revenues in future quarters. Accordingly, the effect of declines in orders from new clients or renewals from existing clients may not be fully reflected in our results of operations and cash flows until future periods. Comparing our revenues and operating results on a period-to-period basis may not be meaningful, as it may not be an indicator of the future sufficiency of our cash and cash equivalents to meet our liquidity requirements. You should not rely on our past results as an indication of our future performance or liquidity.
We rely on our management team and other key employees, including our Chief Executive Officer, Chairman of the Board and President, and the loss or disability of one or more key employees could harm our business. Additionally, the failure to attract and retain additional qualified personnel, including sales personnel, or to expand our marketing and sales
capabilities could prevent us from executing our business strategy.
The loss of or a disability that would prevent our Chief Executive Officer, Chairman of the Board and President or any of our key senior members of management from substantially performing their duties could have a material adverse effect on our business, operating results and financial condition, particularly if we are unable to hire and integrate suitable replacements on a timely basis. Mr. Ravin has been under long-standing medical care for kidney disease, which includes ongoing treatment. Although Mr. Ravin’s condition has not adversely impacted his performance as Chief Executive Officer, Chairman of the Board and President or on the overall management of the Company, we can provide no assurance that his condition will not affect his ability
to perform the role of Chief Executive Officer, Chairman of the Board and President in the future. Further, as we continue to grow our business, we will continue to adjust our senior management team to best address our growth opportunities. If we are unable to attract or retain the right individuals for the team, it could hinder our ability to grow our business and could disrupt our operations or otherwise have a material adverse effect on our business. We do not maintain key man life insurance on any of our employees.
Furthermore, to execute our business strategy, we must attract and retain highly qualified personnel, including sales personnel. Our ability to increase our client base and achieve broader market acceptance of our services will depend to a
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significant
extent on our ability to expand our marketing and sales operations. We plan to continue expanding our sales force globally. We are experiencing a very competitive recruiting environment, creating difficulty in hiring and retaining sufficient numbers of highly skilled sales personnel and other employees with appropriate qualifications. In particular, we have experienced extreme hiring competition in the San Francisco Bay Area, where we have a significant amount of operations, but also face extremely competitive hiring environments across the United States and the other countries in which we operate. Our efforts to attract, develop, integrate and retain highly skilled employees with appropriate qualifications may be compounded by intensified restrictions on travel, immigration, or the availability of work visas. Many companies with which we compete for experienced personnel have greater resources and less stock price volatility than we do. In making employment decisions,
job candidates often consider the value of the equity incentives they are to receive in connection with their employment. If the price of our stock continues to experience significant volatility, our ability to attract or retain qualified employees will be adversely affected. In addition, as we continue to expand into new geographic markets, there can be no assurance that we will be able to attract and retain the required management, sales, marketing and support services personnel to profitably grow our business. If we fail to attract highly qualified new sales and other personnel or fail to retain and motivate our current personnel, our growth prospects could be severely harmed.
Moreover, our sales personnel typically take an average of between nine to twelve months before any new sales personnel can operate at the capacity typically expected of experienced sales personnel. This ramp cycle, combined
with our typical six- to twelve-month sales cycle for engaged prospects, means that we will not immediately recognize a return on this investment in our sales results. In addition, the cost to acquire clients is high due to the cost of these marketing and sales efforts. Further, the cost of marketing and sales efforts will likely increase as we continue to offer new products and services, as even our experienced sales personnel will need to receive specialized training on our new offerings. Our business may be materially harmed if our efforts do not generate a corresponding increase in revenue. We may not achieve anticipated revenue growth from expanding our sales force if we are unable to hire, develop and retain talented sales personnel, if our new sales personnel are unable to achieve desired productivity levels in a reasonable period of time or if our sales and marketing programs are not effective.
Our
past growth is not indicative of our future growth, and if we grow rapidly, we may not be able to manage our growth effectively.
Our revenue grew from $101.9 million for the three months ended September 30, 2022 to $107.5 million for the three months ended September 30, 2023, representing a period over period increase of 5%. You should not consider our past growth as indicative of our future performance. We believe growth of our revenue depends on a number of factors, including our ability to:
•price our products and services effectively so that we are able to attract new clients and retain existing clients without compromising our profitability;
•introduce
our products and services to new geographic markets;
•introduce new enterprise software products and services supporting additional enterprise software vendors, products and releases;
•satisfactorily conclude any Oracle-related litigation and any other litigation or governmental inquiry that may occur; and
•increase awareness of our company, products and services on a global basis.
We may not successfully accomplish all or any of these objectives.
In addition, our historical growth has placed and may continue to place significant demands
on our management and our operational and financial resources. Our organizational structure is becoming more complex as we add additional staff, and we will need to improve our operational, financial and management controls, as well as our reporting systems and procedures. Further, we believe that our corporate culture has been a critical component of our success. We have invested substantial time and resources in building our team and nurturing our culture. As we continue to expand our business and operate as a public company, we may find it difficult to maintain our corporate culture while managing our employee growth. We will require significant capital expenditures and the allocation of valuable management resources to grow and change in these areas without undermining our corporate culture of rapid innovation, teamwork and attention to client service that has been central to our growth. Any failure to manage our anticipated growth and related organizational changes
in a manner that preserves our culture could negatively impact future growth and achievement of our business objectives.
Our failure to generate significant capital through our operations or raise additional capital necessary to fund and expand our operations, invest in new services and products, and service our debt could reduce our ability to compete and could harm our business.
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We may need to incur additional debt under our Credit Facility and/or raise additional capital beyond what is available under our Credit Facility if we cannot fund our growth or service our debt through our operating cash flows. Should this occur, we may not be able to obtain additional debt or
additional equity financing on favorable terms, if at all, which could harm our business, results of operations and financial condition. We are also subject to certain restrictions for future financings as discussed in the risk factor “The terms of our Credit Facility impose operating and financial restrictions on us.” If we raise additional equity financing, our stockholders may experience significant dilution of their ownership interests and the value of our Common Stock could decline. If we engage in additional debt financings, the holders of the debt securities or lenders would have priority over the holders of our Common Stock. We may also be required to accept terms that further restrict our ability to incur additional indebtedness, take other actions that would adversely impact the short-term price of our Common Stock, or force us to maintain specified liquidity or other ratios, any of which could harm our business,
results of operations and financial condition and reduce the value of our Common Stock.
Our business may suffer if it is alleged or determined that our technology infringes the intellectual property rights of others.
The software industry is characterized by the existence of a large number of patents, copyrights, trademarks, trade secrets and other intellectual and proprietary rights. Companies in the software industry are often required to defend against claims and litigation alleging infringement or other violations of intellectual property rights. Many of our competitors and other industry participants have been issued patents and/or have filed patent applications and may assert patent or other intellectual property rights within the industry. Our ongoing litigation with Oracle relates in part to copyright infringement claims and,
from time to time, we may receive threatening letters or notices alleging infringement or may be the subject of claims that our services and underlying technology infringe or violate the intellectual property rights of others. Any allegation of infringement, whether innocent or intentional, can adversely impact marketing, sales and our reputation.
