Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 877K
2: EX-31.1 Certification -- §302 - SOA'02 HTML 24K
3: EX-31.2 Certification -- §302 - SOA'02 HTML 24K
4: EX-32.1 Certification -- §906 - SOA'02 HTML 21K
5: EX-32.2 Certification -- §906 - SOA'02 HTML 21K
12: R1 Cover Page HTML 81K
13: R2 Unaudited Condensed Consolidated Balance Sheets HTML 122K
14: R3 Unaudited Condensed Consolidated Balance Sheets HTML 52K
(Parenthetical)
15: R4 Unaudited Condensed Consolidated Statements of HTML 98K
Operations and Comprehensive Income
16: R5 Unaudited Condensed Consolidated Statements of HTML 78K
Stockholders' Deficit
17: R6 Unaudited Condensed Consolidated Statements of HTML 113K
Cash Flows
18: R7 Nature of Business and Basis of Presentation HTML 25K
19: R8 Liquidity and Significant Accounting Policies HTML 32K
20: R9 Deferred Contract Costs and Deferred Revenue HTML 37K
21: R10 Other Financial Information HTML 32K
22: R11 Redeemable Series A Preferred Stock HTML 143K
23: R12 Common Stock Offering, Restricted Stock Units, HTML 59K
Stock Options and Warrants
24: R13 Income Taxes HTML 25K
25: R14 Commitments and Contingencies HTML 47K
26: R15 Related Party Transactions HTML 24K
27: R16 Earnings (Loss) Per Share HTML 51K
28: R17 Financial Instruments and Significant HTML 35K
Concentrations
29: R18 Leases HTML 47K
30: R19 Liquidity and Significant Accounting Policies HTML 42K
(Policies)
31: R20 Deferred Contract Costs and Deferred Revenue HTML 34K
(Tables)
32: R21 Other Financial Information (Tables) HTML 30K
33: R22 Redeemable Series A Preferred Stock (Tables) HTML 136K
34: R23 Common Stock Offering, Restricted Stock Units, HTML 57K
Stock Options and Warrants (Tables)
35: R24 Commitments and Contingencies (Tables) HTML 45K
36: R25 Earnings (Loss) Per Share (Tables) HTML 49K
37: R26 Financial Instruments and Significant HTML 27K
Concentrations (Tables)
38: R27 Leases (Tables) HTML 45K
39: R28 Liquidity and Significant Accounting Policies HTML 93K
(Details)
40: R29 Deferred Contract Costs and Deferred Revenue HTML 41K
(Details)
41: R30 OTHER FINANCIAL INFORMATION - Other Accrued HTML 35K
Liabilities (Details)
42: R31 OTHER FINANCIAL INFORMATION - Narrative (Details) HTML 22K
43: R32 REDEEMABLE SERIES A PREFERRED STOCK - Narrative HTML 166K
(Details)
44: R33 REDEEMABLE SERIES A PREFERRED STOCK - Series A HTML 79K
Preferred Stock Summary (Details)
45: R34 REDEEMABLE SERIES A PREFERRED STOCK - Change in HTML 47K
Value of Temporary Equity (Details)
46: R35 REDEEMABLE SERIES A PREFERRED STOCK - Dividends HTML 55K
(Details)
47: R36 COMMON STOCK OFFERING, RESTRICTED STOCK UNITS, HTML 117K
STOCK OPTIONS AND WARRANTS - Narrative (Details)
48: R37 COMMON STOCK OFFERING, RESTRICTED STOCK UNITS, HTML 65K
STOCK OPTIONS AND WARRANTS - Stock Option Activity
(Details)
49: R38 COMMON STOCK OFFERING, RESTRICTED STOCK UNITS, HTML 36K
STOCK OPTIONS AND WARRANTS - Shares Available for
Grant (Details)
50: R39 COMMON STOCK OFFERING, RESTRICTED STOCK UNITS, HTML 31K
STOCK OPTIONS AND WARRANTS - Assumptions of Fair
Value of Stock Option Grants (Details)
51: R40 COMMON STOCK OFFERING, RESTRICTED STOCK UNITS, HTML 29K
STOCK OPTIONS AND WARRANTS - Stock-based
Compensation Expense (Details)
52: R41 Income Taxes (Details) HTML 23K
53: R42 COMMITMENTS AND CONTINGENCIES - Series A Preferred HTML 33K
Stock Dividends (Details)
54: R43 COMMITMENTS AND CONTINGENCIES - Narrative HTML 48K
(Details)
55: R44 Related Party Transactions (Details) HTML 45K
56: R45 Earnings (LOSS) PER SHARE - Earnings per share HTML 63K
(Details)
57: R46 Earnings (LOSS) PER SHARE - Summary (Details) HTML 32K
58: R47 FINANCIAL INSTRUMENTS AND SIGNIFICANT HTML 78K
CONCENTRATIONS - Narrative (Details)
59: R48 FINANCIAL INSTRUMENTS AND SIGNIFICANT HTML 29K
CONCENTRATIONS - Summary (Details)
60: R49 LEASES - Narrative (Details) HTML 29K
61: R50 LEASES - Components of lease expense (Details) HTML 25K
62: R51 LEASES - Supplemental balance sheet information HTML 32K
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Registrant's telephone number, including area code:
i(702)i839-9671
Not
Applicable
(Former name, former address and formal 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
iPublic
Units, each consisting of one share of Common Stock, $0.0001 par value, and one-half of one Warrant
iRMNIU
OTC Pink Current Information Marketplace
iWarrants,
exercisable for one share of Common Stock, $0.0001 par value
iRMNIW
OTC Pink Current Information Marketplace
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. iiYes/þ 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). iiYes/þ 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 i85,266,000 shares of its $0.0001 par value common stock outstanding as of May 7, 2021.
LIABILITIES,
REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable
$
i2,372
$
i3,241
Accrued
compensation, benefits and commissions
i33,840
i38,026
Other
accrued liabilities
i19,063
i21,154
Operating
lease liabilities, current
i3,806
i3,940
Deferred
revenue, current
i219,453
i228,967
Total
current liabilities
i278,534
i295,328
Long-term
liabilities:
Deferred revenue, noncurrent
i30,544
i27,966
Operating
lease liabilities, noncurrent
i15,023
i15,993
Accrued
PIK dividends payable
i1,051
i1,193
Liability
for redeemable warrants
i6,790
i2,122
Other
long-term liabilities
i2,514
i2,539
Total
liabilities
i334,456
i345,141
Commitments
and contingencies (Note 8)
i
i
Redeemable Series A Preferred Stock:
Authorized
ii180/ shares; issued and outstanding ii146/
shares and ii155/ shares as of March 31, 2021 and December
31, 2020, respectively. Liquidation preference of $i146,104, net of discount of $i14,497 and $i154,911,
net of discount of $i17,057, as of March 31, 2021 and December 31, 2020, respectively.
i131,607
i137,854
Stockholders’
deficit:
Preferred stock; $ii0.0001/
par value. Authorized ii99,820/ shares
(excluding ii180/ shares of Series A Preferred Stock); no other series has been designated
i—
i—
Common
stock; $ii0.0001/ par value. Authorized ii1,000,000/
shares; issued and outstanding ii85,140/ and ii76,406/
shares as of March 31, 2021 and December 31, 2020, respectively
i9
i8
Additional
paid-in capital
i152,762
i98,258
Accumulated
other comprehensive loss
(i2,682)
(i318)
Accumulated
deficit
(i304,584)
(i301,008)
Total
stockholders' deficit
(i154,495)
(i203,060)
Total
liabilities, redeemable preferred stock and stockholders' deficit
$
i311,568
$
i279,935
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
RIMINI STREET, INC.
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income
SUPPLEMENTAL DISCLOSURE
OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Discount on shares of Common Stock issued in March 2021 Public Offering:
Underwriter discounts and commissions
$
i2,948
$
i—
Underwriter
expenses
i1,050
i—
Accrued
professional fees related to the issuance of Common Stock
i436
i—
Discount
on shares issued in Private Placements:
Redeemable Series A Preferred Stock Dividends and Accretion:
Accrued cash dividends
$
i3,540
$
i3,910
Accrued
PIK dividends
i1,051
i1,173
Accretion
of discount on Series A Preferred Stock
i1,473
i1,547
Issuance
of Series A Preferred Stock for PIK dividends
i1,193
i1,070
Increase
in payables for capital expenditures
$
i175
$
i—
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 enterprise software support services. The Company’s subscription-based software support products and services offer enterprise software licensees a choice of solutions that replace or supplement the support products
and services offered by enterprise software vendors.
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, 2020, included in the Company’s 2020 Annual Report on Form 10-K as filed with the SEC on March 3, 2021 and as subsequently amended on May 10, 2021 (as amended, the “2020 Form 10-K/A”).
The accompanying condensed consolidated balance sheet and related disclosures as of December 31, 2020 have been derived from the Company’s audited financial statements. The Company’s
financial condition as of March 31, 2021, and operating results for the three months ended March 31, 2021 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, 2021.
NOTE 2 — iLIQUIDITY
AND SIGNIFICANT ACCOUNTING POLICIES
Liquidity
As of March 31, 2021, the Company’s current liabilities exceeded its current assets by $i11.4 million, and the Company recorded a net loss of $i3.6
million for the three months ended March 31, 2021. As of March 31, 2021, the Company had available cash, cash equivalents and restricted cash of $i153.5 million. As of March 31, 2021, the
Company's current liabilities included $i219.5 million of deferred revenue whereby the historical costs of fulfilling the Company's commitments to provide services to its clients was approximately i38%
of the related deferred revenue for the three months ended March 31, 2021.
As discussed in Note 6, the Company completed a firm commitment underwritten public offering on March 11, 2021 (the "March 2021 Offering") of i7.8 million shares of its Common Stock at a price
of $i7.75 per share for total gross proceeds of $i57.0 million. Underwriter discounts and commissions were $i2.9 million
and the underwriter expenses were $i0.2 million. The Company also incurred additional professional fees and expenses of $i1.3 million
as part of the transaction, resulting in net proceeds from the March 2021 Offering of approximately $i55.7 million. The Company had previously completed a firm commitment underwritten public offering on August 18, 2020 (the “August 2020 Offering”) of i6.1 million
shares of its Common Stock at a price of $i4.50 per share for total gross proceeds of $i27.5 million. Underwriter discounts and commissions were $i1.7 million
and the underwriter expenses were $i0.1 million. The Company also incurred additional professional fees of $i0.6 million
as part of the transaction, resulting in net proceeds from the August 2020 Offering of approximately $i25.1 million. The Company intends to use the net proceeds from the March 2021 Offering to redeem i60,000
shares of Series A Preferred Stock.
As discussed in Note 5, the Company issued a notice of partial redemption on March 16, 2021, calling for redemption on April 16, 2021 of i60,000 shares of its i13.00%
Series A Preferred Stock at an aggregate redemption price of $i62.3 million. The Company funded the partial redemption with the proceeds from its two recent common stock offerings, which raised aggregate net proceeds of approximately $i80.8
million.
7
RIMINI STREET, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 $i6.0 million.
In March 2020, the World Health Organization declared the outbreak of a novel strain of the coronavirus (“COVID-19”) to be a pandemic. Assuming that, after the issuance date of these financial statements, the Company’s ability to operate continues not to be significantly adversely impacted by the COVID-19 pandemic, 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 cash dividend requirements, working capital needs, capital expenditures and contractual obligations for at least 12 months from the issuance date of these financial statements.
Revision
of Previously Issued Financial Statements
The Company has revised certain prior period amounts on the unaudited condensed consolidated financial statements to correct a misstatement with respect to improperly classifying the GP Sponsor Private Placement Warrants as equity instead of as a warrant liability that is adjusted through charges or credits to the income statement each quarter to reflect changes in the fair value of the warrants, under the guidance of Accounting Standards Codification (“ASC”) 815-40, Contracts in Entity’s Own Equity. The Company recorded a liability for the warrants of $i2.1 million
as of December 31, 2020 and adjusted its additional paid-in capital and accumulated deficit accordingly. There was no impact to the statement of operations and statement of cash flows for the three months ended March 31, 2020 as there was no change in the warrant liability fair value for the three-month period then ended. There was no income tax impact associated with this revision. Total stockholders’ deficit decreased by $ii0.7/ million
as of both March 31, 2020 and December 31, 2019, respectively.
The Company has assessed the impact of improperly classifying the GP Sponsor Private Placement Warrants as equity rather than as a warranty liability that is adjusted through charges or credits to the income statement each quarter to reflect changes in the fair value of the warrants, and determined the impact is not material, quantitatively or qualitatively, to the periods presented. Accordingly, the Company will adjust prior periods as those financial statements are presented for comparative purposes in future filings.
See
Note 11 for additional information regarding the assumptions made to determine the fair value of the GP Sponsor Private Placement Warrants as of March 31, 2021 and December 31, 2020.
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 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 significant accounting estimates include, but are not necessarily limited to, 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 operation may be affected.
i
Recent Accounting Pronouncements
Recently Adopted Standards. The following accounting standards were adopted during the fiscal year 2021:
In December 2019, the Financial Accounting Standards Board (“FASB”)
issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The guidance removes certain exceptions to the general income tax accounting principles, and clarifies and amends existing guidance to facilitate consistent application of the accounting principles. The new guidance was effective for the Company as of January 1, 2021. The adoption of this guidance did not have a material impact on the Company's Consolidated Financial Statements.
In January 2020, the FASB issued ASU 2020-1, Investments—Equity Securities (Topic 321), Investments - Equity and Joint Ventures (Topic
323), and Derivatives and Hedging (Topic 815). The guidance clarifies interactions between current accounting standards on equity securities, equity method and joint ventures, and derivatives and hedging. The new guidance addresses accounting for the transition into and out of the equity method and measuring certain purchased options and forward contracts to acquire investments. The new guidance was effective for the Company as of January 1, 2021. The adoption of this guidance did not have a material impact on the Company's Consolidated Financial Statements.
8
NOTE
3 - iDEFERRED CONTRACT COSTS AND DEFERRED REVENUE
i
Activity
for deferred contract costs for the three months ended March 31, 2021 and 2020 is shown below (in thousands):
Deferred revenue, current and noncurrent, as of the beginning of period
$
i256,933
$
i235,498
Billings,
net
i80,959
i65,188
Revenue
recognized
(i87,895)
(i78,032)
Deferred
revenue, current and noncurrent, as of the end of period
$
i249,997
$
i222,654
/
The
transaction price allocated to the remaining performance obligations represents contracted revenue that has not yet been recognized. As of March 31, 2021, the remaining transaction price included in deferred revenue was $i219.5 million in current and $i30.5
million in noncurrent.
Accrued
dividends on Redeemable Series A Preferred Stock
i3,540
i3,842
Current
maturities of capital lease obligations
i402
i429
Income
taxes payable
i1,137
i2,245
Other
accrued expenses
i2,736
i3,513
Total
other accrued liabilities
$
i19,063
$
i21,154
/
Interest
Expense
Interest expense of $i47 thousand and $i13 thousand for the three months ended March 31, 2021
and 2020, respectively was comprised primarily from finance leases.
NOTE 5 — iREDEEMABLE SERIES A PREFERRED STOCK
2018 Securities Purchase Agreement
9
RIMINI
STREET, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On July 19, 2018, the Company closed a Securities Purchase Agreement (the “2018 SPA”) with several accredited investors (the “Purchasers”) for a private placement (the “Initial Private Placement”) of (i) i140,000
shares of Series A Preferred Stock, (ii) approximately i2.9 million shares of Common Stock, and (iii) convertible secured promissory notes (the “Convertible Notes”), with no principal amount outstanding at issuance that solely collateralize amounts, if any, that may become payable by the Company pursuant to certain redemption provisions of the Series A Preferred Stock.
Pursuant
to the 2018 SPA, the Purchasers acquired an aggregate of i140,000 shares of Series A Preferred Stock, i2.9 million
shares of Common Stock, and Convertible Notes with no principal amount outstanding as of the issuance date, for an aggregate purchase price equal to $i133.0 million in cash (after taking into account a discount of $i7.0 million,
but before the incremental and direct transaction costs associated with the Private Placement of $i4.6 million). iThe
allocation of the net proceeds as of the closing date, along with changes in the net carrying value of the Series A Preferred Stock through March 31, 2021 are set forth below (dollars in thousands):
1.The
liquidation preference for each share of Series A Preferred Stock on the closing date for the Initial Private Placement was $i1,000 per for an aggregate liquidation preference of $i140.0 million.
The estimated fair value of the Series A Preferred Stock was approximately $i126.8 million on July 19, 2018, which is the basis for allocation of the net proceeds. Please refer to Note 11 for further discussion of the valuation methodology employed.
2.The fair value of the issuance of approximately i2.9 million
shares of the Common Stock was based on the last closing price of $i6.95 per share on the date prior to closing the transaction.
3.The aggregate cash proceeds of $i133.0 million
on July 19, 2018 were allocated pro rata based on the fair value of all consideration issued.
4.Incremental and direct costs of the Initial Private Placement were allocated pro rata based on the fair value of all consideration issued. Such costs include financial advisory and professional fees of $i2.7 million that were incurred by the
Company, and due diligence and professional fees incurred by the investors of $i1.9 million.
At the closing, the Company used the $i133.0 million
of proceeds from the Initial Private Placement plus cash and cash equivalents of $i2.7 million to (i) repay all outstanding indebtedness and various operating and financing fees and expenses under the former Credit Facility in the aggregate amount of $i132.8 million,
(ii) pay incremental and direct transaction costs of $i2.7 million, and (iii) pay a professional services retainer of $i0.2 million.