Interruptions to or degraded performance of our service could result in client dissatisfaction, damage to our reputation, loss of clients, limited growth and reduction in revenue.
Our software support agreements with our clients generally guarantee a 10-minute response time with respect to certain high-priority issues. If we do not meet the 10-minute guarantee, our clients may in some instances be entitled to liquidated damages, service credits or refunds. To date, no such payments have been
made.
We also deliver tax, legal and regulatory updates to our clients. If there are inaccuracies in these updates, or if we are not able to deliver them on a timely basis to our clients, our reputation may be damaged, and we could face claims for compensation from our clients and potentially lose clients.
Any interruptions or delays in our service, whether as a result of third-party error, our own error, natural disasters or other catastrophic events, security breaches or a result of any other issues, whether accidental or willful, could harm our relationships with clients and cause our revenue to decrease and our expenses to increase. Also, in the event of damage or interruption, our insurance policies may not adequately compensate us for any losses that we may incur. These factors, in turn, could further reduce our revenue,
subject us to liability, cause us to pay liquidated damages, issue credits or cause clients not to renew their agreements with us, any of which could materially adversely affect our business.
We depend and rely on SaaS technologies and related services from third parties in order to operate critical functions of our business and interruptions or performance problems with these technologies or services may adversely affect our business and operating results.
We depend and rely on software-as-a-service, or SaaS, technologies and related services from third parties in order to operate critical functions of our business, including billing and order management, financial accounting services, and customer relationship management services. If these services become unavailable due to extended outages or interruptions, security vulnerabilities,
or cyber-attacks, because they are no longer available on commercially reasonable terms or prices, or due to other unforeseen circumstances, our expenses could increase, our ability to manage these critical functions could be interrupted, and our processes for and ability to manage sales of our products, recognize revenue, and support our customers could be impaired, all of which could adversely affect our business and operating results.
We may experience fluctuations in our results of operations due to the sales cycles for our products and services, which makes our future results difficult to predict and could cause our results of operations to fall below expectations or our guidance.
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Our
results of operations have fluctuated in the past and are expected to fluctuate in the future due to a variety of factors, many of which are outside of our control, including seasonality linked to certain of the sales cycles for our products and services. Historically, our sales cycle has been tied to the renewal dates for our clients’ existing and prior vendor support agreements for the products that we support. Because our clients make support vendor selection decisions in conjunction with the renewal of their existing support agreements with Oracle and SAP, among other enterprise software vendors, we have experienced an increase in business activity during the quarterly periods in which those agreements are up for renewal. However, because we have introduced and intend to continue to introduce products and services for additional software products that do not follow the same renewal timeline or pattern, our past results may not be indicative of our future performance,
and comparing our results of operations on a period-to-period basis may not be meaningful. Also, if we are unable to engage a potential client before its renewal date for software support services in a particular year, it will likely be at least another year before we would have the opportunity to engage that potential client again, given that such potential client likely had to renew or extend its existing support agreement for at least an additional year’s worth of service with its existing support provider. Furthermore, our existing clients generally renew their agreements with us at or near the end of each calendar year, so we have also experienced and expect to continue to experience heavier renewal rates in the fourth quarter.
We may not be able to accurately forecast the amount and mix of future product and service subscriptions, revenue and expenses, and as a result, our results of operations
may fall below our estimates or the expectations of securities analysts and investors. If our revenue or results of operations fall below the expectations of investors or securities analysts, or below any guidance we may provide, the price of our Common Stock could decline.
Our reputation and/or business could be negatively impacted by ESG matters and/or our reporting of such matters.
There is an increasing focus from regulators, including U.S. state attorneys general, certain investors, certain clients, the communities in which we operate and other stakeholders concerning environmental, social, and governance (“ESG”) matters, both in the United States and internationally. These stakeholders may have differing priorities and expectations regarding ESG matters. In particular, certain of our clients or potential clients might require
that we implement specified ESG procedures or standards in order to do business or continue to do business with them. In addition, proxy advisory firms and certain institutional investors who manage investments in public companies are increasingly integrating ESG factors into their investment analysis. The specific consideration of ESG factors in making business, investment and voting decisions is unsettled and still developing. In addition, recent judicial decisions, federal and state legislative actions and actions of private interest groups have challenged certain ESG policies and practices. Accordingly, the frameworks and methods for assessing ESG policies are not fully developed, likely vary across our various stakeholders and will likely continue to evolve over time.
Moreover, the subjective nature of methods used by our various stakeholders to assess a company with respect to ESG criteria
could result in erroneous perceptions or a misrepresentation of our actual ESG policies and practices. In addition, we could also incur additional costs and require additional resources to monitor, report and comply with various ESG practices and associated legal, legislative and regulatory requirements. To the extent that our required and voluntary disclosures about ESG matters increase, we could be criticized for the accuracy, adequacy, or completeness of such disclosures. If we fail to comply with specific ESG-related client/potential client or investor expectations and standards, or to provide the disclosure relating to ESG issues that any third parties may believe is necessary or appropriate (regardless of whether there is a legal requirement to do so), our reputation, business, financial condition, and/or results of operations, as well as the price of our common stock, could be negatively impacted.
We
may need to change our pricing models to compete successfully.
We currently offer our clients support services for a fee that is equal to a percentage of the annual fees charged by the enterprise software vendor; therefore, changes in such vendors’ fee structures would impact the fees we would receive from our clients. If the enterprise software vendors offer deep discounts on certain services or lower prices generally, we may need to change our pricing models, which could have an adverse effect on our results of operations. In addition, our other product and service offerings, such as our Rimini ONE integrated services, have pricing models that use a variety of different metrics and formulas as compared to our support solutions. To the extent that we do not have substantial experience with pricing such new products and services, we may need to adjust our pricing models for these offerings over
time to ensure that we remain competitive and realize a return on our investment in developing these new products and services. If we do not adapt our pricing models as necessary or appropriate, our revenue could decrease and adversely affect our results of operations.
We may not be able to scale our business systems quickly enough to meet our clients’ growing needs, and if we are not able to grow efficiently, our results of operations could be harmed.
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As enterprise software products become more advanced and complex, we will need to devote additional resources to innovating, improving and expanding our offerings to provide relevant products and services to our clients using
these more advanced and complex products. In addition, we will need to appropriately scale our internal business systems and our global operations and client engagement teams to serve our growing client base, particularly as our client demographics expand over time. Any such expansion may be expensive and complex, requiring financial investments, management time and attention. Any failure of or delay in these efforts could adversely affect the quality or success of our services and negatively impact client satisfaction, resulting in potential decreased sales to new clients and possibly lower renewal rates by existing clients.
We could also face inefficiencies or operational failures as a result of our efforts to scale our infrastructure. There can be no assurance that the expansion and improvements to our infrastructure and systems will be fully or effectively implemented within budgets or on a
timely basis, if at all. Any failure to efficiently scale our business could result in reduced revenue and increased expenditures and adversely impact our operating margins and results of operations.