In
connection with the completion of the Initial Private Placement, the Company, among other customary closing actions, (i) filed a Certificate of Designations with the State of Delaware setting forth the rights, preferences, privileges, qualifications, restrictions and limitations on the Series A Preferred Stock (the “CoD”), (ii) entered into a Registration Rights Agreement with the Purchasers setting forth certain registration rights of capital stock held by the Purchasers (the “Registration Rights Agreement”), (iii) delivered a Convertible Note to each Purchaser, and (iv) entered into a Security Agreement (the “Security Agreement”) in respect of the
Company’s assets collateralizing the amounts that may become payable pursuant to the Convertible Notes if certain redemption provisions of the Series A Preferred Stock are triggered in the future.
March 2019 Securities Purchase Agreement
On March 7, 2019, the Company entered into a securities purchase agreement (the “March 2019 SPA”) with an accredited investor for a private placement (the “March 2019 Private Placement”) of (i) i6,500
shares of Series A Preferred Stock, (ii) i134,483 shares of Common Stock, and (iii) a Convertible Note (as defined below) with no principal balance outstanding. The shares of Series A Preferred Stock were authorized pursuant to the CoD and are subject to the provisions set forth in an amended Security Agreement, a Convertible Note and a registration rights agreement that is substantially similar in all material
10
RIMINI
STREET, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
respects to the Registration Rights Agreement entered into in connection with the 2018 SPA discussed above. The accredited investor in the March 2019 Private Placement is affiliated with one of the accredited investors in the Initial Private Placement.
The aggregate cash proceeds from the March 2019 Private Placement were $i5.8 million
in cash (after an i11.0% discount or $i0.7 million). The net proceeds were approximately $i5.0 million
after estimated transaction costs payable by the Company of $i0.8 million. The transaction costs consisted of i85,000
shares of Common Stock issued to the existing holders of the Series A Preferred Stock for their consent at a cost of approximately $i0.5 million and direct transaction costs of approximately $i0.3 million
related to due diligence and professional fees. The net proceeds were allocated based on their relative fair values at issuance of the Series A Preferred Stock and the Common Stock. The allocation of the net proceeds from the March 2019 Private Placement are set forth below (dollars in thousands):
(1)The
liquidation preference for each share of Series A Preferred Stock on the closing date for the March 2019 Private Placement was $i1,000 per share for an aggregate liquidation preference of $i6.5 million.
The estimated fair value of the Series A Preferred Stock was approximately $i5.3 million on March 7, 2019, which is the basis for allocation of the net proceeds. Please refer to Note 11 for further discussion of the valuation methodology employed.
(2)The fair value of the issuance of approximately i134,483
shares of the Common Stock was based on the closing price of $i5.37 per share on the date prior to closing of the transaction.
(3)The aggregate cash proceeds of $i5.8 million
on March 7, 2019 were allocated pro rata based on the fair value of all consideration issued.
(4)Incremental and direct costs related to the March 2019 Private Placement were allocated pro rata based on the fair value of all consideration issued. Such costs included the issuance of i85,000 shares of Common Stock to the Initial Private Placement investors in the Series A Preferred Stock
for their consent of approximately $i0.5 million and financial advisory and professional fees that were incurred of approximately $i0.3 million
that were either paid or accrued directly by the Company as of March 31, 2019.
June 2019 Securities Purchase Agreement
On June 20, 2019, the Company entered into a securities purchase agreement (the “June 2019 SPA”) with accredited investors for a private placement (the “June 2019 Private Placement”) of (i) i3,500
shares of Series A Preferred Stock, (ii) i72,414 shares of Common Stock, and (iii) a Convertible Note (as defined below) with no principal balance outstanding. The shares of the Series A Preferred Stock were authorized pursuant to the CoD and are subject to the provisions set forth in an amended Security Agreement (as defined below), a Convertible Note and a registration rights agreement that is substantially similar in all material respects to
the Registration Rights Agreement entered into connection with the 2018 SPA discussed above. The accredited investors in the June 2019 Private Placement are not affiliated with the accredited investors in the March 2019 Private Placement or the Initial Private Placement.
The aggregate cash proceeds from the June 2019 Private Placement were $i3.3 million in cash (after a i5.0%
discount or $i0.2 million). The net proceeds were approximately $i3.0 million after estimated transaction costs payable by
the Company of $i0.3 million. The transaction costs consisted of i35,000
shares of Common Stock issued to the existing holders of the Series A Preferred Stock for their consent at a cost of approximately $i0.2 million and direct transaction costs of approximately $i0.2
million related to professional fees of the investors, existing holders of Series A Preferred Stock and the Company. The net proceeds were allocated based on their relative fair values at issuance of the Series A Preferred Stock and the Common Stock. The allocation of the net proceeds from the June 2019 Private Placement are set forth below (dollars in thousands):
11
RIMINI STREET, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1)The
liquidation preference for each share of Series A Preferred Stock on the closing date for the June 2019 Private Placement was $i1,000 per share for an aggregate liquidation preference of $i3.5
million. The estimated fair value of the Series A Preferred Stock was approximately $i3.0 million on June 20, 2019, which is the basis for allocation of the net proceeds. Please refer to Note 11 for further discussion of the valuation methodology employed.
(2)The fair value of the issuance of approximately i72,414
shares of the Common Stock was based on the closing price of $i5.19 per share on the date prior to closing of the transaction.
(3)The aggregate cash proceeds of $i3.3
million on June 20, 2019 were allocated pro rata based on the fair value of all consideration issued.
(4)Incremental and direct costs related to the June 2019 Private Placement were allocated pro rata based on the fair value of all consideration issued. Such costs included the issuance of i35,000 shares of Common Stock to the Initial Private Placement investors in the Series A Preferred
Stock for their consent of approximately $i0.2 million and financial advisory and professional fees that were incurred of approximately $i0.2
million that were either paid or accrued directly by the Company as of June 30, 2019.
On January 5, 2021, the Company entered into an agreement with certain of the holders of its Series A Preferred Stock (the “January 2021 Stock Repurchase Agreement”) to repurchase i10,000
shares of Series A Preferred Stock and the associated obligations pursuant to the Company’s Convertible Secured Promissory Notes outstanding in respect thereof (the “Note Obligations”) for an aggregate purchase price of approximately $i8.95 million representing a discount to the face value of such shares of Series A Preferred Stock and no make-whole payments were required. The January 2021 Stock Repurchase Agreement contains customary representations, warranties
and covenants of the parties and waivers relating to the purchased shares of Series A Preferred Stock.
Upon the closing of the transactions contemplated by the January 2021 Stock Repurchase Agreement, the shares of Series A Preferred Stock purchased by the Company were retired (and the underlying Note Obligations cancelled) and are not eligible for re-issuance by the Company in accordance with the terms of the CoD.
On October 30, 2020, the Company entered into an agreement (the “October 2020 Stock Repurchase Agreement”) with certain
of the holders of its Series A Preferred Stock to repurchase i5,000 shares of Series A Preferred Stock and the associated Note Obligations for an aggregate purchase price of approximately $i4.5 million
representing a discount to the face value of such shares of Series A Preferred Stock and no make-whole payments were required. The October 2020 Stock Repurchase Agreement contains customary representations, warranties and covenants of the parties and waivers relating to the purchased shares of Series A Preferred Stock.
Subsequent Event
On March 16, 2021, the “Company issued a notice of partial redemption (the “March 2021 Notice of Redemption”) calling for the redemption on April 16, 2021 of i60,000
shares of its i13.00% Series A Preferred Stock at an aggregate total redemption price of $i62.3 million.
The total price consists of $i60.0 million related to the face value of $i1,000 per share of Series A Preferred Stock and $i2.3 million
or $i39.05 per share of Series A Preferred Stock related to the dividends to be earned for the period from April 1, 2021 through July 18, 2021. The redeemed shares of Series A Preferred Stock, along with the dividends to be earned, will be recorded when the redemption offer becomes mandatorily redeemable on April 16, 2021.
The
Company funded the redemption with a portion of the proceeds from its two recent common stock offerings, which raised aggregate net proceeds of approximately $i81 million.
12
RIMINI STREET, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
i
The
changes in the net carrying value of Series A Preferred Stock from December 31, 2020 to March 31, 2021 are set forth below (dollars in thousands):
For
future calculations of earnings applicable to common stockholders, the aggregate discount applicable to the Series A Preferred Stock will be accreted using the effective interest method from the respective issuance dates through July 19, 2023 when the holders of all outstanding shares of Series A Preferred Stock may first elect to redeem their shares for cash.
Agreements Related to Private Placement Transactions
In connection with the completion of the Initial Private Placement, the Company, among other customary closing actions, (i) filed the CoD, (ii) entered into the Registration Rights Agreement, (iii) delivered
a Convertible Note to each Purchaser, and (iv) entered into the Security Agreement in respect of the Company’s assets collateralizing the amounts that may become payable pursuant to the Promissory Notes if certain redemption provisions of the Series A Preferred Stock are triggered in the future. In connection with both the March 2019 Private Placement and June 2019 Private Placement, the Company entered into a securities purchase agreement, a Registration Rights Agreement, a First (March 2019) and Second (June 2019) Amendment to the Security Agreement, and issued Convertible Notes to each investor, in each case substantially in the same form as entered into by the
Company in the Initial Private Placement.
Certificate of Designations of the Series A Preferred Stock and Dividends
The CoD authorizes the issuance of up to i180,000 shares of Series A Preferred Stock. The holders of Series A Preferred Stock are entitled to, from the respective issuance date, a cash dividend of i10.0%
per annum (the “Cash Dividends”) and a payment-in-kind dividend of i3.0% per annum (the “PIK Dividends” and, together with the Cash Dividends, the “Dividends”) for the first ifive
years following the initial June 2018 closing and thereafter all dividends accruing on such Series A Preferred Stock will be payable in cash at a rate of i13.0% per annum. The Series A Preferred Stock is classified as mezzanine equity in the Company’s consolidated balance sheet as of March 31, 2021 and December 31, 2020 since the holders have redemption rights beginning on July 19,
2023 (and earlier under certain circumstances).
As required under the CoD, the Cash Dividends and PIK Dividends for the period in which the Series A Preferred Stock was outstanding during the first quarter of 2021 were settled on April 1, 2021 to holders of record on March 16, 2021. Accordingly, the Company accrued a current liability for accrued Cash Dividends through March 31, 2021 for $i3.5 million.
A long-term liability was recorded for $i1.1 million of PIK Dividends that accrued through March 31, 2021, and that were settled through the issuance of i1,051
shares of Series A Preferred Stock on April 1, 2021. iPresented below is a summary of total and per share dividends declared through March 31, 2021 (dollars in thousands, except per share amounts):
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The liquidation value of the Series A Preferred Stock is convertible into shares of Common Stock at an initial conversion rate of $i10.00 per share for a total of i14.6 million
shares of Common Stock based on i146,104 shares of Series A Preferred Stock outstanding as of March 31, 2021. Each share of Series A Preferred Stock is convertible at the holder’s option into ione
share of Common Stock at a conversion price equal to the quotient of (i) the Liquidation Preference (as defined below), and (ii) $i10.00 (subject to appropriate adjustment in the event of a stock split, stock dividend, combination or other similar recapitalization) (the “Per Share Amount”). The Company has the right to convert outstanding shares of Series A Preferred Stock into Common Stock for the Per Share Amount after July 19,
2021, if the Company’s volume weighted average stock price for at least i30 trading days of the i45
consecutive trading days immediately preceding such conversion is greater than $i11.50 per share. The Company can exercise this right to convert twice per calendar year for a maximum number of shares of Common Stock equal to the amount that has publicly traded over the i60
consecutive trading days prior to the conversion date (less any shares of Common Stock that have been issued pursuant to any such conversion during such i60-day period).
The Series A Preferred Stock will become mandatorily redeemable, upon the election by the holders of a majority of the then outstanding shares, on or after July 19, 2023. Any and all of the then outstanding liquidation value of
the Series A Preferred Stock plus any capitalized PIK Dividends and any unpaid accrued Cash Dividends not previously included in the Liquidation Preference (the “Redemption Amount”) is required to be repaid in full in cash on such redemption date or satisfied in the form of obligations under the Convertible Notes. Additionally, in certain circumstances the Company may require the holders of shares of the Series A Preferred Stock to convert into shares of Common Stock in lieu of cash payable upon redemption.
The Series A Preferred Stock will also become mandatorily redeemable at any time upon the reasonable determination of the holders of a majority of the Series A Preferred Stock then outstanding of the occurrence of a Material Adverse Effect or the occurrence of a Material Litigation Effect (as such terms are defined
in the CoD), with the Redemption Amounts payable automatically becoming payment obligations pursuant to the Convertible Notes with a concurrent cancellation of the shares of the Series A Preferred Stock, unless under certain circumstances, the Company redeems the Series A Preferred Stock for cash at such time.
Prior to July 19, 2021, the Company has the right to redeem up to $i80.0
million of shares of the Series A Preferred Stock for cash amounts equal to the Redemption Amount which would include a make-whole premium that provides the holders thereof with full yield maintenance as if the Series A Preferred Stock was held until July 19, 2021, provided that such redemptions are subject to certain conditions and limitations. After July 19, 2021, the Company will have the right to redeem shares of Series A Preferred Stock for a cash per share amount equal to the Redemption Amount.
The holders of Series A Preferred Stock may exercise their conversion rights prior to any optional redemption. In the event of a liquidation, dissolution or winding up of the
Company, the Series A Preferred Stock is entitled to a liquidation preference in the amount of the greater of (i) $i1,000 plus accrued but unpaid Dividends (the “Liquidation Preference”), and (ii) the per share amount of all cash, securities and other property to be distributed in respect of the Common Stock such holder would have been entitled to receive for its Series A Preferred Stock on an as-converted
basis. In the event of a liquidation, dissolution or winding up of the Company prior to July 19, 2021, the holders are entitled to a make-whole premium that provides the holders thereof with full yield maintenance as if the shares of Series A Preferred Stock were held until July 19, 2021.
Until approximately i95%
of the Series A Preferred Stock or Convertible Notes are no longer outstanding, the Company is restricted from incurring Indebtedness (as defined in the June 2019 SPA, March 2019 SPA and 2018 SPA), subject to certain exceptions.
The original Registration Rights Agreement required the Company to register the resale of the shares of Common Stock and Series A Preferred Stock issued pursuant to the 2018 SPA. The
Company satisfied such registration requirements in November 2018. The Registration Rights Agreements, entered into in connection with both the March 2019 and June 2019 Private Placements, required the Company to register the resale of the shares of Common Stock and Series A Preferred Stock pursuant to the March 2019 SPA and the June 2019 SPA within 120 days of the respective March 7, 2019 and June 20, 2019 closing dates. The Company satisfied all such registration requirements in July 2019. Each such Registration Rights
Agreement also includes customary “piggyback” registration rights, suspension rights, indemnification, contribution, and assignment provisions.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Common Stock Offerings
On March 11, 2021, the Company completed the March 2021 Offering of i7.8 million
shares of its Common Stock at a price of $i7.75 per share for total gross proceeds of $i56.9 million. Underwriter discounts and commissions were $i2.9 million
and the underwriter expenses were $i0.2 million. The Company also incurred additional professional fees and expenses of $i1.3 million
as part of the transaction, resulting in net proceeds from the March 2021 Offering of approximately $i55.6 million. The Company intends to use the net proceeds from the March 2021 Offering to redeem i60,000
shares of Series A Preferred Stock.
On August 18, 2020, the Company completed the August 2020 Offering of i6.1 million shares of its Common Stock at a price of $i4.50
per share for total gross proceeds of $i27.5 million. Underwriter discounts and commissions were $i1.7 million
and the underwriter expenses were $i0.1 million. The Company also incurred additional professional fees of $i0.6 million
as part of the transaction, resulting in net proceeds from the August 2020 Offering of approximately $i25.1 million. The Company intends to use the net proceeds from the August 2020 Offering to redeem i60,000
shares of Series A Preferred Stock and for working capital and other general corporate purposes.
Stock Option Plans
The Company’s stock option 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, 2021, the Board of Directors authorized an increase of approximately i3.1 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, 2020, included in the 2020 Form 10-K/A. The information presented below provides an update for activity under the Stock Plans for the three months ended March 31, 2021.
Restricted Stock Units
For the three months ended March 31, 2021, the Board of Directors granted restricted stock units (“RSUs”) under the 2013 Plan for an aggregate of approximately i0.7
million shares of Common Stock to employees and to non-employee directors of the Company. Other than the RSU grants to continuing directors, which vest on June 2, 2021, and the grant to the Company's non-employee director first elected in June 2020, which vests in part on the first and second anniversary of grant, these RSUs 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 $i7.09 per
share, the aggregate fair value for the shares underlying the RSUs amounted to $i4.9 million as of the grant date that will be recognized as compensation cost over the vesting period. Accordingly, compensation expense related to RSUs of approximately $i1.9
million and $i1.1 million was recognized for the three months ended March 31, 2021 and 2020, respectively. As of March 31, 2021, the unrecognized expense of $i12.9
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 i1.9 years.
Stock Options
For the three months ended March 31, 2021, the Board of Directors granted stock options
for the purchase of an aggregate of approximately i0.5 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. These stock options generally vest annually for one-third of the awards and expire iten
years after the grant date.
iThe following table sets forth a summary of stock option activity under the Stock Plans for the three months ended March 31, 2021 (shares in thousands):
15
RIMINI STREET, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1)Represents
the weighted average exercise price.
(2)Represents the weighted average remaining contractual term until the stock options expire.
(3)As of March 31, 2021, the aggregate intrinsic value of all stock options outstanding was $i23.2 million. As of March
31, 2021, the aggregate intrinsic value of vested stock options was $i18.5 million.
(4)The number of outstanding stock options that are not expected to ultimately vest due to forfeiture amounted to i0.2
million shares as of March 31, 2021.
i
The following table presents activity affecting the total number of shares available for grant under the Stock Plans for the three months ended March 31, 2021 (in thousands):
The
aggregate fair value of approximately i0.5 million stock options granted for the three months ended March 31, 2021 amounted to $i1.5
million, or $i2.94 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 three months ended March 31, 2021, 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:
Expected life (in years)
i6.0
Volatility
i40%
Dividend
yield
i0%
Risk-free interest rate
i0.78%
Fair
value per common share on date of grant
$i7.52
As of March 31, 2021 and December 31, 2020, total unrecognized compensation costs related to unvested stock options, net of estimated forfeitures, was $i2.1
million and $i1.2 million, respectively. As of March 31, 2021, the unrecognized costs are expected to be charged to expense on a straight-line basis over a weighted-average vesting period of approximately i2.2
years.
Stock-Based Compensation Expense
iStock-based compensation expense attributable to RSUs and stock options is classified as follows (in thousands):
16
RIMINI
STREET, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On
April 12, 2021, the SEC issued a Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (the “SEC Staff Statement”). Upon review of the SEC Staff Statement which addressed certain accounting and reporting considerations related to warrants similar to the Company's GP Sponsor Private Placement Warrants and upon review of ASC 815-40, Contracts in Entity’s Own Equity, the Company determined that its GP Sponsor Private Placement Warrants should have been classified as a liability instead of equity. See Note 2 for further information regarding this revision to the
Company's consolidated financial statements. See Note 11 for information regarding the fair value of the GP Sponsor Private Placement Warrants as of March 31, 2021 and December 31, 2020.
As of March 31, 2021, warrants were outstanding for an aggregate of i18.1 million shares
of Common Stock, including i3.4 million shares of Common Stock exercisable at $i5.64
per share, and an aggregate of i14.7 million shares of Common Stock exercisable at $i11.50
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, 2020, included in the 2020 Form 10-K/A.
NOTE 7 — iINCOME TAXES
On
March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was passed into law, amending portions of relevant U.S. tax laws. The CARES Act contains changes to corporate taxation, including among other things, adjusting net operating loss (NOL) limitations and carryback rules, refundable AMT credits, bonus depreciation and interest expense limitations. The CARES Act also provides for an Employee Retention Credit, a fully refundable payroll tax credit for certain eligible employers and the ability for all eligible employers to defer payment of the employer share of payroll taxes owed on wages paid for the period ending December 31, 2020 (such deferred payroll taxes are due in two installments: 50% by December 31, 2021 and 50% by December 31,
2022). The Company has elected to defer payroll tax payments which totaled $i3.3 million as of March 31, 2021.
For the three months ended March 31, 2021 and 2020, the Company's effective
tax rate was (i76.5)% and i27.6% respectively. The Company's
income tax expense was primarily attributable to earnings in foreign jurisdictions subject to income taxes and foreign withholding taxes. In addition, there was no tax impact associated with the loss on change in fair value of redeemable warrants for three months ended March 31, 2021. 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 months ended March 31, 2021 and 2020.
NOTE 8 — iCOMMITMENTS
AND CONTINGENCIES
Series A Preferred Stock Dividends
In connection with the issuance of Series A Preferred Stock as discussed in Note 5, the Company is obligated to pay Cash Dividends and issue additional shares of Series A Preferred Stock in settlement of PIK Dividends. From January 1, 2021 through July 19, 2023, the date until which the Series A Preferred Stock is expected to remain outstanding, estimated Cash Dividends and PIK Dividends required to be declared are as follows (in thousands):
17
RIMINI
STREET, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Year Ending December 31:
Cash
PIK
Total
2021
$
i10,534
$
i3,160
$
i13,694
2022
i9,032
i2,709
i11,741
2023
i5,085
i1,526
i6,611
Total
$
i24,651
$
i7,395
$
i32,046
The
amounts above do include the impact of repurchase of i15,000 shares and the redemption of i60,000
of Series A Preferred Stock as discussed in Note 5.
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. The Company's matching contributions to these plans totaled $i0.8 million
and $i0.7 million for the three months ended March 31, 2021 and 2020, respectively.
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, 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 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 one 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.
Injunction
Following post-trial motions, the District Court entered a permanent injunction prohibiting the Company from using certain processes. In August 2019, the United States Court of Appeals for the Ninth Circuit affirmed the permanent injunction issued by the District Court, while also correcting certain legal errors that narrowed the scope of the injunction. The injunction prohibits the Company from using support processes that had been found in Rimini I to “innocently” infringe certain Oracle copyrights,
which the Company ceased using no later than July 31, 2014. The 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.
On July 10, 2020, Oracle filed a motion to show cause contending that the Company is in violation of the injunction, and the
Company opposed this motion, disputing Oracle’s claims. On March 31, 2021, the District Court issued an order resolving many outstanding disputes between the parties relating to the injunction. The District Court found that the Company violated the injunction in four certain narrow instances. The Company has sought reconsideration for two of these violations (since they occurred before the injunction became effective). The Company has been ordered to show cause why it should not be held in contempt in a filing that is due May 10, 2021, with Oracle’s response due June
9, 2021, and the Company’s reply due June 21, 2021. The District Court has scheduled an evidentiary hearing for September 2021 to address additional claims involving the injunction. The District Court refused to consider Oracle’s claims about certain processes that were not litigated in Rimini I and that are being litigated in the separately filed Rimini Street Inc. v. Oracle Int’l Corp. litigation (described below under the heading “Rimini II Litigation”).
18
RIMINI STREET, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
At
this time, the Company does not have sufficient information regarding possible damages for the contempt asserted by Oracle. As a result, an estimate of the range of loss cannot be reasonably determined. The Company believes that it has complied with the injunction, that Oracle will not be able to meet the burden to establish contempt of the injunction for the four certain narrow instances for which the District Court found violations, that Oracle will be unable to establish additional violations of the injunction at the September 2021 hearing and that an award for sanctions is not probable. Accordingly, no accrual has been made as of March 31, 2021. If the Company
is found to be in contempt of the injunction, Oracle may seek equitable, punitive, and compensatory relief, the outcome of which could have a material adverse effect on the Company’s business and financial condition.
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, do not infringe certain Oracle
copyrights (“Rimini II”). The Company’s operative complaint asserts declaratory judgment, tort, and statutory claims. Oracle’s operative counterclaim asserts declaratory judgment and copyright infringement claims and Lanham Act, breach of contract, and business tort violations.
On September 15, 2020, the District Court issued an order resolving the parties’ motions for summary judgment. It found infringement of 17 Oracle PeopleSoft copyrights for work the Company performed for a set of “gap customers”that were supported by processes litigated in Rimini I, and
that became the Company's customers after Rimini I was filed. The District Court also found infringement of ifour Oracle PeopleSoft copyrights involving support of itwo
specific Company clients, described by the District Court as “limited cases” and involving “limited circumstance[s].” There was no finding of infringement on any other Oracle copyrights at issue.
The order also resolved several of the non-copyright claims asserted by the parties: (i) allowing the Company’s claim for injunctive relief against Oracle for unfair competition in violation of the California Business & Professions Code §17200 et seq. to proceed to trial; (ii) granting summary judgment for Oracle on the Company’s affirmative claims for damages under the Nevada and California unfair and deceptive trade practices statutes; and (iii) holding that Oracle had the right to revoke the
Company’s access to its websites. The Court also reiterated that the Company has the legal right to provide aftermarket support for Oracle’s enterprise software.
The parties filed their joint pretrial order in Rimini II in December 2020. Also in December 2020, Oracle filed a motion to realign the parties and bifurcate trial, asking the District Court to (i) realign the parties, with Oracle designated as plaintiff and the Company and Mr. Ravin designated as the defendants in the case caption and at trial, and (ii) bifurcate the trial with a jury trial phase proceeding, first, followed by a separate bench phase on
the parties’ equitable claims for unfair competition and Oracle’s claim for an accounting. In January 2021, the Company filed a motion to modify the order of proof and for an advisory jury verdict, asking the District Court to (i) modify the order of proof in the case so that, at trial, Oracle will present its case-in-chief first, followed by the Company’s case-in-chief, (ii) not bifurcate the parties’ unfair competition claims or Oracle’s accounting claim from the other claims, (iii) empanel an advisory jury to make findings of fact with respect to the parties’ unfair competition claims and Oracle’s accounting claim; and (iv) hold a single jury trial.
As of this date, no damages of any kind have been awarded by the District Court in
Rimini II. Damages, if any, will be a decision for the Rimini II jury. The Company reserves all rights, including appellate rights, with respect to the District Court and jury rulings and findings in Rimini II. There is currently no trial date scheduled, and while the Company does not expect a trial to occur in this matter earlier than the first half of 2022, the trial could occur earlier or later than that.
At this time, the Company does not have sufficient information regarding possible damages exposure for the counterclaims asserted by Oracle.As to the claims asserted by Oracle, in Rimini I, the jury
awarded damages in the form of a fair market value license of $i35.4 million for the i93 copyrighted works at issue, which the
Company has paid. The parties dispute the relevance of that award for Rimini II, and the Court has not yet resolved that dispute. The Company maintains that zero damages should be awarded in Rimini II. A jury will ultimately determine what amount, if any, of damages to award. Both parties have sought injunctive relief in addition to monetary damages in this matter, and the Company has reserved its rights to appeal regarding the possible recovery of damages by the Company in connection with the Company’s claims against Oracle. As a result, an estimate of the range of loss cannot be reasonably determined. The
Company also believes that an award for damages payable to Oracle is not probable, so no accrual has been made as of March 31, 2021. However, as with any jury trial, the ultimate outcome may be different from our best estimates and could have a material adverse impact on our financial results and our business.
19
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 estimable 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$i13.9
million and $i13.8 million as of March 31, 2021 and December 31, 2020, 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
Rimini Street, Inc. (“RSI”) was incorporated in the state of Nevada in September 2005. RSI provides enterprise software support services. In May 2017, RSI entered into an Agreement and Plan of Merger (the “Merger Agreement”) with GP Investments Acquisition Corp. (“GPIA”), a publicly-held special purpose acquisition company (“SPAC”) incorporated
in the Cayman Islands and formed for the purpose of effecting a business combination with one or more businesses. The Merger Agreement was approved by the respective shareholders of RSI and GPIA in October 2017, and closing occurred on October 10, 2017, resulting in (i) the merger of a wholly-owned subsidiary of GPIA with and into RSI, with RSI as the surviving corporation, after which (ii) RSI merged with and into GPIA, with GPIA as the surviving corporation and renamed “Rimini Street, Inc.” (referred to herein as “RMNI”, as distinguished from RSI, which is defined as the predecessor entity with the same legal name) immediately after consummation of the second merger. An affiliate of GP Sponsor is a member of the Company's Board of Directors.
In
addition, an affiliate of Adams Street Partners and its affiliates (collectively referred to as "ASP") is also a member of the Company's Board of Directors. As of March 31, 2021, ASP owned approximately i27.7% of the Company’s issued and outstanding shares of Common Stock. In July 2018, ASP acquired i19,209
shares of Series A Preferred Stock and approximately i0.4 million shares of Common Stock issued in the Initial Private Placement for total consideration of approximately $i19.2
million. As of March 31, 2021, ASP had voting control of approximately i21.2% of the Company’s issued and outstanding shares of Common Stock, including voting rights associated with its i20,654
shares of Series A Preferred Stock. Prior to termination on July 19, 2018 of the Company's amended Credit Facility, ASP owned a $i10.0 million indirect interest in the amended Credit Facility.
NOTE 10 —iEARNINGS
(LOSS) PER SHARE
i
The Company computes earnings per share in accordance with ASC Topic 260, Earnings per Share, which requires earnings per share for each class of stock to be calculated using the two-class method. The holders of Series A Preferred Stock are entitled to participate in Common Stock dividends, if and when declared, on a ione-to-one
per-share basis. Accordingly, in periods in which the Company has net income, earnings per share will be computed using the two-class method whereby the pro rata dividends on Common Stock that are also distributable to the holders of Series A Preferred Stock will be deducted from earnings applicable to common stockholders, regardless of whether a dividend is declared for such undistributed earnings. Under the two-class method, earnings for the reporting period are allocated between the holders of the Company's Common Stock and the Series A Preferred Stock based on their respective participation rights in undistributed earnings.
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. Net income allocated to the holders of the Company's Series A Preferred Stock is calculated based on the shareholders’ proportionate share of the weighted average shares of Common Stock outstanding on an if-converted basis. Diluted earnings per share of Common Stock is calculated by adjusting
/
20
RIMINI STREET, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 the three months ended March 31, 2021 and 2020, 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 table sets forth the computation of basic and diluted net income attributable to common stockholders for the three months ended March 31, 2021 and 2020 (in thousands, except per share amounts):
Weighted average number of shares of Common Stock outstanding
i78,733
i67,863
Additional
shares outstanding if Series A Preferred Stock is converted to Common Stock
i14,651
i15,639
Total
shares outstanding if Series A Preferred Stock is converted to Common Stock
i93,384
i83,502
Percentage
of shares allocable to Series A Preferred Stock
i15.7
%
i18.7
%
Weighted
average number of shares of Common Stock outstanding:
Basic and diluted
i78,733
i67,863
Net
loss per share attributable to common stockholders:
Basic and diluted
$
(i0.13)
$
(i0.06)
For
the three months ended March 31, 2021 and 2020, basic and diluted loss per share attributable to common stockholders were the same because all Common Stock equivalents were anti-dilutive.
i
As of March 31, 2021 and December 31, 2020, the following potential Common Stock
equivalents were excluded from the computation of diluted net loss per share for the respective periods ending on these dates since the impact of inclusion was anti-dilutive (in thousands):
2021
2020
Series A Preferred Stock
i14,610
i15,491
Restricted
stock units
i3,730
i3,322
Stock
options
i6,693
i7,007
Warrants
i18,128
i18,128
Total
i43,161
i43,948
/
21
RIMINI
STREET, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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, 2020, included in the 2020 Form 10-K/A. 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.
As of March 31, 2021 and December 31, 2020, the Company has determined that its GP Sponsor Private Placement Warrants are subject to treatment as a liability. The GP Sponsor Private Placement Warrants may not be redeemed by the Company so long as these warrants are held by the initial purchasers or such purchasers' permitted transferees. If these warrants are held by someone other than the initial purchasers or such purchasers' permitted transferees,
these warrants are redeemable by the Company and exercisable on the same basis as the GPIA Public Warrants. As a result, the GP Sponsor Private Placement Warrants were reclassified as a liability. The fair value of these instruments as of March 31, 2021 and December 31, 2020 was $i6.8 million and $i2.1 million,
respectively, utilizing the BSM method. The GP Sponsor Private Placement Warrants are classified as Level 2 financial instruments. The key assumptions used to determine the fair value was the term period of the warrants, the risk free rate and volatility. As of March 31, 2021, the term to expiration was i1.53 years, the risk free rate of i0.12%
and the implied volatility of i43.4%.
As discussed in Note 5, the fair value for the Company's Series A Preferred Stock issuances on June 20, 2019, March 7, 2019 and July 19, 2018 were determined to be $i3.0
million, $i5.3 million and $i126.8 million,
respectively, which were utilized to determine the basis for allocating the net proceeds. The fair value was determined by utilizing a combination of a discounted cash flow methodology related to funds generated by the Series A Preferred Stock, along with the BSM option-pricing model in relation to the conversion feature. Key assumptions applied for the discounted cash flow and BSM analysis included (i) three different scenarios whereby the Series A Preferred Stock would remain outstanding between i4 and i5
years along with a probability weighting assigned to each scenario, (ii) an implied yield of the Series A Preferred Stock ranging from i20.9% to i22.9% calibrated to the transaction values as of June
20, 2019, March 7, 2019 and July 19, 2018, respectively, (iii) risk-free interest rates of i1.72%, i2.44%
and i2.8% and (iv) historical volatility of i30.0%.
The carrying amounts of the
Company’s financial instruments including cash and cash equivalents, restricted cash, accounts receivable, accounts payable, and accrued liabilities approximate fair values due to their short-term maturities. Based on borrowing rates currently available to the Company for debt with similar terms, the carrying value of capital lease obligations approximate fair value as of the respective balance sheet dates. The liability for redeemable warrants are also considered financial instruments and valued utilizing the BSM method and assumptions noted above.