Because our long-term growth strategy involves further expansion of our sales to clients outside the United States, our business will be susceptible to risks associated with global operations, including currency exchange rate fluctuations.
A significant component of our growth strategy involves the further expansion of our operations and client base outside the United States. Accordingly, our international revenue grew from $48.5 million for the three months ended September 30, 2022 to $51.7 million for the three months ended September 30, 2023,
an increase of $3.2 million or 7%. We currently have subsidiaries outside of the United States in Australia, Brazil, Canada, UAE (Dubai), France, Germany, Hong Kong, India, Israel, Japan, Korea, Malaysia, Mexico, Netherlands, New Zealand, Poland, Singapore, Sweden, Taiwan and the United Kingdom, which focus primarily on selling our services in those regions.
In the future, we may expand to other locations outside of the United States. Our current global operations and future initiatives will involve a variety of risks, including among others:
•changes in a specific country’s or region’s political or economic conditions;
•the occurrence of catastrophic
events, including natural disasters, that may disrupt our business;
•changes in regulatory requirements, taxes or trade laws or the imposition of trade sanctions;
•currency exchange rate fluctuations and the resulting effect on our revenue and expenses, and the cost and risk of entering into currency exchange rate hedging transactions;
•more stringent regulations relating to data security, such as where and how data can be housed, accessed and used, and the unauthorized use of, or access to, commercial and personal information;
•differing labor regulations, especially in countries and geographies where labor laws are more advantageous to employees as compared to the United States, including deemed hourly
wage and overtime regulations;
•challenges inherent in efficiently managing an increased number of employees over large geographic distances, including the need to implement appropriate systems, policies, benefits and compliance programs as well as hire and retain local management, sales, marketing and support personnel, along with the ability to recapture costs to open up new geographies;
•difficulties in managing a business in new markets with diverse cultures, languages, customs, legal systems, alternative dispute systems and regulatory systems;
•increased logistics, travel, real estate, infrastructure and legal compliance costs associated with global operations;
•limitations on our ability to reinvest
earnings from operations in one country to fund the capital needs of our operations in other countries;
•laws and business practices favoring local competitors or general preferences for local vendors;
•limited or insufficient intellectual property protection;
•war, political instability or terrorist activities, including geopolitical actions specific to an international region, such as the ongoing geopolitical conflict between Israel and Hamas;
•exposure to liabilities under anti-corruption and anti-money laundering laws, including the United States Foreign Corrupt Practices Act and similar laws and regulations in other jurisdictions; and
•adverse
tax burdens and foreign exchange controls that could make it difficult to repatriate earnings and cash.
Our exposure in operating our business globally with the risks noted above and the unique challenges of each new geography increase the risk that any potential future expansion efforts that we may undertake will not be successful. If we invest substantial time and resources to expand our global operations and are unable to do so successfully and in a timely manner, our business and results of operations will be adversely affected.
Consolidation in our target sales markets is continuing at a rapid pace, which could harm our business in the event that our clients are acquired and their agreements are terminated, or not renewed or extended.
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Consolidation
among companies in our target sales markets has been robust in recent years, and this continuing trend poses a risk for us. If such consolidation rates continue, we expect that some of the acquiring companies will terminate, renegotiate and elect not to renew our agreements with the clients they acquire, which may have an adverse effect on our business and results of operations.
If there is a widespread shift by clients or potential clients to enterprise software vendors, products and releases for which we do not provide software products or services, our business, financial condition and results of operations would be adversely impacted.
Our current revenue is primarily derived from the provision of support services for Oracle and SAP enterprise software products. If other enterprise software vendors, products and releases emerge to
take substantial market share from current Oracle and SAP products and releases we support, and we are unable to, or do not, offer products or services for such vendors, products or releases, demand for our products and services may decline or our products and services may become obsolete. Developing new products and services to address different emerging enterprise software vendors, products and releases could take a substantial investment of time and financial resources, and we cannot guarantee that we will be successful. If fewer clients use enterprise software products for which we provide products and services, and we are not able to provide services for new vendors, products and releases, our business may be adversely impacted.
We continue to invest resources in research and development to enhance our current product and service offerings, and other new offerings that will appeal to clients
and potential clients, for example, our partnership with Salesforce to support SaaS solutions, our Application Management Services (AMS) for SAP and Oracle products and our Rimini ONE integrated services. The development of new product and service offerings may not generate sufficient revenue to offset the increased research and development expenses and may not generate gross profit margins consistent with our current margins. Also, our new product and service offerings may be in markets that are more competitive than markets for our existing product and service offerings, making it more difficult to introduce them to clients and potential clients effectively or provide them profitably.
If our new or modified products, services or technology do not work as intended, are not responsive to client needs or industry or regulatory changes, are not appropriately timed with market opportunity, or are
not effectively brought to market, we may lose existing and prospective clients or related opportunities, in which case our financial condition and results of operations may be adversely impacted, and if we are not successful in implementing any new product and service offerings, we may need to write off the value of our investment in such offerings.
Cybersecurity threats continue to increase in frequency and sophistication; if our data security measures are compromised or unauthorized access to or misuse of client data occurs, our services may be perceived as not being secure, clients may curtail or cease their use of our services, our reputation and our business may be harmed, and we may incur significant liabilities.
Our services sometimes involve accessing, processing, sharing, using, storing and transmitting proprietary information
and protected data of our clients. We rely on proprietary and commercially available systems, software, tools and monitoring, as well as other processes, to provide security for accessing, processing, sharing, using, storing and transmitting such information and data. If our security measures are compromised as a result of third-party action, employee, vendor or client error, malfeasance, stolen or fraudulently obtained log-in credentials or otherwise, our reputation could be damaged, our business and our clients may be harmed, and we could incur significant liabilities. Cyberattacks continue to increase in frequency and in magnitude generally, and these threats are being driven by a variety of sources, including nation-state sponsored espionage and hacking activities, industrial espionage, organized crime, sophisticated organizations and hacking groups and individuals. Furthermore, due to tensions related to the ongoing geopolitical conflicts
such as between Russia and Ukraine, the risk of cyber-attacks may be elevated. We have been the subject of cybersecurity threats and expect such threats to continue in the future. In addition, if the security measures of our clients are compromised, even without any actual compromise of our own systems or security measures, we may face negative publicity or reputational harm if our clients or anyone else incorrectly attributes the blame for such security breaches to us, our products and services, or our systems. We may also be responsible for repairing any damage caused to our clients’ systems that we support, and we may not be able to make such repairs in a timely manner or at all.
We may be unable to fully anticipate or prevent techniques used to obtain unauthorized access or to sabotage systems because they change frequently and generally are not detected until after an
incident has occurred. As we increase our client base and our brand becomes more widely known and recognized, we may become more of a target for third parties seeking to compromise our systems or security measures or gain unauthorized access to our clients’ proprietary information and protected data as was the case in a 2021 successful phishing incident where we were a victim, which resulted in some unauthorized
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sharing of client addresses and outstanding billing data information, but did not significantly impact our business or client relationships.