Significant Concentrations
i
The
Company attributes revenues to geographic regions based on the location of its clients’ contracting entity. The 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 months and nine months ended March 31, 2021 or 2019. As of March 31, 2021 and 2020, no clients accounted for more than 10% of total net accounts receivable. The Company tracks its assets by physical location. As of March 31, 2021 and 2020, the net carrying value of the
Company’s property and equipment located outside of the United States amounted to approximately $i1.2 million and $i1.3 million, respectively. As of March
31, 2021, the Company had operating lease right-of-use assets of $i10.0 million, $i5.5 million
and $i0.6 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 of America. Deposits, including those held in foreign branches of global banks, may exceed the amount of insurance provided on such deposits. As of March 31, 2021 and December 31, 2020, the Company had cash, cash equivalents and restricted cash with a single financial institution for an aggregate of $i110.4 million
and $i50.2 million, respectively. As of March 31, 2021 and December 31, 2020, the Company had restricted cash of $i0.3
million and $i0.3 million, respectively. 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 Topic 842. 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 April 2021 to January 2027. 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.
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 March 31, 2021, the Company did not have any material additional operating leases that have not yet commenced.
iThe
components of lease expense and supplemental balance sheet information were as follows (in thousands):
23
RIMINI STREET, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Maturities
of operating lease liabilities as of March 31, 2021 were as follows (in thousands):
Year ending March 31:
2022
$
i5,581
2023
i5,215
2024
i4,290
2025
i4,219
2026
i2,654
Thereafter
i2,047
Total
future undiscounted lease payments
i24,006
Less imputed interest
(i5,177)
Total
$
i18,829
/
For
the three months ended March 31, 2021 and 2020, respectively, the Company paid $i1.6 million and $i1.5
million, respectively, for operating lease liabilities.
24
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,”“estimate,”“expect,”“intend,”“may,”“might,”“plan,”“possible,”“potential,”“predict,”“project,”“should,”“will,”“would” and similar expressions that convey uncertainty of future events or outcomes are intended to identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. Forward-looking statements include, but are not limited to, information concerning:
•the
duration of and economic, operational and financial impacts on our business of the COVID-19 pandemic, as well as the actions taken by governmental authorities, clients or others in response to the COVID-19 pandemic;
•the evolution of the enterprise software management and support landscape facing our clients and prospects;
•our ability to educate the market regarding the advantages of our enterprise software management and support services and products;
•estimates of our total addressable market;
•projections of client savings;
•the occurrence of catastrophic events that may disrupt our business or that of our current and prospective
clients;
•our ability to maintain an adequate rate of revenue growth;
•our expectations about future financial, operating and cash flow results;
•the sufficiency of future cash and cash equivalents to meet our liquidity requirements;
•our business plan and our ability to effectively manage our growth and associated investments;
•beliefs and objectives for future operations;
•our ability to expand our leadership position in independent enterprise software support and sell our new application managed services;
•our
ability to attract and retain clients;
•our ability to further penetrate our existing client base;
•our ability to maintain our competitive technological advantages against new entrants in our industry;
•our ability to timely and effectively scale and adapt our existing technology;
•our ability to innovate new products and bring them to market in a timely manner, including our announced salesforce and our announced application management services offerings;
•our ability to maintain, protect, and enhance our brand and intellectual property;
•our ability to capitalize
on changing market conditions including a market shift to hybrid and cloud/SaaS offerings for information technology environments and retirement of certain software releases by software vendors;
•our ability to develop strategic partnerships;
•benefits associated with the use of our services;
•our ability to expand internationally;
•our ability to raise equity or debt financing and other transactions to simplify our capital structure in the future;
•the effects of increased competition in our market and our ability to compete effectively;
•our intentions with respect
to our pricing model;
•cost of revenues, including changes in costs associated with production, manufacturing, and client support;
•operating expenses, including changes in sales and marketing, and general administrative expenses;
•anticipated income tax rates;
•our ability to maintain our good standing with the United States and international governments and capture new contracts;
•costs associated with defending intellectual property infringement and other claims, such as those claims discussed under the section titled “Business—Legal
Proceedings” in our 2020 Annual Report on Form 10-K, as filed with the SEC on March 3, 2021 and as subsequently amended on May 10, 2021 (as amended the “2020 Form 10-K/A”);
•our expectations concerning relationships with third parties, including channel partners and logistics providers;
•economic and industry trends or trend analysis;
•the attraction and retention of qualified employees and key personnel;
•future acquisitions of or investments in complementary companies, products, subscriptions or technologies;
•uncertainty
from the discontinuance of LIBOR and transition to other interest rate benchmarks;
•the impact of the reclassification of certain of our warrants as liabilities;
25
•the effects of seasonal trends on our results of operations, including the contract renewal cycles for vendor-supplied software services; 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 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, 2020, included in our 2020 Form 10-K/A.
Certain
figures, such as interest rates and other percentages included in this section have been rounded for ease of presentation. Percentage figures included in this section have not in all cases been calculated based on such rounded figures but on the basis of such amounts prior to rounding. For this reason, percentage amounts in this section may vary slightly from those obtained by performing the same calculations using the figures in our unaudited condensed consolidated financial statements or in the associated text. Certain other amounts that appear in this section may similarly not sum due to rounding.
We were incorporated as Rimini Street, Inc. (“RSI”) in the state of Nevada in September 2005. In May 2017, RSI entered into an Agreement and Plan of Merger (the “Merger Agreement”) with GP Investments
Acquisition Corp. (“GPIA”), a publicly-held special purpose acquisition company incorporated in the Cayman Islands and formed for the purpose of effecting a business combination with one or more businesses. Substantially all of GPIA’s assets consisted of cash and cash equivalents. The Merger Agreement was approved by the respective shareholders of RSI and GPIA in October 2017, and closing occurred on October 10, 2017, resulting in (i) the merger of a wholly-owned subsidiary of GPIA with and into RSI, with RSI as the surviving corporation, after which (ii) RSI merged with and into GPIA, with GPIA as the surviving corporation. Prior to consummation of the mergers, GPIA domesticated as a Delaware corporation (the “Delaware Domestication”). Immediately after the Delaware Domestication and the consummation of the second merger, GPIA was renamed “Rimini Street, Inc.” (referred to herein as the
Company, as distinguished from RSI with the same legal name).
We are a global provider of enterprise software management and support products and services, and the leading independent software support provider for Oracle and SAP products, based on both the number of active clients supported and recognition by industry analyst firms.
In November 2019, we announced the global availability of our Application Management Services (“AMS”) for Oracle, which includes coverage for Oracle Database, Middleware and a wide range of Oracle applications including E-Business Suite, JD Edwards, PeopleSoft and Siebel. In addition to leveraging our support services for Oracle that replaces expensive and less robust software vendor annual support with a more responsive and comprehensive support offering, our clients can now have us manage
their Oracle systems day-to-day with an integrated application management and support service provided by a single trusted vendor. As an integrated service, we believe we can provide clients a better model, better
26
service providers, and better outcomes with higher satisfaction and significant savings of time, labor and money. The AMS for Oracle includes system administration, operational support, health monitoring and enhancement support.
In August 2019, we announced plans to globally offer AMS for SAP enterprise software, expanding the scope of support services we will offer clients globally. This AMS service is in addition to our traditional enterprise Support Services. We are already providing
this new SAP AMS service to clients in North and South America. The service includes system administration and SAP Basis support, system health monitoring with proactive analysis, preventative system recommendations and event detection; and enhancement support for complex SAP software landscapes.
In 2018, we announced plans to support Software as a Service ("SaaS") solutions beginning with Salesforce products. As a partner of Salesforce, we provide our award-winning service and support for custom code, release updates and application integrations in addition to ongoing administrative, configuration and enhancement of Salesforce’s industry leading cloud solutions.
We founded our company to disrupt and redefine the enterprise software support
market by developing and delivering innovative new products and services that fill a then unmet need in the market. We believe we have achieved our leadership position in independent enterprise software support by recruiting and hiring experienced, skilled and proven staff; delivering outcomes-based, value-driven and award-winning enterprise software support products and services; seeking to provide an exceptional client-service, satisfaction and success experience; and continuously innovating our unique products and services by leveraging our proprietary knowledge, tools, technology and processes.
Enterprise software support products and services is one of the largest categories of overall global information technology (“IT”) spending. We believe core enterprise resource planning (“ERP”), client relationship management (“CRM”), product lifecycle management (“PLM”) and
technology software platforms have become increasingly important in the operation of mission-critical business processes over the last 30 years, and also that the costs associated with failure, downtime, security exposure and maintaining the tax, legal and regulatory compliance of these core software systems have also increased. As a result, we believe that licensees often view software support as a mandatory cost of doing business, resulting in recurring and highly profitable revenue streams for enterprise software vendors. For example, for fiscal year 2020, SAP reported that support revenue represented approximately 42% of its total revenue. For fiscal year 2020, Oracle reported a margin of 85% for cloud services and license support.
We believe that software vendor support is an increasingly costly model that has not evolved to offer licensees the responsiveness, quality, breadth of capabilities or value
needed to meet the needs of licensees. Organizations are under increasing pressure to reduce their IT costs while also delivering improved business performance through the adoption and integration of emerging technologies, such as mobile, virtualization, internet of things (“IoT”) and cloud computing. Today, however, the majority of IT budget is spent operating, maintaining and supporting existing infrastructure and systems. As a result, we believe organizations are increasingly seeking ways to redirect budgets from maintenance to new technology investments that provide greater strategic value, and our software management and support products and services help clients achieve these objectives by reducing the total cost of support.
As of March 31, 2021, we employed over 1,500 professionals and supported over 2,550 active clients globally, including
75 Fortune 500 companies and 17 Fortune Global 100 companies across a broad range of industries. We define an active client as a distinct entity, such as a company, an educational or government institution, or a business unit of a company that purchases our services to support a specific product. For example, we count as two separate active client instances in circumstances where we provide support for two different products to the same entity.
Our subscription-based revenue provides a strong foundation for, and visibility into, future period results. For the three months ended March 31, 2021 and 2020, we generated revenue of $87.9 million and $78.0 million, respectively, representing an increase of 13%. During the three months ended March 31, 2021,
we had a loss of $3.6 million, and as of March 31, 2021, we had an accumulated deficit of $304.6 million. Approximately 54% and 61% of our revenue was generated in the United States for the three months ended March 31, 2021 and 2020, respectively. Approximately 46% and 39% of our revenue was generated in foreign jurisdictions for the three months ended March 31, 2021 and 2020, respectively.
Since our inception, we have financed our operations through cash collected from clients and net proceeds from equity financings and borrowings. As of March 31, 2021, we have no outstanding contractual debt obligations.
Impact
of COVID-19
27
During the first quarter of 2021, we continued investing for long-term growth. However, as we neared the end of the first quarter of 2020, the emergence of the COVID-19 pandemic took hold and was having widespread, rapidly evolving and unpredictable impacts on global society, economies, financial markets and business practices. Federal and state governments have implemented multiple measures aiming to contain the spread of the virus, including social distancing, travel restrictions, border closures, quarantine guidance following travel to certain jurisdictions, limitations on public gatherings and continued closures of certain non-essential businesses. As a result, to protect the health and well-being of our employees,
clients and the communities in which we operate, we transitioned as many of our employees as possible to a work-at-home model, temporarily closed our offices worldwide, placed restrictions on non-essential business travel, transitioned to a no in-person event marketing strategy and implemented a fully remote sales model. We believe these measures have been successful and have not significantly affected our financial results for the three months ended March 31, 2021. We have implemented business continuity measures and will continue to respond to the COVID-19 pandemic as circumstances dictate.
As a result of the measures that we have taken in response to the COVID-19 pandemic described above, we have realized reduced costs of travel, reductions in costs resulting from cancelling certain in-person marketing events, reductions in office operating costs
and potential rent abatement related to office closures around the world. While some of our offices have partially re-opened with limited staffing, our offices will not fully re-open until local authorities permit us to, and our own criteria and conditions to ensure employee health and safety are satisfied.We continue to expect to offset some of these reduced costs with accelerated investments including implementing virtual sales and other marketing programs, special compensation bonuses for lower-paid employees and special compensation bonuses for employees who have tested positive for COVID-19. For example, during the COVID-19 pandemic, we paid COVID-19 special bonuses to certain of our employees to help with pandemic-related special costs and for the few of our employees who have tested positive for COVID-19. We have authorized COVID-19 special bonuses during pandemic that have been paid throughout 2020 and the three
months ended March 31, 2021. The cost of these special bonuses were more than offset by the cost reductions relating to travel and in-person marketing event fees and expenses described above.
The COVID-19 pandemic had no significant net impact on our revenue or results of operations during the three months ended March 31, 2021, and we continued to deliver uninterrupted and critical support services to our clients during this period. Our ability to utilize our secure remote-connectivity global infrastructure promotes the safety of our employees while abiding by the restrictions currently in place where they are located throughout the world. While we did implement discounted or extended payment terms for certain of our clients in 2020, in most cases it was in exchange for contractual concessions favorable
to us, for example, extended contract terms or marketing support for references, and the collective impact of such changes was not material to our results. However, the COVID-19 pandemic has impacted business markets worldwide, primarily due to the uncertainty relating to the continued effects of the pandemic. As a result, we have experienced some clients not renewing our services as their businesses have been adversely impacted during the pandemic. Despite this, we expect to continue to be able to market, sell and provide our current and future products and services to clients globally. We also expect to continue investing in the development and improvement of new and existing products and services to address client needs.
The extent to which the COVID-19 pandemic impacts our business going forward will
depend on numerous evolving factors we cannot reliably predict, including the duration and scope of the pandemic; governmental and business actions in response to the pandemic; and the impact on economic activity, including the possibility of recession or financial market instability. These factors may adversely impact consumer, business, and government spending on technology as well as our clients’ ability to pay for our services on an ongoing basis. This uncertainty also affects management’s accounting estimates and assumptions, which could result in greater variability in a variety of areas that depend on these estimates and assumptions, including receivables and forward-looking guidance. As such, the effects of the COVID-19 pandemic may not be fully reflected in our financial results until future periods. Refer to "Risk Factors" (Part I, Item 1A of this Report) for a discussion of these factors and other risks.
On
March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law in the United States to address the economic impact of the COVID-19 pandemic. We have elected to defer payroll tax payments which totaled $3.3 million as of March 31, 2021 as permitted by the CARES Act (such deferred payroll taxes are due in two installments: 50% by December 31, 2021 and 50% by December 31, 2022). We continue to monitor any effects that may result from the CARES Act and other similar legislation or actions in geographies in which our business operates.
Recent Developments
On
March 16, 2021, we issued a notice of partial redemption calling to redeem 60,000 shares of our 13.00% Series A Preferred Stock at an aggregate total redemption price of $62.3 million. The total price consists of $60.0 million related to the face value of $1,000 per share of Series A Preferred Stock and $2.3 million or $39.05 per share of Series A Preferred Stock
28
related to the dividends to be earned for the period from April 1, 2021 through July 18, 2021. The redeemed shares of Series A Preferred Stock, along with the dividends to be earned, will be recorded when the redemption offer becomes mandatorily redeemable on April
16, 2021.
Additionally, reference is made to Note 5 to our unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report for a discussion of developments related to our Series A Preferred Stock, Common Stock and Convertible Notes.
On March 11, 2021, we completed a firm commitment underwritten public offering (the "March 2021 Offering") of 7.8 million shares of our Common Stock at a price of $7.75 per share for total gross proceeds of $57.0 million. Underwriter discounts and commissions were $2.9 million and the underwriter expenses were $0.2 million. We also incurred additional professional fees and expenses of $1.3 million as part of the transaction, resulting in net proceeds from the March 2021 Offering of approximately
$55.6 million. We intend to use the net proceeds from the March 2021 Offering to redeem 60,000 shares of Series A Preferred Stock. Reference is made to Note 6 to our unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report for information about the March 2021 Offering.
Also, reference is made to Note 6 to our unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report for a discussion of developments related to our Common Stock.
Also, reference is made to Note 8 to our unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report for a discussion of developments in our litigation with Oracle.
Key
Business Metrics
Number of clients
Since we founded our company, we have made the expansion of our client base a priority. We believe that our ability to expand our client base is an indicator of the growth of our business, the success of our sales and marketing activities, and the value that our services bring to our clients. We define an active client as a distinct entity, such as a company, an educational or government institution, or a business unit of a company that purchases our services to support a specific product. For example, we count as two separate active clients when support for two different products is being provided to the same entity. As of March 31, 2021 and 2020,
we had over 2,550 and 2,070 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 March 31, 2021 and 2020, we had over 1,340 and 1,160 unique clients, respectively.
The increases in both our active and unique client counts have been almost exclusively from new unique clients and not from sales of new
products and services to existing unique clients. However, as noted previously, we intend to focus future growth on both new and existing clients. We believe that the growth in our number of clients is an indication of the increased adoption of our enterprise software products and services.
Annualized recurring revenue
We recognize subscription revenue on a daily basis. We define annualized recurring revenue as the amount of subscription revenue recognized during a quarter and multiplied by four. This gives us an indication of the revenue that can be earned in the following 12-month period from our existing client base assuming no cancellations or price changes occur during that period. Subscription revenue excludes any non-recurring revenue, which has been insignificant to date.
Our
annualized recurring revenue was $349 million and $310 million as of March 31, 2021 and 2020, 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.
29
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 91% and 92% for the 12 months ended March 31, 2021 and 2020, respectively.
Gross profit percentage
We derive revenue through the provision of our enterprise software products and services. All the costs incurred in providing these products and services are recognized as part of the cost of revenue. The cost of revenue includes all direct product line expenses, as well as the expenses incurred by our shared services
organization which supports all product lines.