Although we attempt to identify, mitigate and manage these risks by employing a number of measures, including insurance, monitoring of our systems and
networks, employee training and maintenance of backup and protective systems, our systems, networks, products and services remain potentially vulnerable to increasingly sophisticated advanced persistent threats that may have a material effect on our business. In addition, the devotion of additional resources to the security of our information technology systems in the future could significantly increase the cost of doing business or otherwise adversely impact our financial results.
In addition, many governments have enacted laws requiring companies to notify individuals of data security incidents involving certain types of personal data, and some of our clients contractually require notification of any data security compromise. In the event of a data security compromise, we may have difficulty timely complying with notification requirements that are unreasonably short or burdensome. New SEC rules
and potential other applicable legislative action will require public disclosure of material security compromises experienced by our clients, by our competitors or by us, which may lead to widespread negative publicity. Any data security compromise in our industry, whether actual or perceived, could harm our reputation, erode client confidence in the effectiveness of our security measures, negatively impact our ability to attract new clients, cause existing clients to elect not to renew their agreements with us, or subject us to third party lawsuits, government investigations, regulatory fines or other action or liability, all or any of which could materially and adversely affect our business, financial condition and results of operations.
We cannot provide assurances that any limitations of liability provisions in our contracts
for a security breach would be enforceable or adequate or would otherwise protect us from any such liabilities or damages with respect to any particular claim. Further, certain of our contracts do not contain limitations of liability specific to security breaches, which could expose us to significant liabilities or damages, all or any of which could materially and adversely affect our business, financial condition and results of operations. We also cannot be sure that our existing general liability insurance coverage and coverage for errors or omissions will continue to be available on acceptable terms or will be available in sufficient amounts to cover one or more claims, or that the insurer will not deny coverage as to any future claim. The successful assertion of one or more claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance
policies, including premium increases or the imposition of substantial deductible or co-insurance requirements, could have a material adverse effect on our business, financial condition and results of operations.
We are subject to governmental and other legal obligations related to privacy and security, and our actual or perceived failure to comply with such obligations could harm our business.
As an expanding global company, we are subject to the laws and regulations of numerous jurisdictions worldwide regarding accessing, processing, sharing, using, storing, transmitting, disclosure and protection of personal data, the scope of which are constantly changing, subject to differing interpretation and related to jurisdictions where we have operations, customers, or where we conduct marketing, and such laws may be inconsistent between countries
or in conflict with other laws, legal obligations or industry standards. For example, the General Data Protection Regulation in the European Union creates a broad range of requirements and imposes substantial penalties for non-compliance, including possible fines of up to 4% of global annual revenue for the preceding financial year or €20 million (whichever is higher) for the most serious infringements. We are also subject to certain requirements in other international jurisdictions with or developing strong privacy and security legislation, as well as expanding U.S. state law, including the California Consumer Privacy Act of 2018, the California Privacy Rights Act of 2020, the Virginia Consumer Data Protection Act of 2021 (effective Jan 1, 2023), the Colorado Consumer Privacy Act of 2021 (effective July 1, 2023), as well as privacy and security legislation in other states, including Nevada, each of which add to the range
of privacy- and security-related compliance requirements. We generally comply with industry standards and strive to comply with all applicable legal obligations relating to privacy, data protection and security, but it is possible that these laws and other legal obligations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with industry standards or our practices or may be mandated at a pace that exceeds our ability to comply. Compliance with such requirements may be costly and may require us to modify our business practices, which could adversely affect our business and profitability. Any failure or perceived failure by us to comply with these laws, policies or other obligations may result in governmental enforcement actions or litigation against us, with potential consequences such as fines and other expenses related to such governmental actions, an order requiring that we change our data practices or
business practices, and could cause our clients to lose trust in us, any of which could have an adverse effect on our business.
If our products and services fail due to defects or similar problems, and if we fail to correct any defect or other software problems, we could lose clients, become subject to service performance or warranty claims or incur significant costs.
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Our products and services and the systems infrastructure necessary for the successful delivery of our products and services to clients are inherently complex and may contain material defects or errors unknown to us. We have from time to time found defects in our products and services after delivery to our
customers and may discover additional defects in the future. In particular, we have developed our own tools and processes to deliver comprehensive tax, legal and regulatory updates tailored for each client, which we endeavor to deliver to our clients in a shorter timeframe than our competitors, which may result in an increased risk of material defects or errors occurring. We may not be able to detect and correct all defects or errors before clients begin to use our products and services, as some may be unknown. Consequently, defects or errors may be discovered after our products and services are provided and used. These defects or errors could also cause inaccuracies in the data we collect and process for our clients, or even the loss, damage or inadvertent release of such confidential data. Even if we are able to implement fixes or corrections to our tax, legal and regulatory updates in a timely manner, any history of defects or inaccuracies in the data we collect for
our clients, or the loss, damage or inadvertent release of such confidential data could cause our reputation to be harmed, and clients may elect not to renew, extend or expand their agreements with us and subject us to service performance credits, warranty or other claims or increased insurance costs. The costs associated with any material defects or errors in our products and services or other performance problems may be substantial and could materially adversely affect our financial condition and results of operations.
If we are not able to maintain an effective system of internal control over financial reporting, current and potential investors could lose confidence in our financial reporting, which could harm our business and have an adverse effect on our Common Stock price.
We have had material weaknesses in our internal control
over financial reporting in the past as described in our historical periodic reports filed with the SEC. We remediated the material weaknesses; however, we cannot provide assurance that material weaknesses in our internal control over financial reporting will not be identified in the future.
We are required to have our independent registered public accounting firm attest to and report on management’s assessment of the effectiveness of our internal control over financial reporting. If we are unable to conclude that we have effective internal control over financial reporting, or if our independent registered public accounting firm is unable to provide us with an attestation and an unqualified report as to the effectiveness of our internal control over financial reporting, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the value of
our securities. For further information regarding our controls and procedures, see “Controls and Procedures” in Part I, Item 4 of this Report.
If we fail to enhance and protect our brand, our ability to expand our client base will be impaired and our financial condition may suffer.
We believe that our development and protection of the Rimini Street brand is critical to achieving widespread awareness of our products and services, and as a result, is important to attracting new clients and maintaining existing clients. We also believe that the importance of brand recognition will increase as competition in our market increases. Successful promotion of our brand will depend largely on the effectiveness of our marketing efforts and on our ability to provide reliable products and services at competitive prices, as well as the outcome
of our ongoing litigation with Oracle. Brand promotion activities may not yield increased revenue, and even if they do, any increased revenue may not offset the expenses we incurred in building our brand. If we fail to successfully promote, maintain and protect our brand, our business could be adversely impacted.
If we fail to adequately protect our proprietary rights, our competitive position could be impaired and we may lose valuable assets, experience reduced revenue and incur costly litigation to protect our rights.