We define gross profit as the difference between revenue and the costs incurred in providing the software products and services. Gross profit percentage is the ratio of gross profit divided by revenue. Our gross profit percentage was approximately 61.5% and 61.3% for the three months ended March 31, 2021 and 2020, respectively. We believe the gross profit percentage 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 March 31, 2021 and 2020, are presented below (in thousands):
Three
Months Ended March 31,
Variance
2021
2020
Amount
Percent
Revenue
$
87,895
$
78,032
$
9,863
12.6%
Cost
of revenue:
Employee compensation and benefits
23,660
20,370
3,290
16.2%
Engineering consulting costs
4,735
4,866
(131)
(2.7)%
Administrative
allocations (1)
3,590
3,592
(2)
(0.1)%
All other costs
1,851
1,371
480
35.0%
Total cost of revenue
33,836
30,199
3,637
12.0%
Gross
profit
54,059
47,833
6,226
13.0%
Gross margin
61.5
%
61.3
%
Operating expenses:
Sales
and marketing
30,383
28,412
1,971
6.9%
General and administrative
16,603
12,001
4,602
38.3%
Impairment charge related to operating right of
use assets
393
—
393
100.0%
Litigation costs and related recoveries, net
4,763
3,673
1,090
29.7%
Total operating expenses
52,142
44,086
8,056
18.3%
Operating
income
1,917
3,747
(1,830)
(48.8)%
Non-operating income and (expenses):
Interest expense
(47)
(13)
(34)
261.5%
Loss
on change in fair value of redeemable warrants
(4,668)
—
(4,668)
100.0%
Other income (expenses), net
772
(218)
990
(454.1)%
Income (loss) before
income taxes
(2,026)
3,516
(5,542)
(157.6)%
Income tax expense
(1,550)
(971)
(579)
59.6%
Net income (loss)
$
(3,576)
$
2,545
$
(6,121)
(240.5)%
30
(1)Includes
the portion of costs for information technology, security services and facilities costs that are allocated to cost of revenue. In our unaudited condensed consolidated financial statements, the total of such costs is allocated between cost of revenue, sales and marketing, and general and administrative expenses, based primarily on relative headcount, except for facilities which is based on occupancy.
Revenue. Revenue increased from $78.0 million for the three months ended March 31, 2020 to $87.9 million for the three months ended March 31, 2021, an increase of $9.9 million or 13%. The increase was driven by a 15% increase in the average number of unique clients from 1,163 for the three months ended March 31, 2020 to 1,333
for the three months ended March 31, 2021. On a geographic basis, United States revenue grew slightly from $47.4 million for the three months ended March 31, 2020 to $47.6 million for the three months ended March 31, 2021, an increase of $0.1 million or 0.2%. Our international revenue grew from $30.6 million for the three months ended March 31, 2020 to $40.3 million for the three months ended March 31, 2021, an increase of $9.8 million or 32%. Our international revenue growth was led by strong results from our Asia-Pacific region.
Cost of revenue. Cost of revenue increased from $30.2 million for the three months ended March
31, 2020 to $33.8 million for the three months ended March 31, 2021, an increase of $3.6 million or 12%. The key drivers related to the cost of revenue increase were a $3.3 million increase in compensation costs and a $0.5 million increase in all other costs, which was offset by a decrease of $0.1 million in engineering consulting costs. The compensation cost increase was attributable to an increase of 17% in the average number of employees required to support the revenue growth.
As discussed in Note 8 to our consolidated financial statements included in Part 1, Item 1 of this Report, following post-trial motions, the United States District Court for the District of Nevada (the “District Court”) entered a permanent injunction prohibiting us from using certain processes, including processes adjudicated as infringing at trial, that we ceased
using no later than July 2014, which we subsequently appealed to the United States Court of Appeals for the Ninth Circuit (the “Court of Appeals”). In August 2019, the Court of Appeals affirmed the permanent injunction issued by the District Court, while also correcting certain legal errors that narrowed the scope of the injunction. A copy of the injunction is publicly available in the case docket. As a result of the injunction, we expect to incur additional expenses in the range of 1% to 2% of revenue for additional labor costs because, as drafted, the injunction contains language that could be read to cover some current support practices (“Process 2.0”) that are being litigated in the “Rimini II” lawsuit and that have not been found to be infringing. On July 10, 2020, Oracle filed a motion to show cause contending that we are in contempt of the injunction. On March
31, 2021, the District Court issued an order resolving many outstanding disputes between the parties relating to the injunction and found that we violated the injunction in four certain narrow instances. During an evidentiary hearing scheduled for September 2021, the parties will (i) present evidence and argue whether we violated the injunction for certain accused conduct for which the District Court requested additional information; and (ii) argue whether we should be held in contempt in the four instances where the District Court found a violation of the injunction, and what sanctions, if any, are appropriate.
Gross profit. Gross profit increased from $47.8 million for the three months ended March 31, 2020 compared to $54.1 million for the three months ended March
31, 2021, an increase of $6.2 million or 13%. Gross margin for the three months ended March 31, 2020 was 61.3% compared to 61.5% for three months ended March 31, 2021. For the three months ended March 31, 2021, total cost of revenue increased by 12%, compared to an increase in revenue of 13% for the three months ended March 31, 2021. As a result, our gross profit margin improved slightly by 0.2% period over period.
Sales and marketing expenses. As a percentage of our revenue, sales and marketing expenses declined from 36% for the three months ended March 31, 2020 to 35% for the three months ended March
31, 2021. In dollar terms, sales and marketing expenses increased from $28.4 million for the three months ended March 31, 2020 to $30.4 million for the three months ended March 31, 2021, an increase of $2.0 million or 7%. This increase was primarily due to (i) an increase in employee compensation and benefits of $3.8 million, (ii) an increase in marketing promotional expenses and trade show expenses of $0.7 million, (iii) an increase in recruitment costs of $0.2 million and (iv) an increase in contract labor of $0.2 million. These increases were offset, in part, by (v) a decrease in travel expenses of $2.7 million, and (vi) a decrease in administrative allocations of $0.2 million. We continue to accelerate our future revenue growth by investing in more resources.
The
$3.8 million increase in sales and marketing expense attributable to employee compensation and benefits for the three months ended March 31, 2021, was primarily due to an increase in salaries, wages and benefit costs of $2.3 million due to an 8% increase in the average number of employees devoted to sales and marketing functions, pay increases, and higher bonus payouts and commissions of $1.5 million.
General and administrative expenses. General and administrative expenses increased from $12.0 million for the three months ended March 31, 2020 to $16.6 million for the three months ended March 31, 2021, an increase of $4.6 million or 38%.
31
This
increase was comprised of several items, which included (i) increased costs in salaries, wages and benefits of $3.9 million as the average number of employees increased by 27 or 10%, (ii) an increase in all other costs of $1.1 million, (iii) an increase in administrative allocations of $0.3 million, (iv) an increase of our computer software and license costs of $0.2 million, (v) an increase in professional services of $0.2 million and (vi) an increase in sales taxes and other taxes of $0.2 million for the three months ended March 31, 2021. These unfavorable variances were offset, in part, by favorable variances including (i) a decrease in contract labor of $0.6 million, (ii) a decrease in travel expenses of $0.3 million, (iii) a decrease in recruitment costs of $0.2 million and (iv) a decrease in rent and facility costs of $0.1 million.
Looking forward on a quarter-over-quarter basis, we are monitoring the demand for our services in light of the COVID-19 pandemic related environment and will adjust our spend accordingly. However, we expect to incur higher expenses associated with supporting the growth of our business, both in terms of size and geographical diversity, and to meet the increased compliance requirements associated with no longer being classified as an “emerging growth company” for purposes of SEC reporting. Public company costs that are expected to increase in the future include costs relating to initial compliance with the auditor attestation requirements under Section 404 of the Sarbanes-Oxley Act, additional information systems costs, costs for additional personnel in our accounting, human resources, IT and legal functions, SEC and Nasdaq fees, and incremental professional, legal, audit and insurance costs. As a result, not taking
into account temporary reductions in certain expenses resulting from the COVID-19 pandemic, we expect our general and administrative expenses related to public company costs will continue to increase in future periods.
Impairment charge related to operating right of use assets. We recognized an impairment charge of $0.4 million for the three months ended March 31, 2021, related to one of our offices as we ceased use of a portion of the office space during the period due to the increased use of remote work which has occurred during the COVID-19 pandemic.
Litigation costs, net of related insurance recoveries. Litigation costs, net of related insurance recoveries for the three months ended March
31, 2021 and 2020, consist of the following (in thousands):
2021
2020
Change
Professional fees and other costs of litigation
$
4,763
$
2,752
$
2,011
Insurance
costs and recoveries, net
—
921
(921)
Litigation costs and related recoveries, net
$
4,763
$
3,673
$
1,090
Professional fees and other costs associated with litigation increased
from $2.8 million for the three months ended March 31, 2020 to $4.8 million for the three months ended March 31, 2021, an increase of $2.0 million. This increase was primarily due to increased costs associated with discovery work on the Rimini II litigation and the Rimini I appeal during the three months ended March 31, 2021.
Insurance costs and related recoveries, net decreased from a benefit of $0.9 million for the three months ended March 31, 2020 to no costs for the three months ended March 31, 2021. We recognized costs of $0.9 million in the prior year period to revise our estimated liability owed to an insurance company related to a pro rata sharing
agreement for any recoveries associated with the Court of Appeals and U.S. Supreme Court awards. The liability was paid in September 2020. We are self-insured for any costs related to any current or future intellectual property litigation. We currently believe our cash on hand, accounts receivable and contractually committed backlog provides us with sufficient liquidity to cover costs related to our litigation with Oracle.
Interest expense. Interest expense increased from $13 thousand for the three months ended March 31, 2020 to $47 thousand for the three months ended March 31, 2021, an increase of $34 thousand. Interest expense increased due to entering into finance leases during the fourth quarter of 2020.
Loss
on change in fair value of redeemable warrants. Loss on change in fair value of redeemable warrants amounted to a loss of $4.7 million for the three months ended March 31, 2021 as the fair value per warrant changed from $0.35 per warrant to $1.12 per warrant for the three months ended March 31, 2021. There was no change in fair value per warrant for the three months ended March 31, 2020.
Other income (expenses), net. Other income (expenses), net is primarily comprised of interest income, foreign exchange gains and losses, and other non-operating income and expenses. For the three months ended March 31, 2021, net other income of approximately $0.8 million
was comprised primarily of foreign exchange gains of approximately $0.8 million.
32
For the three months ended March 31, 2020, net other expense of $0.2 million was also comprised primarily of foreign exchange losses of approximately $0.2 million.
Income tax expense. We had an income tax expense of $1.0 million for the three months ended March 31, 2020 compared to $1.6 million for the three months ended March 31, 2021. For the three months ended March 31, 2021, our income taxes were
attributable to both our foreign and U.S. operations of $1.5 million and $0.1 million, respectively. The income taxes in the U.S. related primarily to foreign withholding taxes. For the three months ended March 31, 2020, our income taxes were attributable to both our foreign and U.S. operations of $0.6 million and $0.3 million, respectively.
Liquidity and Capital Resources
Overview
As of March 31, 2021, we had a working capital deficit of $11.4 million and an accumulated deficit of $304.6 million. For the three months ended March
31, 2021, we had a net loss of $3.6 million. As of March 31, 2021, we had available cash, cash equivalents and restricted cash of $153.5 million.
On March 11, 2021, we completed the March 2021 Offering of 7.8 million shares of our Common Stock at a price of $7.75 per share for total gross proceeds of $57.0 million. Net proceeds from the March 2021 Offering were $55.6 million after underwriter and offering expenses. We intend to use the net proceeds from the March 2021 Offering to redeem 60,000 shares of Series A Preferred Stock during the second quarter of 2021.
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 $219.5 million that is included in current liabilities as of March 31, 2021. 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 38% of the related deferred revenue based on our gross profit percentage of 62% for the three months ended March 31, 2021.
For the next year, assuming that the Company’s operations are not significantly impacted by the COVID-19 pandemic, we believe that cash, cash
equivalents and restricted cash of $153.5 million as of March 31, 2021, plus future cash flows from operating activities will be sufficient to meet our anticipated cash needs including working capital requirements, planned capital expenditures and our contractual obligations.
For the three months ended March 31, 2021, we generated cash flows from our operating activities of approximately $24.5 million, which was derived from our cash earnings of approximately $6.0 million and by favorable changes in operating assets and liabilities of approximately $18.5 million. We believe that our operating cash flows for the year ending December 31, 2021 will be sufficient to fund the portion of our contractual obligations that is not funded with existing capital resources.
Private
Placements
Please refer to Note 5 to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report for information regarding the March 2021 Notice of Redemption, January 2021 Stock Repurchase Agreement, October 2020 Stock Repurchase Agreement, the June 2019 Private Placement, the March 2019 Private Placement, and the Initial Private Placement.
The holders of Series A Preferred Stock are entitled to, from the respective issuance date, a cash dividend of 10.0% per annum and a payment-in-kind dividend of 3.0% per annum for the first five years following the initial June 2018 closing and thereafter all dividends accruing on such Series A Preferred Stock will be payable in cash at a rate of 13.0% per annum. Assuming the repurchase of 15,000 shares and the redemption of 60,000
shares of the Series A Preferred Stock as well as no conversions to Common Stock, the following cash and PIK dividends (settled through issuance of additional shares of Series A Preferred Stock), are expected to accrue for each year from January 1, 2021 through July 19, 2023 (in thousands):
Year Ending December 31:
Cash
PIK
Total
2021
$
10,534
$
3,160
$
13,694
2022
9,032
2,709
11,741
2023
5,085
1,526
6,611
33
The
repurchase of 15,000 shares and redemption of 60,000 shares of Series A Preferred Stock as discussed in Note 5 has reduced our future annual cash dividends ranging from $9.0 million to $10.5 million over the next two years.
Please refer to Note 5 to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report for further details about the Series A Preferred Stock including (i) mandatory redemption rights, (ii) the security agreement and promissory notes that may become payable pursuant to certain redemption provisions, (iii) rights to convert the Series A Preferred Stock to shares of Common Stock, (iv) registration rights, and (v) voting rights and preferences in liquidation.
Cash Flows Summary
Presented
below is a summary of our operating, investing and financing cash flows for the three months ended March 31, 2021 and 2020 (in thousands):
2021
2020
Net cash provided by (used in):
Operating activities
$
24,494
$
26,336
Investing
activities
(374)
(524)
Financing activities
45,908
(3,683)
The effect of foreign currency translation was unfavorable for $2.6 million for the three months ended March 31,2020 compared to an unfavorable change of $4.4 million for the three months ended March 31, 2021.
Cash Flows Provided by Operating Activities
A
key component of our business model requires that clients typically prepay us annually for the services which we will provide over the following year or longer. As a result, we typically collect cash in advance of the date when the vast majority of the related services are provided. The key components in the calculation of our cash provided by operating activities for the three months ended March 31, 2021 and 2020, are as follows (in thousands):
2021
2020
Net
income (loss)
$
(3,576)
$
2,545
Non-cash expenses, net
9,611
3,522
Changes in operating assets and liabilities, net
18,459
20,269
Net cash provided by operating activities
$
24,494
$
26,336
For
the three months ended March 31, 2021, cash flows provided by operating activities amounted to approximately $24.5 million. The key drivers resulting in our cash provided by operating activities for the three months ended March 31, 2021, included our net loss of $3.6 million, as adjusted for non-cash and non-operating expenses totaling $9.6 million and favorable changes in operating assets and liabilities of $18.5 million, resulting in net cash provided by operating activities of $24.5 million.
For the three months ended March 31, 2021, the non-cash expenses, net consisted primarily of a loss on change in fair value of redeemable warrants of $4.7 million, stock-based compensation expense of $2.2 million, amortization and accretion related to operating
lease right of use ("ROU") assets of $1.6 million, depreciation and amortization expense of $0.6 million, and an impairment charge related to operating ROU assets of $0.4 million. For the three months ended March 31, 2021, the changes in operating assets and liabilities, net consisted of favorable changes to accounts receivable of $33.2 million and deferred contract costs of $0.4 million, These favorable cash sources were offset by unfavorable changes to accrued liabilities of $7.1 million, deferred revenue of $4.6 million, prepaid expenses, deposits and other of $2.5 million and accounts payable of $1.0 million.
For the three months ended March 31, 2020, cash flows provided by operating activities
amounted to approximately $26.3 million. The key drivers resulting in our cash provided by operating activities for the three months ended March 31, 2020, included our net income of $2.5 million, as adjusted for non-cash and non-operating expenses totaling $3.5 million and favorable changes in operating assets and liabilities of $20.3 million, resulting in net cash provided by operating activities of $26.3 million.
34
For the three months ended March 31, 2020, the non-cash expenses, net consisted primarily of stock-based compensation expense of $1.5 million, amortization and accretion related to operating lease ROU assets of $1.5 million
and depreciation and amortization expense of $0.4 million. For the three months ended March 31, 2020, the changes in operating assets and liabilities, net consisted of favorable changes to accounts receivable of $35.4 million, accounts payable of $4.0 million and prepaid expenses and other assets of $1.1 million. These favorable cash sources were offset by unfavorable changes to deferred revenue of $10.8 million, accrued liabilities of $9.0 million and deferred contract costs of $0.4 million.
Cash Flows Used in Investing Activities
Cash used in investing activities was primarily driven by capital expenditures for leasehold improvements and computer equipment as we continued to invest in
our business infrastructure and advance our geographic expansion. Capital expenditures totaled $0.4 million and $0.5 million for the three months ended March 31, 2021 and 2020, respectively.
For the three months ended March 31, 2021, capital expenditures of $0.4 million consisted of $0.2 million primarily for new computer equipment in our U.S. facilities and $0.2 million for computer equipment at our foreign locations, primarily in India.
For the three months ended March 31, 2020, capital expenditures of approximately $0.5 million consisted primarily of $0.3 million for leasehold improvements, furniture and fixtures, and new computer
equipment related to our U.S. facilities, and $0.2 million for computer equipment at our foreign locations, primarily in India.
Cash Flows from Financing Activities
For the three months ended March 31, 2021, cash provided by financing activities of $45.9 million was attributable to net proceeds of $57.0 million generated from March 2021 Offering and proceeds of $2.9 million received from stock option exercises. These cash proceeds were offset, in part, by payments to repurchase shares of Series A Preferred Stock of $9.0 million, dividend payments of $4.0 million, and by payments for professional fees associated with our March 2021 Offering of $0.9 million and capital lease payments of $0.1 million.
For
the three months ended March 31, 2020, cash utilized in financing activities of $3.7 million was attributable to dividend payments of $3.9 million, and capital lease payments of $0.1 million, which were offset, in part, by proceeds of $0.3 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 March 31, 2021, we had cash and cash equivalents of $47.8 million in our foreign subsidiaries.
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion and analysis of financial condition and results of operations is based on our unaudited condensed
consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported revenue and expenses during the reporting periods. These items are monitored and analyzed for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Changes in estimates are reflected in reported results
for the period in which they become known. Actual results may differ from these estimates under different assumptions or conditions.
For the three months ended March 31, 2021, see Note 2 to our unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report for changes to the critical accounting policies.
Recent Accounting Pronouncements
35
From time to time, new accounting pronouncements are issued
by the Financial Accounting Standards Board (“FASB”) or other standard setting bodies that are adopted by us as of the specified effective date. For 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
In August 2020, the FASB issued ASU 2020-6, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40).
The guidance eliminates the beneficial conversion and cash conversion accounting for convertible instruments. The new guidance also modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation. The new guidance is effective for us as of January 1, 2022. We are assessing the impact of the adoption of this guidance on our Consolidated Financial Statements.
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 the three months ended March 31, 2021 and 2020, we generated approximately 46% and 39% 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.
During the three months ended March 31, 2021 and 2020, the effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business would not have had a material impact on our consolidated financial statements.
Interest Rate Sensitivity
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.
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
36
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 Quarterly Report on Form 10-Q as of March 31, 2021, 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 not effective, and as a result of the material weakness in our internal control over financial reporting
as described below, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of March 31, 2021 to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC.
This evaluation included review of the control documentation, evaluation of the design effectiveness of controls, testing the operating effectiveness of controls and a conclusion on this evaluation. Based on our evaluation, we have concluded that our internal control over financial reporting was not effective as of March 31, 2021, due to the material weakness in internal
control over financial reporting relating in improperly applying the accounting guidance for its GP Sponsor Private Placement Warrants, recognizing them as equity instead of a warrant liability, under the guidance of Accounting Standards Codification 815-40, Contracts in Entity’s Own Equity.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the latest fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Remediation Plan
We and our Board of Directors are committed
to maintaining a strong internal control environment. Management, with oversight from our Audit Committee, have evaluated the material weakness described above and designed a remediation plan to address the material weakness and enhance our internal control environment. In response to this material weakness, the Company’s management has expended, and will continue to expend, a substantial amount of effort and resources for the remediation and improvement of our internal control over financial reporting. While we have processes to properly identify and evaluate the appropriate accounting technical pronouncements and other literature for all significant or unusual transactions, we are improving these processes to ensure that the nuances of such transactions are effectively evaluated in the context of the increasingly complex accounting standards. Our plans at this time include acquiring
enhanced access to accounting literature, research materials and documents and increased communication among our personnel and third-party professionals with whom we consult regarding the application of complex accounting transactions. Our remediation plan can only be accomplished over time and will be continually reviewed to determine that it is achieving its objectives. We can offer no assurance that these initiatives will ultimately have the intended effects. The remediation plan is being implemented and includes a robust risk assessment process coupled with additional controls and procedures. Management is committed to successfully implementing the remediation plan as promptly as possible.
PART II - OTHER INFORMATION
ITEM
1. Legal Proceedings.
The legal proceedings described in Note 8 of 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.
37
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, downturns in the general economy or the industries in which our clients operate should be interpreted as heightened risks as a result of the COVID-19 pandemic.
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 “Cautionary Note About Forward-Looking Statements” set forth in Part I, Item 2 of this Report. All forward-looking statements made by us are qualified by the risk factors described below.
Risks Related to Our Business, Operations and Industry
Risks Related to
Litigation
•We are involved in litigation with Oracle. An adverse outcome in the litigation could result in the payment of substantial damages and/or an injunction against certain of our business practices.
•The Oracle software products that are part of our litigation represent a significant portion of our revenue.
•Oracle has a history of litigation against companies offering alternative support programs for Oracle products.
Other Risks Related to Our Business, Operations and Industry
•The duration of and impacts on our business of the COVID-19 pandemic, as well as the responsive actions taken by governments or clients may have a material
adverse effect on our business.
•The market for independent software support services is relatively undeveloped and may not grow.
•We have had a history of losses and may not achieve or sustain profitability in the future.
•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.
•If our retention rates decrease our future revenue and results of operations may be harmed.
•We face significant competition.
•Our past growth is not indicative of future growth, and 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.
•The loss of one or more key employees could harm our business.
•The failure to attract and retain additional qualified personnel could prevent us from executing our business strategy.
•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.
•Failure to effectively develop and expand our marketing and sales capabilities could harm our ability to increase our client base and achieve broader market acceptance of our products and services.
•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.
•We may experience fluctuations in our results of operations due to a number of factors, which makes our future results difficult to predict and could cause our results of operations to fall below
expectations or our guidance.
•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.
•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.
•We may need to change our pricing models to compete successfully.
•If we are not able to scale our business quickly and grow efficiently, our results of operations could be harmed.
•We have experienced significant growth resulting
in changes to our organization and structure, which if not effectively managed, could have a negative impact on our business.
•Our business will be susceptible to risks associated with global operations.
•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.
•Consolidation in our target sales markets is continuing at a rapid pace, which could harm our business.
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•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.
•Delayed or unsuccessful investment in new technology, products, services and markets may harm our financial condition and results of operations.
•If our data security measures are compromised, our services may be 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.
•If our products and services fail due to defects or similar problems, we could lose clients, become subject to service performance or warranty claims or incur significant costs.
•If
we take advantage of certain exemptions from reporting and disclosure requirements available to smaller reporting companies that are also accelerated filers, this could make our common stock less attractive to investors.
•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.
•Economic uncertainties 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 negatively impact our results of operations.
•Catastrophic events may disrupt our business.
•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 not be able to use a portion of our net operating loss carryforwards, which could adversely affect profitability.
•We are a multinational organization, and we could be obligated to pay additional taxes in various jurisdictions.
•Future strategic transactions 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.
•Failure to comply with laws and regulations could harm our business.
•Changes in financial accounting standards or practices may cause adverse, unexpected financial reporting fluctuations and affect our reported results of operations.
•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.
Risks Related to Capitalization Matters and Corporate Governance
Risks Related to our Preferred Stock and Common Stock, Warrants and Units
•Our
Series A Preferred Stock and their related Convertible Notes restrict our ability to incur certain indebtedness, and the Convertible Notes contain additional restrictions and obligations, which limit our flexibility in operating our business.
•The price of our Common Stock, warrants and units may be volatile.
•Our preferred stockholders and 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 or of the shares of Common Stock issuable upon conversion of the Series A Preferred Stock may cause the market price of our Common Stock to drop significantly.
•Any
issuance of Common Stock upon conversion of the Series A Preferred Stock and/or exercise of warrants will cause dilution to existing stockholders and may depress the market price of our Common Stock.
•We do not currently intend to pay dividends on our Common Stock.
•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.
Other
Risks Related to our Series A Preferred Stock and Convertible Notes
•Our Series A Preferred Stock and related Convertible Notes have rights, preferences and privileges that are not held by, and are preferential to, the rights of our common stockholders, which could adversely affect our liquidity and financial condition, and may result in the interests of their holders differing from those of our common stockholders.
•Our ability to pay Cash Dividends on the Series A Preferred Stock may be limited or we may not have sufficient cash to pay our redemption obligations due upon the occurrence of a redemption event.
•There is no market for the Series A Preferred Stock or Convertible Notes and their value will be directly affected by the market price of our Common Stock, which
may be volatile.
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Risks Related to Our Business, Operations and Industry
Risks Related to Litigation
We and our Chief Executive Officer are involved in litigation with Oracle. An adverse outcome in the ongoing litigation could result in the payment of substantial damages and/or an injunction against certain of our business practices, either of 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) (“District Court”), against us and our Chief Executive Officer, 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 (“Rimini I”). The litigation involved our business processes and the manner in which we provided our services to our clients.
After completion of 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 its 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 unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report).
The total judgment paid by us and our insurance carriers reflects a reduction of approximately $12.8 million that
we had previously paid to Oracle (plus interest of $0.2 million), representing an award of non-taxable expenses to Oracle that was eventually overturned by unanimous decision of the U.S. Supreme Court in March 2019. As mandated by the U.S. Supreme Court, $13.0 million (the principal amount plus post-judgment interest) was refunded to us by Oracle in April 2019.
Following post-trial motions, the District Court entered a permanent injunction prohibiting us from using certain processes. In August 2019, the United States Court of Appeals for the Ninth Circuit Court of Appeals (the “Court of Appeals”) affirmed the permanent injunction issued by the District Court, while also correcting certain legal errors that narrowed the scope of the injunction. The injunction prohibits Rimini from using support processes that had been found in Rimini I to “innocently” infringe certain Oracle copyrights,
which Rimini ceased using no later than July 31, 2014.
On July 10, 2020, Oracle filed a motion to show cause contending that we are in contempt of the injunction, which we opposed. On March 31, 2021, the District Court issued an order resolving many outstanding disputes between the parties relating to the injunction and found that we violated the injunction in four certain narrow instances. During an evidentiary hearing scheduled for September 2021, the parties will present evidence and argue whether we (i) violated the injunction for certain accused conduct for which the District Court requested additional information; and (ii) should be held in contempt in the four instances where the District Court found a violation of the injunction, and what
sanctions, if any, are appropriate. At this time, we do not have sufficient information regarding possible damages for the contempt asserted by Oracle. As a result, an estimate of the range of loss cannot be reasonably determined. We believe that we have complied with the injunction, that Oracle will not be able to meet the burden to establish contempt of the injunction for the four certain narrow instances for which the District Court found violations, that Oracle will be unable to establish additional violations of the injunction at the September 2021 hearing and that an award for sanctions is not probable. Accordingly, no accrual has been made as of March 31, 2021. If we are found to be in contempt of the injunction, Oracle may seek equitable, punitive, and compensatory relief, the outcome of which could have a material adverse effect on our business and financial condition.
Oracle
may file additional contempt motions against us at any time to attempt to enforce its interpretation of the injunction or if it has reason to believe we are not in compliance with express terms of the 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 pendency of the injunction, alone, or the District Court’s March 31, 2021 order relating to the injunction described above, could dissuade clients from purchasing or continuing to purchase our services. Further, certain outcomes, should they occur, may also trigger the mandatory redemption of our Series A Preferred Stock, with the redemption amounts automatically becoming payment obligation under our Convertible Notes with a concurrent cancellation of the outstanding shares of the Series A Preferred Stock. 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 dividends due in respect of our Series A Preferred Stock or, if the shares are converted, the interest under the Convertible Notes. Holders of our Convertible Notes are entitled to
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accelerate repayment of the indebtedness under such notes if we default in our interest payment obligations. We cannot assure you that we will have sufficient assets which would allow us to repay such indebtedness in full at such time. In addition, we may not be able to obtain additional debt or equity financing, if required, to repay our obligations under the Convertible Notes. As a result, we could be forced into bankruptcy or liquidation.
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 support practices, in use since at least July 2014, do not infringe certain Oracle copyrights (“Rimini II”). Our operative complaint asserts declaratory judgment, tort, and statutory claims. Oracle’s operative counterclaim asserts declaratory judgment and copyright infringement claims and Lanham Act, breach of contract, and business tort violations.
On September 15, 2020, the District Court issued an order resolving the parties’ motions for summary judgment. It found infringement of 17 Oracle PeopleSoft copyrights for work we performed for a
set of “gap customers”that were supported by processes litigated in Rimini I, and that became our customers after Rimini I was filed. The District Court also found infringement of four Oracle PeopleSoft copyrights involving support of two specific clients, described by the District Court as “limited cases” and involving “limited circumstance[s].” There was no finding of infringement on any other Oracle copyrights at issue.
We could be required to pay substantial damages for 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. Further, these outcomes may also trigger the
mandatory redemption of our Series A Preferred Stock, with the redemption amounts automatically becoming payment obligations under our Convertible Notes with a concurrent cancellation of the outstanding shares of the Series A Preferred Stock. If we are obligated to pay substantial damages to Oracle or are enjoined from certain business practices, this could reduce the amount of cash flows available to pay dividends due in respect of our Series A Preferred Stock or the indebtedness under the Convertible Notes. If we default in our payment obligations under the Convertible Notes and the indebtedness under the Convertible Notes 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 rulings by the District Court in Rimini II, the District Court in Rimini I, and possibly the Court of Appeals in both Rimini I and Rimini II in connection with hearings, motions, decisions, and other matters, as well as other interim developments related to the litigations. If securities analysts or investors regard these rulings as negative, the market price of our Common Stock may decline. 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 Rimini I and Rimini II, we are unable to predict the timing or outcome of these lawsuits. 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 I, Item 1 and Note 8 of 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 litigation with Oracle represent a significant portion of our current revenue.
In Rimini II, Oracle has filed counterclaims relating to our support services for Oracle’s PeopleSoft, J.D. Edwards, Siebel, E-Business Suite, and Database software products. For the three months ended March 31, 2021, approximately 63% of our revenue was derived from the support services that we provide for our clients using Oracle’s PeopleSoft, J.D. Edwards, Siebel, E-Business Suite and
Database software products. The percentage of revenue derived from services we provide for PeopleSoft software only was approximately 11% of our total revenue during this same period. Although we provide support services for additional Oracle product lines that are not subject to litigation and support services 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 II litigation. Should Oracle prevail on its claims in Rimini II or should a contempt action result in a finding that we are in violation of the injunction, 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 compensation from our clients, any of which could have a material adverse effect on our business, financial condition and results of operations.
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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 assure you 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 and, specifically, Oracle’s July 2020 contempt filing and related March 31, 2021 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.
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 contempt proceeding. However, our errors and omissions insurers may or may not provide defense or indemnification coverage for the contempt proceeding. While we currently believe our cash on hand, accounts receivable and contractually committed backlog provides us with liquidity to cover costs related to 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
The duration of and economic, operational and financial impacts on our business of the COVID-19
pandemic, as well as the actions taken by governmental authorities, clients or others in response to the COVID-19 pandemic may have a material adverse effect on our business, financial condition, results of operations, or cash flows.
In response to the uncertain and rapidly evolving situation relating to the COVID-19 pandemic, we have taken precautionary measures to protect the health and well-being of our employees, clients, and the communities in which we operate. We have established work-at-home arrangements for most of our employees, placed restrictions on non-essential business travel, transitioned to a no in-person event marketing strategy and implemented a fully remote sales model. We believe that many of our clients are doing and will continue to do the same. These precautionary measures could impact our clients’ and potential clients’ ability or willingness to participate in our sales,
marketing and client success efforts, which could adversely affect our business, financial condition and results of operations. Further, there is significant uncertainty around the breadth and duration of business disruptions related to COVID-19, as well as its impact on the global economy and consumer confidence. The COVID-19 pandemic could have a sustained adverse impact on economic and market conditions and trigger a period of global economic slowdown, 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,
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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 are unable to accurately predict the ultimate impact of the COVID-19 pandemic due to various uncertainties, including the duration of the outbreak, the effectiveness of the vaccines developed to slow or stop the spread of the virus and actions that may be taken by governmental authorities to contain the virus. We closely monitor the impact of the COVID-19 pandemic, continually assessing its potential effects on our business. The extent to which our results are affected by COVID-19 will largely depend on future developments which cannot be accurately predicted and are uncertain, but the COVID-19 pandemic or the perception of its effects could have a material adverse effect on our business, financial condition, results of operations, or cash flows.
Further, due to our subscription-based business model, the effect of the pandemic may not be fully reflected in our results of operations until future periods, and the global macroeconomic effects of the pandemic may persist for an indefinite period, even after the pandemic has subsided. Refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations - Impact of COVID-19 for additional information.
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 are still 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. Companies may not engage us for other reasons, including concerns regarding our ongoing litigation with Oracle, the potential for future litigation, the potential negative effect our engagement could have on their relationships with their enterprise software vendor, or concerns that they could infringe third party intellectual property rights or breach
one or more software license agreements if they engage us to provide support services. New concerns or considerations may also emerge in the future. Particularly because our market is relatively undeveloped, we must address our 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 have had a history of losses and may not achieve or sustain profitability in the future.