Our success depends, in part, upon protecting our proprietary products, services, knowledge, software tools and processes. We rely on a combination of copyrights, trademarks, service marks, trade secret laws and contractual restrictions to establish and protect our proprietary rights. However, the steps we take to protect
our intellectual property may be inadequate. We will not be able to protect our intellectual property if we are unable to enforce our rights or if we do not detect unauthorized use of our intellectual property. Any of our copyrights, trademarks, service marks, trade secret rights or other intellectual property rights may be challenged by others or invalidated through administrative process or litigation. Furthermore, legal standards relating to the validity, enforceability and scope of protection of intellectual property rights are uncertain. Despite our precautions, it may be possible for unauthorized third parties to copy or use information that we regard as proprietary to create products and services that compete with ours. In addition, the laws of some countries do not protect proprietary rights to the same extent as the laws of the United States. To the extent we expand our global activities, our exposure to unauthorized copying and use of our brand, processes and
software tools may increase.
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We enter into confidentiality and invention assignment agreements with our employees and consultants and enter into confidentiality agreements with the parties with whom we have strategic relationships and business alliances. No assurance can be given that these agreements will be effective in controlling access to and distribution of our proprietary intellectual property. Further, these agreements may not prevent our competitors from independently developing products and services that are substantially equivalent or superior to our products and services.
Although we have been successful in the past, there can be no assurance that
we will receive any additional patent protection for our proprietary software tools and processes. Even if we were to receive patent protection, those patent rights could be invalidated at a later date. Furthermore, any such patent rights may not adequately protect our processes, our software tools or prevent others from designing around our patent claims.
To protect our intellectual property rights, we may be required to spend significant resources to monitor and protect these rights. Litigation brought to protect and enforce our intellectual property rights could be costly, time consuming and distracting to management and could result in the impairment or loss of portions of our intellectual property. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property
rights. Our inability to protect our products, processes and software tools against unauthorized copying or use, as well as any costly litigation or diversion of our management’s attention and resources, could delay further sales or the implementation of our products and services, impair the functionality of our products and services, delay introductions of new products and services, result in our substituting inferior or more costly technologies into our products and services, or injure our reputation.
We may be subject to additional obligations to collect and remit sales tax and other taxes, and we may be subject to tax liability, interest and/or penalties for past sales, which could adversely harm our business.
State, local and foreign jurisdictions have differing and complex rules and regulations governing sales, use, value-added
and other taxes, and these rules and regulations can be subject to varying interpretations that may change over time. In particular, the applicability of such taxes to our products and services in various jurisdictions is unclear. Further, these jurisdictions’ rules regarding tax nexus are complex and can vary significantly. As a result, we could face the possibility of tax assessments and audits, and our liability for these taxes and associated interest and penalties could exceed our original estimates. Should these jurisdictions determine that we should be collecting additional sales, use, value-added or other taxes, it could result in substantial tax liabilities and related penalties for past sales, discourage clients from purchasing our products and services or otherwise harm our business and results of operations.
The amount of and ultimate realization of the benefits from the net operating loss carryforwards
for income tax purposes is dependent, in part, upon the tax laws in effect, our future earnings, and other future events, the effects of which cannot be determined; if we are not able to use a significant portion of our net operating loss carryforwards, our profitability could be adversely affected.
We have United States federal and state net operating loss carryforwards due to prior period losses, which could expire unused and be unavailable to offset future income tax liabilities, which could adversely affect our profitability.
In addition, under Section 382 of the Internal Revenue Code of 1986, as amended, our ability to utilize net operating loss carryforwards or other tax attributes in any taxable year may be limited if we experience an “ownership change.” A Section 382 “ownership change” generally occurs
if one or more stockholders or groups of stockholders who own at least 5% of our stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. Similar rules may apply under state tax laws in the United States. While our ownership changes to date have not triggered any limitations under Section 382, it is possible that any future ownership changes or issuances of our capital stock, could have a material effect on the use of our net operating loss carryforwards or other tax attributes, which could adversely affect our profitability.
We are a multinational organization faced with increasingly complex tax issues in many jurisdictions, and we could be obligated to pay additional taxes in various jurisdictions.
As a multinational organization, we may be subject
to taxation in several jurisdictions worldwide with increasingly complex tax laws, the application of which can be uncertain. Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. As such, our results may differ from previous estimates and may materially affect our financial position.
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The amount of taxes we pay in jurisdictions in which we operate could increase substantially as a result of changes in the applicable tax principles, including increased tax rates, new tax laws or revised interpretations of existing tax laws and precedents, which could have a material
adverse effect on our liquidity and results of operations. In addition, the authorities in these jurisdictions could review our tax returns and impose additional tax, interest and penalties, and the authorities could claim that various withholding requirements apply to us or our subsidiaries or assert that benefits of tax treaties are not available to us or our subsidiaries, any of which could have a material impact on our business and results of operations.
Any actions taken by governmental authorities, clients or others in response to any lingering impacts of the COVID-19 pandemic in the future may have a material adverse effect on our business, financial condition, results of operations, and cash flows.
The
COVID-19 pandemic has adversely affected the global economy, created significant financial market volatility and disrupted global supply chains, business operations and consumer confidence. In response to the COVID-19 pandemic, we have taken, and may take additional or different measures designed to protect the health of our employees and to minimize our operational disruption and resulting provision of services to our clients. As there is still some remaining uncertainty around any lingering impacts of the COVID-19 pandemic on the global economy and consumer confidence, such lingering impact could have a sustained adverse impact on economic and market conditions, which may delay prospective clients’ decisions regarding engaging our services, impair the ability of our current clients to make timely payments to us, cause our current clients to ask for payment concessions or discounts, impact client renewal rates and adversely affect our revenue. If such conditions occur,
we may be required to increase our reserves, allowances for doubtful accounts and write-offs of accounts receivable, and our results of operations would be harmed.
We continue to monitor the remaining impact of the COVID-19 pandemic to assess its potential effects on our business. The extent to which our results may be affected will largely depend on future developments which cannot be accurately predicted and are uncertain, but any lingering impacts of the COVID-19 pandemic could have a material adverse effect on our business, financial condition, results of operations, or cash flows. Refer to the section titled “Global Economic Uncertainty” under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2 of this Report for additional information.
Risks
Related to our Indebtedness and Securities
Our level of indebtedness and any future indebtedness we may incur may limit our operational and financing flexibility and negatively impact our business.
On September 30, 2023, our outstanding indebtedness under the Credit Facility and finance leases totaled $75.1 million. We may incur substantial additional indebtedness in the future. Our Credit Facility and other debt instruments we may enter into in the future may significantly impact our business, including the following among others:
•our ability to obtain additional financing for working capital, capital expenditures, acquisitions or general corporate purposes may be impaired;
•our
requirement to use a significant portion of our cash flows from operations to pay principal and interest on our indebtedness, which will reduce the funds available to us for operations and other purposes;
•our level of indebtedness could place us at a competitive disadvantage compared to our competitors that may have proportionately less debt;
•our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate may be limited; and
•our level of indebtedness may make us more vulnerable to economic downturns and adverse developments in our business.