We had a net loss of $3.6 million for the three months ended March 31, 2021 and we had an accumulated deficit of $304.6 million
as of March 31, 2021. We will need to generate and sustain increased revenue levels in future periods while managing our costs to become profitable, and, even if we do, we may not be able to maintain or increase our level of profitability. 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. We may incur significant losses in the future for a number of reasons, including, as a result of our ongoing litigation with Oracle, the potential for future litigation, impact of the COVID-19 pandemic, other risks described herein, unforeseen expenses,
difficulties, complications and delays and other unknown events. If we are unable to achieve and sustain profitability, the market price of our securities may significantly decrease.
If we are unable to attract new clients or retain and/or sell additional products or services to our existing clients, our revenue growth will be adversely affected.
To increase our revenue, we must add new clients, encourage existing clients to renew or extend their agreements with us on terms favorable to us and sell additional products and services to existing clients. As competitors introduce lower-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 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. 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. 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
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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.
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, the impact of the COVID-19 pandemic 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.
We face significant competition from both enterprise software vendors and other companies offering independent enterprise software support 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 business.
We face intense competition from enterprise software vendors, such as Oracle and SAP, who provide software support services for their own products. Enterprise software vendors have offered discounts to companies to whom we have marketed our services. In addition, our current and potential competitors and enterprise software vendors may develop and market new technologies that render our existing or future services less competitive or obsolete. Competition could significantly impede our ability to sell our services on terms favorable to us and we may need to decrease the prices for our 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 vendors in the independent enterprise software support services market with whom we compete with respect to certain of our services. We expect competition to continue to increase in the future, particularly if we prevail in Rimini II, which could harm our ability to increase sales, maintain or increase renewals and maintain our prices.
Our current and potential competitors may have significantly more financial, technical 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, 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. As a result, these competitors may be better able to respond quickly to new technologies and provide more robust support offerings. In addition,
certain independent enterprise software support organizations may have or may develop more cooperative relationships with enterprise software vendors, which may allow them to compete more effectively over the long term. Enterprise software vendors may also offer support services at reduced or no additional cost to their customers. In addition, enterprise software vendors may take other actions in an attempt to maintain their support service business, including changing the terms of their customer agreements, the functionality of their 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,
various support policies of Oracle and SAP may include clauses that could penalize customers that choose to use independent enterprise software support vendors or that, following a departure from the software vendor’s support program, seek to return to the software vendor to purchase new licenses or services. To the extent any of our competitors have existing relationships with potential clients for enterprise software products and support services, those potential clients may be unwilling to purchase our services because of those existing relationships. If we are unable to compete with such companies, the demand for our services could be substantially impacted.
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 $78.0 million for the
three months ended March 31, 2020 to $87.9 million for the three months ended March 31, 2021, representing a period over period increase of 13%. 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:
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•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 the Oracle 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. We plan to continue our investment in future growth. We expect to continue to expend substantial financial and other resources on, among others:
•sales and marketing efforts;
•training
to optimize our opportunities to overcome litigation risk concerns of our clients;
•expanding in new geographical areas;
•growing our product and service offerings and related capabilities;
•adding additional product and service offerings; and
•general administration, including legal and accounting expenses related to being a public company.
In addition, our historical rapid 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. 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.
Our failure to generate significant capital or raise additional capital necessary to fund and expand our operations and invest in new services and products could reduce our ability to compete and could harm our business.
We may need to raise additional capital beyond funds raised from our issuance and sale of Series A Preferred Stock, our August 2020 Offering and our March 2021 Offering if we cannot fund our growth sufficiently and capital optimization efforts through our operating
cash flows. Should this occur, we may not be able to obtain debt or additional equity financing on favorable terms, if at all. We are also subject to certain restrictions for future financings as discussed in the risk factor“Our Series A Preferred Stock and their related Convertible Notes restrict our ability to incur certain indebtedness, and the Convertible Notes contain additional restrictions and obligations that are currently effective or become effective upon certain events, which limit our flexibility in operating our business.” 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 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 otherwise not be in the best interests of our stockholders, or force us to maintain specified liquidity or other ratios, any of which could harm our business, results of operations and financial condition. If we cannot raise additional capital on acceptable terms, we may not be able to, among other things:
•maintain our operations;
•develop or enhance our products and services;
•continue to expand our sales and marketing functions;
•devote resources to research and development activities;
•acquire complementary technologies, products or businesses;
•expand operations, in the United States or globally;
•hire, train and retain employees; or
•respond to competitive pressures or unanticipated working capital requirements.
Our failure to do any of these things could impact our ability to grow our revenue and seriously harm our business, financial condition and results of operations.
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
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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. 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.
For
example, as described further in the section titled “Risk Factors-Risks Related to Litigation” above, we are engaged in litigation with Oracle relating in part to copyright infringement claims. See the risk factor “We and our Chief Executive Officer are involved in litigation with Oracle. An adverse outcome in the ongoing litigation could result in the payment of substantial damages and/or an injunction against certain of our business practices, either of which could have a material adverse effect on our business and financial results” above for additional information regarding the Rimini I and Rimini II cases.
We rely on our management team and other key employees, including our Chief Executive Officer, and the loss of one or more key employees could harm our business.
Our success
and future growth depend upon the continued services of our management team, including Seth Ravin, our Chief Executive Officer, and other key employees. Since 2008, Mr. Ravin has been under the regular care of a physician for kidney disease, which includes ongoing treatment. During this time, Mr. Ravin has continuously performed all of his duties as Chief Executive Officer of our company on a full-time basis. Although Mr. Ravin’s condition has not had any impact on his performance in his role as Chief Executive Officer 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 in the future. In addition, from time to time, there may be changes in our management team resulting from the hiring
or departure of executives, which could disrupt our business. We may terminate any employee at any time, with or without cause, and any employee may resign at any time, with or without cause. We do not maintain key man life insurance on any of our employees. The loss of one or more of our key employees could harm our business.
The failure to attract and retain additional qualified personnel could prevent us from executing our business strategy.
To execute our business strategy, we must attract and retain highly qualified personnel. We have from time to time experienced, and we expect to continue to experience, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. In particular, we have experienced an extremely competitive hiring environment 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. Further, our efforts to attract, develop, integrate and retain highly skilled employees with appropriate qualifications may be compounded by intensified restrictions on travel (including during the COVID-19 pandemic), immigration, or the availability of work visas. Many of the companies with which we compete for experienced personnel have greater resources than we do. In addition, in making employment decisions, job candidates often consider the value of the stock options or other equity incentives they are to receive in connection with their employment. If the price of our stock declines or experiences 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 new personnel or fail to retain and motivate our current personnel, our growth prospects could be severely harmed.
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. Accordingly, the effect of significant downturns in new sales, renewals or extensions of our service agreements 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.
Failure to effectively develop
and expand our marketing and sales capabilities could harm our ability to increase our client base and achieve broader market acceptance of our products and services.
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Our ability to increase our client base and achieve broader market acceptance of our products and services will depend to a significant extent on our ability to expand our marketing and sales operations. We plan to continue expanding our sales force globally. These efforts will require us to invest significant financial and other resources. 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 department. In addition, the cost to acquire clients is high due to the cost of these marketing and sales efforts. Our business may be materially harmed if our efforts do not generate a correspondingly significant 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.
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. To the extent that 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 and generally have done so faster than our competitors. 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, lose clients, or both.
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 may experience fluctuations in our results of operations due to a number of factors, including 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
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. Accordingly, the results of any one quarter should not be relied upon as an indication of future performance. 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 periods in which those agreements are up for renewal. 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. In addition to the other risks described herein, factors that may affect our quarterly results of operations include the following:
•changes
in spending on enterprise software products and services by our current or prospective clients;
•pricing of our products and services so that we are able to attract and retain clients;
•acquisition of new clients and increases of our existing clients’ use of our products and services;
•client renewal rates and the amounts for which agreements are renewed;
•budgeting cycles of our clients;
•the occurrence of catastrophic events that may disrupt our business, including the COVID-19 pandemic;
•changes in the competitive dynamics of our market, including consolidation
among competitors or clients;
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•the amount and timing of payment for operating expenses, particularly sales and marketing expenses and employee benefit expenses, as well as the quarterly Cash Dividends required to be made on our Series A Preferred Stock;
•the amount and timing of non-cash expenses, including stock-based compensation, PIK Dividends on our Series A Preferred Stock and other non-cash charges;
•the amount and timing of costs associated with recruiting, training and integrating new employees;
•the amount and timing of cash
collections from our clients;
•unforeseen costs and expenses related to the expansion of our business, operations, infrastructure and new products and services such as Application Management Services (AMS);
•the amount and timing of our legal costs, particularly related to our litigation with Oracle;
•changes in the levels of our capital expenditures; foreign currency exchange rate fluctuations; and
•general economic and political conditions in our global markets, including pandemic and other catastrophic conditions outside our control.
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 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 is 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 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 rules and regulations governing sales, use, value-added and other taxes, and these rules and regulations can be complex and are 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. A successful assertion that we should be collecting additional sales, use, value-added or other taxes in those jurisdictions where we have not historically done so and in which we do not accrue for
such taxes 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.
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, so 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 or suffer adverse effect on our results of operations. In addition, we have recently begun to offer new products and services and do not have substantial experience with pricing
such products and services, so we may need to change our pricing models for these new products and services 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 adversely impact our operating margins and results of operations.
We have experienced significant growth resulting in changes to our organization and structure, which if not effectively managed, could have a negative impact on our business.
Our headcount and operations have grown in recent years. We increased the number of full-time employees from over 1,300 as of March 31, 2020 to over 1,500 as of March 31, 2021. 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 expand our business and operate as a public company, we may find it difficult to maintain our corporate culture while managing our employee 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.
In addition, our organizational structure has become more complex as a result of our significant growth. We have added employees and may need to continue to scale and adapt our operational, financial and management controls, as well as our reporting systems and procedures. The expansion of our systems and infrastructure may require us to commit additional financial, operational and management resources before our revenue increases and without any assurances that our revenue will increase.
If we fail to successfully manage our growth, we likely will be unable to successfully execute our business strategy, which could have a negative impact on our business, financial condition 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.
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 $30.6 million for the year ended March 31, 2020 to $40.3 million for the three months ended March 31, 2021, an increase of $9.8 million or 32%. 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:
•changes in a specific country’s or region’s political or economic conditions;
•the occurrence of catastrophic events that may disrupt our business;
•changes
in regulatory requirements, taxes or trade laws such as the United Kingdom’s exit from the European Union (“Brexit”);
•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;
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•currency exchange rate fluctuations and the resulting effect on our revenue and expenses, and the cost and risk of entering into hedging transactions if we choose to do so in the future;
•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;
•political instability or terrorist activities;
•exposure to liabilities under anti-corruption and anti-money laundering laws, including the U.S. 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 limited experience in operating our business globally 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.
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.
Because our recent growth has resulted in the rapid expansion of our business, we do not have a long history upon which to base forecasts of future operating revenue. In
addition, 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 also 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.
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.
Consolidation among companies in our target sales markets has been robust in recent years, and this trend poses a risk for us. If such consolidation continues, 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 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 do not provide 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 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 or releases, our business may be adversely impacted.
Delayed or unsuccessful investment in new technology, products, services and markets may harm our financial condition and results of operations.
We
plan to continue investing resources in research and development in order 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 and our Application Management Services (AMS) for SAP and Oracle products. The development of new product and service offerings could divert the attention of our management and our employees from the day-to-day operations of our business, the new product and service offerings may not generate sufficient revenue to offset the increased research and development expenses, they may not generate gross profit margins consistent with our current margins, and if we are not successful in implementing the new product and service offerings, we may need to write off the value of our investment. Also, these new product and service offerings may be in markets that are more competitive than markets for our
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existing
product and service offerings, making it more difficult to introduce them to clients and potential clients effectively or provide them profitably. Furthermore, 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.
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 may be harmed, and we may incur significant liabilities. Further, 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.
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. In particular, cyberattacks, such as phishing, 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. 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 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.
Many governments have enacted laws requiring companies to notify individuals of data security incidents involving certain types of personal data. In addition, 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. Security compromises experienced by our clients, by our competitors or by us may lead to public disclosures, 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 assure you 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. 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.
As a 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 may be inconsistent between countries or in conflict with other laws, legal
obligations or industry standards. For example, the General Data Protection Regulation (GDPR), in effect in the European Union (EU), creates a broad range of new compliance 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 of the California Consumer Privacy Act of 2018, effective on January 1, 2020, which adds to the range of privacy-related compliance requirements. We generally comply with industry standards and strive to comply with all applicable laws and other legal obligations relating to privacy and data protection, but it is possible that these laws and 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
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practices or may be mandated at a pace that exceeds our ability to comply. Compliance with such laws and other legal obligations 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, potential fines and other expenses related to such governmental actions, result in 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.
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. We have from time to time found defects in our products and services 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. We may not be able to detect and correct defects
or errors before clients begin to use our products and services. 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.
We are a smaller reporting company within the meaning of the Securities Act, and if we take advantage of certain exemptions from reporting and disclosure requirements available to smaller reporting companies that are also accelerated filers within the meaning of the Securities Act, this could make our common stock less attractive to investors.
While we are an accelerated filer, we are also a smaller reporting company (“SRC”), which allows us to take advantage of certain exemptions from various reporting requirements that are applicable to other accelerated filers that are not SRCs, including reduced disclosure obligations regarding executive compensation in our Annual Report and our periodic reports and proxy statements. We will remain an SRC until (a) the aggregate
market value of our outstanding common stock held by non-affiliates as of the last business day our most recently completed second fiscal quarter exceeds $250 million or (b) (1) we have over $100 million in annual revenues and (2) the aggregate market value of our outstanding common stock held by non-affiliates as of the last business day our most recently completed second fiscal quarter exceeds $700 million.
As a result, our stockholders may not have access to certain information they may deem important. We cannot predict whether investors will find our securities less attractive because we will rely on these exemptions. If some investors find our securities less attractive as a result of our reliance on these exemptions, the market prices of our securities may be lower than they otherwise would be, there may be a less active trading market for our securities and the market prices of our securities
may be more volatile.
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 stock price.
We have had material weaknesses in our internal control over financial reporting. As described above under Part I, Item 4 of this Report, our management concluded that we had a material weakness in our internal control over financial reporting as of March 31, 2021 and December 31, 2020, due to inadequate controls in relation to improperly applying the accounting guidance for our GP Sponsor Private Placement Warrants, recognizing the warrants as equity instead of
as a liability.
In addition, in connection with the audit of our consolidated financial statements for the years ended December 31, 2016 and 2015, our management determined that we had material weaknesses in our internal control over financial reporting related to the following:
•inadequate controls in relation to recognition of liabilities for embedded derivatives in connection with our former Credit Facility (2016);
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•inadequate controls in relation to revenue
recognition from support service sales contracts whereby we incorrectly accounted for multi-year, non-cancelable support service sales contracts as a single delivery arrangement and incorrectly accounting for revenue for certain non-standard contract provisions (2015 and 2016);
•various sales tax control matters related to manual processes and determination of tax liabilities in certain states (2015); and
•inadequate controls for accrual of loss contingencies related to our litigation with Oracle (2015).
As
described below and in Part I, Item 4 of this Report, we are in the process of remediating the material weakness in relation to the accounting for our GP Sponsor Private Placement Warrants but can give no assurances as to the timing or completion of this remediation. We previously remediated the remaining material weaknesses described above during the years ended December 31, 2017 and 2016; however, we cannot provide assurance that material weaknesses in our internal control over financial reporting will not be identified in the future.
With respect to controls over revenue accounting procedures, we intend to continue to work on automating our processes, especially around the new FASB revenue accounting standard, as well as to continue to enhance our review processes around new and renewal contracts.
In addition, we are required to have our independent 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 auditors are 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 Part I, Item 4 of this Report.
Economic uncertainties 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 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 economic challenges and possible recession will be exacerbated for an extended period in the wake of the COVID-19 pandemic. As a result, we and our clients find it extremely 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. 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, recent events, including Brexit, change in U.S. trade policies and responsive changes in policy by foreign jurisdictions, governmental and multinational organizations' responses to the COVID-19 pandemic and similar geopolitical developments and uncertainty in the European Union and elsewhere
have increased levels of political and economic unpredictability globally, and may increase the volatility of global financial markets and the global and regional economies.
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 online attack, earthquake, fire, terrorist attack, 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), including COVID-19, that causes any of our employee groups to become ill, quarantined or otherwise unable to work and/or travel due to health reasons or governmental or client corporate restrictions, or causes our clients to have ill or logistically
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restricted workforces, or who choose to cease or delay meetings with us or decisions regarding engaging our services could adversely affect our business, financial condition and results of operations.
If we fail to enhance our brand, our ability to expand our client base will be impaired and our financial condition may suffer.
We believe that our development 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 and maintain 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 processes and software tools may increase.
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 may be necessary in the future to enforce our intellectual property rights and to protect our trade secrets. 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 not be able to use a significant portion of our net operating loss carryforwards, which could adversely affect our profitability.
We have U.S. 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
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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.
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 us and the results of our operations.
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 acquisition purchases 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.
Changes in financial accounting standards or practices may cause adverse, unexpected
financial reporting fluctuations and affect our reported results of operations.
Generally accepted accounting principles in the United States are subject to interpretation by the FASB, the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in accounting standards or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and will likely occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business.
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.
Risks Related to Capitalization Matters and Corporate Governance
Risks Related to our Preferred Stock and Common Stock, Warrants and Units
Our Series A Preferred Stock and their related Convertible Notes restrict our ability to incur certain indebtedness, and the Convertible Notes contain additional restrictions and obligations that are currently effective or become effective upon certain events, which limit our flexibility in operating our business.
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While
a specified minimum number of shares of Series A Preferred Stock or, if applicable, principal amount of Convertible Notes remain outstanding, holders owning a majority of the then outstanding shares of Series A Preferred Stock or principal outstanding under the Convertible Notes must consent to the issuance of debt other than “permitted indebtedness” which means (i) unsecured indebtedness, (ii) indebtedness classified and accounted for as capital leases in an aggregate amount not to exceed $3.5 million at any time outstanding, (iii) indebtedness with respect to credit cards and similar services or in respect of guarantees to clients or suppliers in the ordinary course of business, (iv) secured indebtedness assumed when a person becomes our subsidiary, provided that such secured indebtedness was not incurred in contemplation of such acquisition, merger or consolidation, such liens do not attach to our assets other than the assets subject to such lien at the time
of the transaction, and in any event does not exceed $3.0 million at any time outstanding, and (v) indebtedness secured by a lien not to exceed $1.0 million at any time outstanding, which (i) through (v) in the aggregate may not exceed the greater of (x) $20.0 million or (y) 5% of U.S. GAAP revenue (calculated on a quarterly basis as set forth in our annual report on Form 10-K/A or our quarterly reports on Form 10-Q, as applicable), for the 12 month period ending at the quarter-end immediately prior to the incurrence of such indebtedness.
The Convertible Notes contain customary covenants, including among others, a prohibition on the disposal (by merger, consolidation, liquidation or otherwise) of all or any part of our business, assets or property, subject to certain exceptions (i.e., sales of inventory in the ordinary course of business, non-exclusive licenses, etc.), and from the date upon which
there is a redemption event causing redemption obligations to become principal under the Convertible Notes, restrictions on our ability to make certain payments with respect to its capital stock, subordinated and unsecured indebtedness and, at the option of a holder of a Convertible Note, requirements to deliver certain financial information to the holders at specified intervals, among others.
Upon the occurrence of an event of default under the Convertible Notes, the noteholders would have the right to accelerate all of our obligations under the Convertible Notes, which obligations will immediately become due and payable. If such acceleration occurs prior to July 19, 2021, the noteholders will also be entitled to a make-whole premium that provides full yield maintenance as if the Convertible Notes were held for a full three years through that date.
The
terms of the Convertible Notes may impact our alternatives to finance our business, which could limit our ability to fund growth. Further, full acceleration of the Convertible Notes may occur at a time when we are unable to pay all obligations, and thus subjecting us to the risk of liquidation or bankruptcy if such acceleration occurs.
The price of our Common Stock, warrants and units may be volatile.
The price of our Common Stock, warrants and units may fluctuate due to a variety of factors, including:
•developments in our continuing litigation with Oracle;
•actions that may be taken by our holders of Series A Preferred Stock and the Convertible Notes;
•any
future equity or debt financing or other capitalization optimization transactions by us;
•our ability to pay cash dividends payable on our Series A Preferred Stock or to effectively service any outstanding debt obligations;
•the announcement of new products or product enhancements by us or our competitors;
•changes in legal, regulatory and enforcement frameworks impacting our products;
•variations in our and our competitors’ results of operations;
•the addition or departure of key personnel;
•announcements
by us or our competitors of acquisitions, investments or strategic alliances;
•actual or anticipated fluctuations in our quarterly and annual results and those of other public companies in our industry
•macroeconomic conditions and the economic impact of the COVID-19 pandemic;
•the level and changes in our year-over-year revenue growth rate;
•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;
•our
Public Warrants and units are quoted on the OTC Pink Current Information Marketplace which is a significantly more limited market than Nasdaq; and
•the general state of securities markets.
These market and industry factors may materially reduce the market price of our Common Stock, regardless of our operating performance.
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Our preferred stockholders and 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 and Series A Preferred Stock outstanding as of March 31, 2021, eleven of our stockholders have aggregate voting power of 48.8% of our outstanding capital stock. As of March 31, 2021, on an as-converted basis, (i) approximately 21.2% of our outstanding voting capital stock is held by Adams Street Partners LLC and certain Adams Street fund limited partnerships, (ii) approximately 10.8% of our outstanding voting capital stock is beneficially owned by our Chief Executive Officer, (iii) approximately 6.5% of our outstanding voting capital stock is beneficially owned by GPIC Ltd., and (iv) the remaining holders of our Series A Preferred Stock have aggregate voting power representing approximately 10.4% of our outstanding voting capital stock. Holders of our Series A Preferred Stock are entitled to vote their shares on an as-converted basis
on all matters submitted to a vote of stockholders and to convert their shares into Common Stock at any time, which amounts will increase as PIK dividends are paid through the issuance of additional shares of Series A Preferred Stock. Additionally, holders of our Series A Preferred Stock are required to approve certain matters as a class, voting separately from the Common Stock, such as dividends or distributions on our Common Stock, purchase or redemption of our Common Stock, certain amendments to our Certificate of Incorporation or Certificate of Designations that adversely affect the rights of the preferred stockholders, and authorization of the creation or issuance of any pari passu or senior securities. Our directors and officers or persons affiliated with our directors and officers have aggregate voting power of approximately 39.6% as of March
31, 2021.
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 them. 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.
Future resales of our Common Stock held by our significant stockholders or of the shares of Common Stock issuable upon conversion of the Series A Preferred Stock may cause the market price of our Common Stock to drop significantly.
We
registered for resale the shares of Common Stock issued in the Initial Private Placement, the March 2019 Private Placement and the June 2019 Private Placement, and the shares of Common Stock issuable upon conversion of, or issued as dividends upon, the Series A Preferred Stock or Convertible Notes, and are obligated to take certain actions to facilitate the transfer and sale of such shares. Upon such registration, the shares of Common Stock became freely salable. Additional shares of Series A Preferred Stock are authorized for issuance and may be issued in the future, subject to substantively similar rights. The Common Stock issuable upon conversion of our Series A Preferred Stock may represent overhang that may also adversely affect the market price of our Common Stock. Overhang occurs when there is a greater supply of a company’s stock in the market than there is demand for that stock. When this happens, the price of our stock will decrease, and any additional shares
which stockholders attempt to sell in the market, or the perception that such sales might occur, will only further decrease the share price. If the share volume of our Common Stock cannot absorb converted shares sold by the holders of the Series A Preferred Stock, then the value of our Common Stock will likely decrease.
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 in the price of our Common Stock or putting significant downward pressure on the price of our Common Stock.
Any issuance of Common Stock upon conversion of the Series A Preferred Stock and/or exercise of warrants will cause dilution to existing stockholders and may depress the market price of our Common Stock.
Each
share of our Series A Preferred Stock is initially convertible, at the option of the holders, into 100 shares of our Common Stock (subject to appropriate adjustment in the event of a stock split, stock dividend, combination or other similar recapitalization) for an aggregate of 14.6 million shares of Common Stock as of March 31, 2021and is generally convertible at a conversion price equal to the quotient of its liquidation preference and $10.00. The Series A Preferred Stock also has a PIK dividend that will increase the number of shares of Common Stock into which the Series A Preferred Stock will be convertible while it remains outstanding. We have the right to convert outstanding Series A Preferred Stock into Common Stock after July 19, 2021 if our volume weighted average stock price for at least 30 trading days of the 45
consecutive trading days immediately preceding such conversion is greater than $11.50 per share. We can exercise this right to convert twice per calendar year for a maximum number of shares of Common Stock that has publicly traded over the 60 consecutive trading days prior to the conversion date (less any shares of Common Stock that have been issued pursuant to any such conversion during such 60-day period).
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The issuance of Common Stock upon conversion of the Series A Preferred Stock may result in immediate and substantial dilution to the interests of our Common Stockholders.
Further, the issuance of Common Stock upon exercise of warrants may result in immediate
and substantial 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 a Common Stock, depending upon the price on which the additional shares are issued.
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.
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 and financial condition from time to time. The payment of any dividends will be within the discretion of our Board of Directors and would require us to obtain the consent of and to pay a corresponding dividend to holders of our shares
of Series A Preferred Stock. It is presently expected that except for the cash dividends payable to the holders of our Series A Preferred Stock, 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. Our ability to declare dividends on our Common Stock may also be limited by the terms of financing and other agreements entered into by us or our subsidiaries from time to time. Therefore, stockholders are not likely to receive any dividends on Common Stock for the foreseeable future and 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.
We may seek to engage in capital optimization transactions in the future in respect of our outstanding Preferred stock, warrants or units, the result of which may also trigger some dilution and not achieve an improved capital structure.
The DGCL and our certificate of incorporation and bylaws 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. 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, pursuant to which we have issued Series A Preferred Stock entitled to receive a liquidation preference and certain amounts in connection with a change of control of the Company and other similar extraordinary transactions;
•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 all 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
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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.
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 capital 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 contained in our amended and restated certificate of incorporation 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. This choice of forum provision does not apply to suits brought to enforce any liability or duty created by the Securities Act or the Exchange Act.
Other Risks Related to our Series A Preferred Stock and Convertible Notes
Our Series A Preferred Stock and related Convertible Notes have rights, preferences and privileges that are not held by, and are preferential to, the rights of our common stockholders, which could adversely affect
our liquidity and financial condition, and may result in the interests of the holders of our Series A Preferred Stock and Convertible Notes differing from those of our common stockholders.
In the event of our liquidation, dissolution or the winding up of our affairs, the holders of our Series A Preferred Stock have the right to receive a liquidation preference (the “Liquidation Preference”) entitling them to be paid out of our assets generally available for distribution to our equity holders, before any payment may be made to holders of any other class or series of capital stock, in an amount equal to the greater of (i) $1,000 plus accrued but unpaid dividends and (ii) the per share amount of all cash, securities and other property to be distributed in respect of the Common Stock such holder would have been entitled to receive for its Series A Preferred Stock on an as-converted basis. In
the event of a liquidation, dissolution or winding up of our affairs prior to July 19, 2021, the holders of Series A Preferred Stock are entitled to a make-whole premium that provides them with full yield maintenance as if the shares of Series A Preferred Stock were held for a full three years through
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that date. To the extent principal amounts become outstanding under our Convertible Notes, such notes are entitled to similar preferential amounts upon such events.
In addition, the holders of our Series A Preferred Stock are entitled to (i) Cash Dividends of 10.0% per annum payable quarterly in arrears, and (ii) PIK Dividends of 3.0% per annum. The PIK
dividend is accrued quarterly in arrears for the first five years following the issuance of the Series A Preferred Stock and thereafter all Dividends accruing on such Series A Preferred Stock will be payable in cash at a rate of 13.0% per annum. To the extent principal amounts become outstanding under our Convertible Notes, such Convertible Notes are entitled to substantially the same payments in the form of interest (in lieu of dividends) payments.
Further, the holders of our Series A Preferred Stock also have redemption rights upon the occurrence of certain events upon which obligations in respect of the Series A Preferred Stock become principal amounts under the Convertible Notes. Specifically, the Series A Preferred Stock is mandatorily redeemable, upon the election by the holders of a majority of the then-outstanding shares of Series A Preferred Stock, on or after July
19, 2023 at a redemption price per share equal to the sum of (i) the Liquidation Preference per share plus (ii) an amount per share equal to accrued but unpaid dividends not previously added to the Liquidation Preference on such share of Series A Preferred Stock (the “Redemption Amount”). Any and all then-outstanding liquidation value of the Series A Preferred Stock plus any capitalized or unpaid accrued Dividends not previously included in the Liquidation Preference will be repaid in full in cash on such redemption date or satisfied in the form of obligations under the Convertible Notes issued concurrently with the Series A Preferred Stock to collateralize amounts, if any, that may become payable by us pursuant to certain redemption provisions of the Series A Preferred Stock. The Series A Preferred Stock will also become mandatorily redeemable by the holders at any time upon the reasonable determination of the holders of a majority of the Series A Preferred
Stock then outstanding of the occurrence of a Material Adverse Effect or upon a Material Litigation Effect (as such terms are defined in the Certificate of Designations for the Series A Preferred Stock), with the Redemption Amounts automatically becoming payment obligations pursuant to the Convertible Notes with a concurrent cancellation of the shares of the Series A Preferred Stock.
Finally, prior to or on July 19, 2021, we have the right to redeem up to $80.0 million of shares of the Series A Preferred Stock for cash amounts equal to the Redemption Amount which would include a make-whole premium that provides the holders thereof with full yield maintenance as if the Series A Preferred Stock was held for three years after the initial issuance of the Series A Preferred Stock through that date, subject to certain conditions and limitations. After
such time, we will have the right to redeem shares of Series A Preferred Stock for a cash per share amount equal to the Redemption Amount subject to certain conditions.
On April 16, 2021, we redeemed 60,000 shares of our 13.00% Series A Preferred Stock at an aggregate total redemption price of $62.3 million. The total price consisted of $60.0 million related to the face value of $1,000 per share of Series A Preferred Stock and $2.3 million or $39.05 per share of Series A Preferred Stock related to the dividends to be earned for the period from April 1, 2021 through July 18, 2021. Effective April 16, 2021 after the redemption, we have 87,155 shares of Series A Preferred Stock outstanding.
These
Dividend and Redemption Amount payment obligations could impact our liquidity and reduce the amount of cash flows available for working capital, capital expenditures, growth opportunities, acquisitions, and other general corporate purposes. Our obligations to the holders of Series A Preferred Stock could also limit our ability to obtain additional financing or increase our borrowing costs, which could have an adverse effect on our financial condition. The preferential rights described above could also result in divergent interests between the holders of shares of Series A Preferred Stock or Convertible Notes and the holders of our Common Stock.
Our ability to pay Cash Dividends on the Series A Preferred Stock may be limited under Delaware law or we may not have sufficient cash to pay Dividends or our redemption obligations (and potential Convertible Note payments) due to the holders of our Series A Preferred
Stock upon the occurrence of a redemption event.
Under the DGCL, our Board of Directors may only declare and pay cash dividends on shares of our capital stock out of our statutory “surplus” (which is the amount equal to total assets minus total liabilities, in each case at fair market value, minus statutory capital), or if there is no such surplus, out of our net profits for the then current and/or immediately preceding fiscal year. Even if we are permitted under Delaware law to declare and pay Cash Dividends on the Series A Preferred Stock, we may not have sufficient cash to declare and pay such Dividends or pay the Redemption Amounts due upon the occurrence of certain redemption events, causing there to be outstanding obligations under the Convertible Notes. The Convertible Notes contain customary restrictions on our ability to, among other things, make certain restricted payments with
respect to our capital stock, subordinated indebtedness and unsecured indebtedness, consummate certain mergers, consolidations or dissolutions and
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make certain dispositions, subject to specific exclusions. The Convertible Notes also include customary obligations in respect of inspection, reporting, preservation of the security interest and indemnification.
Upon the occurrence of an Event of Default (as defined in the Convertible Notes), the holders of such Convertible Notes will have the right to accelerate all of our obligations thereunder, and such obligations will become immediately due and payable. In addition, if such acceleration occurs prior to July
19, 2021, the holders will also have the right to receive a make-whole premium thereunder.
If the indebtedness under the Convertible Notes 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.
There is no market for the Series A Preferred Stock or Convertible Notes and their value will be directly affected by the market price of our Common Stock, which may be volatile.
The Series A Preferred Stock has no established trading market and is not listed on any securities exchange, and we have no intention to list the Series A Preferred Stock on any securities exchange. Additionally, the Convertible Notes issued in respect of the redemption obligations
for the Series A Preferred Stock are only transferable with the related shares of Series A Preferred Stock until certain events occur. To the extent that a secondary market for the Series A Preferred Stock develops, we believe that the market price of the Series A Preferred Stock will be significantly affected by the market price of our Common Stock. The trading price of our Common Stock has been and is likely to continue to be volatile. The risk factors described elsewhere herein may cause the price of our Common Stock to fluctuate. In addition, the stock market has experienced extreme price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of affected companies. Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of a company’s securities. These broad market fluctuations may adversely affect the market prices
of our Common Stock, and, in turn, the value of the Series A Preferred Stock and Convertible Notes.
General Risks
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 addition, in response to the COVID-19 pandemic, federal, state, local and foreign governmental authorities have imposed, and
may continue to impose, protocols and restrictions intended to contain the spread of the virus, including limitations on the size of gatherings, closures of work facilities, schools, public buildings and businesses, quarantines, lockdowns and travel restrictions. Such restrictions have disrupted and may continue to disrupt our business operations and limit our ability to perform critical functions.
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
made claims against us for compensation for such non-compliance, our business, financial condition and results of operations could be harmed. In addition, responding to any action will likely result in a significant diversion of management’s attention and resources and an increase in professional fees and costs. Enforcement actions and sanctions could further harm our business, financial condition and results of operations.
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.
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ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
There
were no sales of unregistered shares of the Company's securities during the quarter. The Company issued PIK Dividends as disclosed in Note 5 to the unaudited condensed financial statements included in Part I, Item I of this Report in satisfaction of the Company’s obligations as previously disclosed by the Company.
ITEM 3. Defaults Upon Senior Securities.
None.
ITEM
4. Mine Safety Disclosures.
Not applicable.
ITEM 5. Other Information.
None.
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ITEM 6. Exhibits.
The following exhibits are filed as part of this Quarterly Report on
Form 10-Q:
+ Management contract or compensatory plan or arrangement.
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SIGNATURES
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.