We expect to depend primarily on cash generated by our operations for funds to pay our expenses and any amounts
due under our Credit Facility and any other indebtedness we may incur. Our ability to make these payments depends on our future performance, which will be affected by financial, business, economic and other factors, many of which we cannot control, including inflation and global economic conditions. Our business may not generate sufficient cash flows from operations in the future, and our currently anticipated growth in net sales and cash flows may not be realized, either or both of which could result in our being unable to repay indebtedness or to fund other liquidity needs. If we do not generate adequate resources, we may be required to refinance all or part of our then existing debt, sell assets or borrow more money, in each case on terms that may not be acceptable to us. In addition, the terms of existing or future debt agreements, including our existing Credit Facility, may restrict us from adopting some or any of these alternatives. Our inability to incur additional
debt in the
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future could also delay or prevent a change in control of our Company, make some transactions more difficult and impose additional financial or other covenants on us. In addition, any significant levels of indebtedness in the future could make us more vulnerable to economic downturns and adverse developments in our business. Our current indebtedness and any inability to pay our debt obligations as they come due or an inability to incur additional debt could adversely affect our business and results of operations.
The terms of our Credit Facility impose operating and financial restrictions on us.
Our
Credit Facility contains certain restrictions and covenants that generally limit our ability to, among other things, create liens on assets, sell assets, engage in mergers or consolidations, make loans or investments, incur additional indebtedness, engage in certain transactions with affiliates, incur certain material ERISA or pension liabilities and pay dividends or repurchase capital stock and in each case, subject to certain exceptions set forth in our credit agreement. Our Credit Facility may limit our ability to engage in these types of transactions even if we believe that a specific transaction would contribute to our future growth or improve our operating results. Our Credit Facility also requires us to achieve specified financial and operating results and maintain compliance with specified financial ratios, including as a condition to accessing additional amounts available for borrowing. As of September 30, 2023
and on the date of filing this Report, we were in compliance with each of these financial covenants. Our ability to comply with these provisions may be affected by events beyond our control. A breach of any of these financial covenants or our inability to comply with required financial ratios in our Credit Facility could result in a default under the Credit Facility in which case the lenders would have the right to declare all borrowings, which includes any principal amount outstanding, together with all accrued, unpaid interest and other amounts owing in respect thereof, to be immediately due and payable. If we are unable to repay all borrowings when due, whether at maturity or if declared due and payable following a default, the lenders would have the right to proceed against the collateral granted to secure the indebtedness. If we breach these covenants or fail to comply with other terms of the Credit Facility and the lenders accelerate the amounts outstanding under
the Credit Facility, our business and results of operations would be adversely affected. Additionally, we may need to refinance our Credit Facility at maturity or upon default, and future financing may not be available on acceptable terms, or at all.
Our variable rate indebtedness subjects us to interest rate risk, which, along with the phase-out of LIBOR and transition to SOFR, could cause our indebtedness service obligations to increase significantly.
As a result of market interest rate fluctuations, interest rates under our Credit Facility or other variable rate indebtedness we may incur in the future could be higher or lower than current levels. As interest rates increase, our debt service obligations under our Credit Facility may increase even though the amounts borrowed remain the same, and our net income (loss) and cash flows,
including cash available for servicing our indebtedness, would correspondingly decrease. We have entered into an interest rate swap agreement that involves the exchange of floating for fixed rate interest payments in order to partially reduce interest rate volatility under our Credit Facility. However, we currently do not maintain interest rate swap agreements with respect to all of our variable rate indebtedness, and any interest rate swap agreements we enter into in the future may not fully mitigate our interest rate risk.
Effective February 28, 2023, we amended both our Credit Facility and our then-effective interest rate swap agreement to implement certain changes in the reference rate from LIBOR to SOFR in response to the previous announcement by the ICE Benchmark Administration, the administrator of LIBOR, that it would cease publication of
all remaining U.S. Dollar LIBOR settings effective June 30, 2023. As a result, we have a choice of interest rates between (a) Adjusted Term SOFR and (b) a Base Rate, in each case plus an applicable margin and as further defined in the Credit Facility. The applicable margin is based on our Consolidated Leverage Ratio (as defined in the Credit Facility) and whether we elect Adjusted Term SOFR (ranging from 1.75 to 2.50%) or Base Rate (ranging from 0.75 to 1.50%). SOFR is a relatively new reference rate, and its composition and characteristics are not the same as LIBOR. SOFR is calculated based on short-term repurchase agreements, backed by Treasury securities. As such, SOFR is observed and backward looking, which stands in contrast with LIBOR under the previous methodology, which is an estimated forward-looking rate and relies, to some degree, on the expert judgment of submitting bank panel members.
Given SOFR’s limited history, the future performance of SOFR cannot be predicted based on historical performance, and there is no assurance that SOFR will perform in the same way as LIBOR would have performed at any time or that it is a comparable substitute for LIBOR.The consequences of transitioning to SOFR could result in an increase in the cost of our variable rate indebtedness, which may impact our ability to refinance some or all of our existing indebtedness or otherwise have a material adverse impact on our business, financial condition and results of operations.
Our stock repurchase program could affect the price of our Common Stock and increase volatility and may be suspended or terminated at any time, which may result in a decrease in the trading price of our Common Stock.
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Our
Board of Directors has authorized a $50.0 million stock repurchase program. During the three months ended September 30, 2023, we did not acquire any shares of Common Stock on the open market. Repurchases pursuant to any such stock repurchase program could affect our Common Stock price and increase its volatility. The existence of a stock repurchase program could also cause our Common Stock price to be higher than it would be in the absence of such a program and could potentially reduce the market liquidity for our Common Stock. Such repurchase program will not obligate us to repurchase any further specific dollar amount or number of shares of Common Stock within that authorization and may be suspended or discontinued at any time, which could cause the market price of our Common Stock to decline. The timing and actual number of further shares repurchased under any such stock repurchase program depends on a variety of factors
including the timing of open trading windows, price, corporate and regulatory requirements, and other market conditions. Further, the provisions of the Inflation Reduction Act of 2022 impose an excise tax of 1% tax on the fair market value of stock repurchases made after December 31, 2022, net of certain adjustments for issuances of incentive and other equity. The impact of this provision will depend on the extent of share repurchases and qualified reductions for issuances made in future periods. There can be no assurance that any stock repurchases will enhance stockholder value because the market price of our Common Stock may decline below the levels at which we repurchased shares of Common Stock. Although our stock repurchase program is intended to enhance stockholder value, short-term stock price fluctuations could reduce the program’s effectiveness.
The
price of our Common Stock may be volatile, any issuance of Common Stock upon the exercise of remaining warrants will dilute existing stockholders and such issuances and/or any sales of Common Stock by large stockholders may depress the market price of our Common Stock.
The price of our Common Stock may fluctuate due to various factors enumerated in this Risk Factors section and elsewhere in this Report. Additional factors impacting the price of our Common Stock could include:
•the failure of securities analysts to publish research about us, or shortfalls in our results of operations compared to levels forecast by securities analysts;
•any delisting of our Common Stock from Nasdaq Global Market due to any failure to meet listing requirements;
and
•the general state of securities markets.
These factors may materially reduce the market price of our Common Stock, regardless of our operating performance. Additionally, we have registered for resale the shares of Common Stock of certain of our significant holders of our Common Stock, including our largest stockholder, Adams Street Partners, LLC. Any sale of large amounts of our Common Stock on the open market or in privately negotiated transactions could have the effect of increasing the volatility and putting significant downward pressure on the price of our Common Stock. Also, the issuance of Common Stock upon exercise of warrants that remain outstanding and exercisable may result in immediate dilution to the equity interests of our existing common stockholders and might result in dilution in the tangible net book value
of a share of Common Stock, depending upon the price at which the additional shares are issued. We may also seek to engage in further capital optimization transactions in the future, the result of which could trigger some dilution or have other impacts on the market price of our Common Stock and not achieve an improved capital structure. Any issuance of equity we may undertake in the future to raise additional capital could cause the price of our Common Stock to decline or require us to issue shares at a price that is lower than that paid by holders of our Common Stock in the past, which would result in those newly issued shares being dilutive.
Certain of our common stockholders can exercise significant control, which could limit our stockholders’ ability to influence the outcome of key transactions, including a change of control.
Based
on the number of shares of Common Stock outstanding as of September 30, 2023, two of our stockholders have aggregate voting power of 38.4% of our outstanding capital stock. As of September 30, 2023, (i) approximately 26.4% of our outstanding voting capital stock is held by Adams Street Partners LLC and certain Adams Street fund limited partnerships and (ii) approximately 12.0% of our outstanding voting capital stock is beneficially owned by our Chief Executive Officer, Chairman of the Board and President. Our directors and officers or persons affiliated with our directors and officers have aggregate voting power of approximately 40.0% as of September 30, 2023.
As a result, these stockholders, acting together, have significant influence over all matters
that require approval by our stockholders, including the election of directors and approval of significant corporate transactions. Corporate action might be taken even if other stockholders oppose the action being taken. This concentration of ownership might also have the effect of delaying or preventing a change of control of our company that other stockholders may view as beneficial.
We do not currently intend to pay dividends on our Common Stock and, consequently, the ability to achieve a return on investment in our Common Stock will depend on appreciation in the price of our Common Stock.
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We
have not paid any cash dividends on our Common Stock to date. The payment of any cash dividends on our Common Stock will depend upon our revenue, earnings, cash flow and financial condition from time to time. The payment of any dividends is at the discretion of our Board of Directors and is also limited under the terms of our Credit Facility. Our ability to declare dividends on our Common Stock may also be limited by the terms of future financing and other agreements entered into by us from time to time. It is presently expected that we will retain all earnings for use in our business operations and, accordingly, it is not expected that our Board of Directors will declare any dividends on our Common Stock in the foreseeable future. Therefore, the success of an investment in shares of our Common Stock will depend upon any future appreciation in its value. There is no guarantee that shares of our Common Stock will appreciate in value or even maintain the price at which
our stockholders have purchased their shares.
Risks Relating to our Corporate Governance
The DGCL and our certificate of incorporation, bylaws and corporate governance policies contain certain provisions, including anti-takeover provisions that limit the ability of stockholders to take certain actions and could delay or discourage takeover attempts that stockholders may consider favorable.
Our certificate of incorporation and bylaws,
and Delaware General Corporation Law (the “DGCL”), contain provisions that could have the effect of rendering more difficult, delaying, or preventing an acquisition deemed undesirable by our Board of Directors and therefore depress the trading price of our Common Stock. These provisions could also make it difficult for stockholders to take certain actions, including electing directors who are not nominated by the current members of our Board of Directors or taking other corporate actions, including effecting changes in our management and corporate governance policies and practices. Among other things, our certificate of incorporation and bylaws include provisions regarding:
•a classified
Board of Directors with three-year staggered terms, which could delay the ability of stockholders to change the membership of a majority of our Board of Directors;
•the ability of our Board of Directors to issue shares of preferred stock, including “blank check” preferred stock, and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer;
•the limitation of the liability of, and the indemnification of our directors and officers;
•the exclusive right of our Board of Directors to elect a director to fill a vacancy created by the expansion of the Board of Directors or the resignation, death or removal of a director,
which prevents stockholders from being able to fill vacancies on our Board of Directors;
•the requirement that directors may only be removed from our Board of Directors for cause;
•a prohibition on common stockholder action by written consent, which forces common stockholder action to be taken at an annual or special meeting of stockholders and could delay the ability of stockholders to force consideration of a stockholder proposal or to take action, including the removal of directors;
•the requirement that a special meeting of stockholders may be called only by our Board of Directors, the chairperson of our Board of Directors, our chief executive officer or our president (in the absence of a chief executive officer), which could delay the ability of stockholders to
force consideration of a proposal or to take action, including the removal of directors;
•controlling the procedures for the conduct and scheduling of Board of Directors and stockholder meetings;
•the requirement for the affirmative vote of holders of at least 66 2/3% of the voting power of the then outstanding shares of the voting stock, voting together as a single class, to amend, alter, change or repeal any provision of our certificate of incorporation or our bylaws, which could preclude stockholders from bringing matters before annual or special meetings of stockholders and delay changes in our Board of Directors and also may inhibit the ability of an acquirer
to effect such amendments to facilitate an unsolicited takeover attempt;
•the ability of our Board of Directors to amend the bylaws, which may allow our Board of Directors to take additional actions to prevent an unsolicited takeover and inhibit the ability of an acquirer to amend the bylaws to facilitate an unsolicited takeover attempt; and
•advance notice procedures with which stockholders must comply to nominate candidates to our Board of Directors or to propose matters to be acted upon at a stockholders’ meeting, which could preclude stockholders from bringing matters before annual or special meetings of stockholders and delay changes in our Board of Directors
and also may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of our company.
These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our Board of Directors or management and corporate governance policies.
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In addition, as a Delaware corporation, we are subject to provisions of Delaware law, including Section 203 of the DGCL, which may prohibit certain stockholders holding 15% or more of our outstanding
capital stock from engaging in certain business combinations with us for a specified period of time.
Any provision of our certificate of incorporation, bylaws or DGCL that has the effect of delaying or preventing a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our Common Stock and could also affect the price that some investors are willing to pay for our Common Stock.
Our bylaws designate a state or federal court located within the State of Delaware as the sole and exclusive forum for substantially all disputes
between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, stockholders or employees.
Our bylaws provide that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for:
•any derivative action or proceeding brought on behalf of us;
•any action asserting a claim of breach of a fiduciary duty owed to us or our stockholders by any of our directors, officers or other employees;
•any action asserting a claim against us or any of our directors, officers
or employees arising out of or relating to any provision of the DGCL, our certificate of incorporation or our bylaws; or
•any action asserting a claim against us or any of our directors, officers, stockholders or employees that is governed by the internal affairs doctrine of the Court of Chancery.
This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, or other employees, which may discourage lawsuits with respect to such claims. Alternatively, if a court were to find the choice of forum provision to be inapplicable or unenforceable
in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, results of operations and financial condition.
General Risks
Future acquisitions, strategic investments, partnerships or alliances could be difficult to identify and integrate, divert the attention of management, disrupt our business, dilute stockholder value and adversely affect our financial condition and results of operations.
We may in the future seek to acquire or invest in businesses, products or technologies that we believe could complement or expand our services, enhance our technical capabilities or otherwise offer growth opportunities. The pursuit of potential acquisitions may divert the attention of management and cause
us to incur various expenses in identifying, investigating and pursuing suitable acquisitions, whether or not the acquisitions are completed. If we acquire businesses, we may not be able to integrate successfully the acquired personnel, operations and technologies, or effectively manage the combined business following the acquisition. We may not be able to find and identify desirable acquisition targets or be successful in entering into an agreement with any particular target or obtain adequate financing to complete such acquisitions. Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our results of operations. In addition, if an acquired business fails to meet our expectations, our business, financial condition and results of operations may be adversely affected.
The commercial insurance market is changing rapidly in response
to rising insurance losses and claims, changes in available insurance capacity and adverse worldwide economic conditions, uncertainties, and risks, which may lead to higher premium costs, higher policy deductibles, self-insured retentions, and/or lower coverage limits, potentially impacting our ability to continue our present limits of insurance coverage, obtain sufficient insurance capacity to adequately insure our risks or maintain adequate insurance at a reasonable cost.
Commercial insurance availability and coverage terms, including deductibles, self-insured retentions and pricing, continue to vary with market conditions. While we believe our insurance coverage addresses all material risks to which we are exposed and is adequate and customary for our current global operations, we
have observed rapidly changing conditions in the insurance markets relating to nearly all areas of traditional corporate insurance, resulting in higher premium costs, rising policy deductibles/self-insured retentions and lower coverage limits. If these changes continue, we may not be able to continue our present limits of insurance coverage, obtain sufficient insurance capacity to adequately insure our risks and/or obtain and maintain adequate insurance at a reasonable cost. Our insurance policies cover a number of risks and potential liabilities, such as general liability, property coverage, errors and omissions liability, employment liability, business interruptions, cybersecurity
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liability,
crime, and directors’ and officers’ liability. We cannot be certain that our insurancecoverage will be adequate to cover liabilities actually incurred, that insurance will continue to be available to us on commercially reasonable terms, or at all, or that any insurer will not deny coverage as to any future claim or become insolvent. The successful assertion of one or more large claims against us that exceed available insurancecoverage, the occurrence of changes in our insurance policies, including premium increases, decreases in coverage and the imposition of large deductible, self-insured retentions,
or co-insurance requirements, or the insolvency of any of our insurers, could have a material adverse effect on our business, results of operations and financial condition.
Catastrophic events may disrupt our business.
We rely heavily on our network infrastructure and information technology systems for our business operations. A disruption or failure of these systems in the event of an online attack, earthquake, fire, terrorist attack, geopolitical instability such as the conflicts between Israel and Hamas, war, power loss, telecommunications failure, extreme weather conditions (such as hurricanes, wildfires or floods) or other catastrophic event could cause system interruptions, delays in accessing our service, reputational harm, loss of critical data or could prevent us from providing
our products and services to our clients. In addition, several of our employee groups reside in areas particularly susceptible to earthquakes, such as the San Francisco Bay Area and Japan, and a major earthquake or other catastrophic event could affect our employees, who may not be able to access our systems, or otherwise continue to provide our services to our clients. A catastrophic event that results in the destruction or disruption of our data centers, or our network infrastructure or information technology systems, or access to our systems could affect our ability to conduct normal business operations and adversely affect our business, financial condition and results of operations. Additionally, the emergence or spread of a pandemic or other widespread health emergency (or concerns over and response to the possibility of such an emergency) could adversely affect our business, financial condition and results of operations.
Failure
to comply with laws and regulations applicable to our operations could harm our business.
Our business is subject to regulation by various global governmental agencies, including agencies responsible for monitoring and enforcing employment and labor laws, workplace safety, environmental laws, consumer protection laws, anti-bribery laws, import/export controls, securities laws and tax laws and regulations. For example, transfer of certain software outside of the United States or to certain persons is regulated by export controls.
In certain jurisdictions, these regulatory requirements may be more stringent than those in the United States. Noncompliance with applicable requirements could subject us to investigations, sanctions, enforcement actions, disgorgement of profits, fines, damages, civil and criminal penalties or injunctions
and may result in our inability to provide certain products and services. If any governmental sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation, or if clients make claims against us for compensation for such non-compliance, our business, financial condition and results of operations could be harmed, and responding to any such type of action will likely result in a significant diversion of management’s attention and resources.
Reports published by analysts, including projections in those reports that differ from our actual results, could adversely affect the price and trading volume of our Common Stock.
Securities research analysts may establish and publish their own periodic projections for us. These projections may vary widely and may not accurately predict the results we actually achieve. Our
share price may decline if our actual results do not meet the projections of these securities research analysts. Similarly, if one or more of the analysts who write reports on us downgrades our stock or publishes inaccurate or unfavorable research about our business, our share price could decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, our share price or trading volume could decline. If no additional analysts commence coverage of us, the market price and volume for our common shares could be adversely affected.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
There were no repurchases of our Common Stock during the
three months ended September 30, 2023.
ITEM 3. Defaults Upon Senior Securities.
None.
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ITEM 4. Mine Safety Disclosures.
Not applicable.
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ITEM
5. Other Information.
During the quarter ended September 30, 2023, none of our directors or officers informed us of the iiadoption/ or iitermination/
of a “Rule 10b5-1 trading arrangement” or a “non-Rule 10b5-1 trading arrangement,” as those terms are defined in Regulation S-K, Item 408(c), except as described below.
The Company’s RSU and PSU notice and award agreements provide that, upon the settlement of awards subject to such agreements, such number of shares of Company common stock as the Company determines appropriate to satisfy associated minimum statutory tax withholding obligations shall automatically be sold on the awardee’s behalf, with the sale proceeds remitted to the appropriate taxing authorities. This provision may constitute a “non-Rule 10b5-1 trading arrangement” (as defined in Item 408(c)
of Regulation S-K). Certain of our executive officers have elected to automatically sell such number of shares of Company common stock as to generate cash proceeds in excess of the amount needed to satisfy associated minimum statutory tax withholding obligations (at an identified rate) upon settlement of future RSU and/or PSU awards, with all sale proceeds remitted to appropriate taxing authorities.
On October 31, 2023, the Board of Directors of the Company amended and restated the Company’s bylaws
to enhance the advance notice requirements for stockholder proposals and director nominations, exclude indemnification for Dodd-Frank clawbacks not permitted under SEC rules and update the Company’s exclusive forum provision.
Pursuant to the requirements of Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
