Rimini Street (RMNI) 10-Q2022 Q3 Quarterly report

 

 

 

 

The accompanying Unaudited Condensed Consolidated Balance Sheet and related disclosures as of December 31, 2021 have been derived from the Company’s audited financial statements. The Company’s financial condition as of September 30, 2022, and operating results for both the three and nine months ended September 30, 2022, 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, 2022.

 

 

 

As of September 30, 2022, the Company’s current liabilities exceeded its current assets by $61.6 million, and the Company recorded a net loss of $0.4 million for the three months ended September 30, 2022. As of September 30, 2022, the Company had available cash, cash equivalents and restricted cash of $119.0 million and short-term investments of $11.1 million. As of September 30, 2022, the Company’s current liabilities included $212.1 million of deferred revenue whereby the historical costs of fulfilling the Company's commitments to provide services to its clients was approximately 39% of the related deferred revenue for the three months ended September 30, 2022.

The Company funded the July 20, 2021 redemption with borrowings from a five-year term loan of $90 million, which was entered into on July 20, 2021 (the “Credit Facility”). Annual minimum principal payments over the five year term for the Credit Facility are 5%, 5%, 7.5%, 7.5% and 10%, respectively, with the remaining balance due at the end of the term. See Note 5 for further information regarding the Company's Credit Facility.

As discussed in Note 7, the Company completed a firm commitment underwritten public offering on March 11, 2021 (the “March 2021 Offering”) of 7.8 million shares of its common stock, par value $0.0001 per share (“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. The Company 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. The Company had previously completed a firm commitment underwritten public offering on August 18, 2020 (the “August 2020 Offering”) of 6.1 million shares of its Common Stock at a price of $4.50 per share for total gross proceeds of $27.5 million. Underwriter discounts and commissions were $1.7 million and the underwriter expenses were $0.1 million. The Company also incurred additional professional fees of $0.6 million as part of the transaction, resulting in net proceeds from the August 2020 Offering of approximately $25.1 million.

 

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 accounting estimates include, but are not necessarily limited to, valuation of accounts receivable, valuation assumptions for stock options and leases, deferred income taxes and the related valuation allowances, and the evaluation and measurement of contingencies. To the extent there are material differences between the Company’s estimates and actual results, the Company’s future consolidated results of operation may be affected.

 

Deferred revenue activity consisted of the following (in thousands):

The transaction price allocated to the remaining performance obligations represents contracted revenue that has not yet been recognized. As of September 30, 2022, the remaining transaction price included in deferred revenue was $212.1 million in current and $36.1 million in noncurrent.

 

Other accrued liabilities consisted of the following (in thousands): 

Debt is presented net of debt discounts and issuance costs in the Company's balance sheets and consisted of the following (in thousands):

On May 31, 2022, the Company prepaid $5.0 million of indebtedness outstanding under its Credit Facility with no prepayment penalty. On September 30, 2022, June 30, 2022 and March 31, 2022, the Company made its required three principal payments of $1.1 million, respectively.

On May 31, 2022, the Company also amended the Credit Facility to increase the aggregate value of the Common Stock shares that can be repurchased by the Company to $50 million during the term of the Credit Facility.

Effective July 20, 2021, the Company received $89.3 million of net proceeds pursuant to the Credit Facility. The borrowings under the Credit Facility were incurred with an original discount of 0.375%. As part of the transaction, the Company incurred issuance costs of $4.2 million, which were capitalized and are being amortized over the term of the Credit Facility.

The Credit Facility bears interest at the London Interbank Offered Rate (“LIBOR”), plus a margin ranging from 1.75% to 2.50%. Effective April 1, 2022, the margin for the Credit Facility was decreased to 1.75% for the three months ended September 30, 2022. For the three months ended September 30, 2022, the interest rate on the Credit Facility was comprised of LIBOR was 2.5% and the margin was 1.75%.

On May 18, 2022, the Company entered into an interest rate swap agreement with a notional value of $40 million, with a fixed payer LIBOR rate of 2.9935% and an initial floating LIBOR rate of 0.93557%. The floating rate is reset at each month end and has an embedded floor rate of 0.0%. The term of the interest rate swap agreement coincides with that of the Credit Facility. See Note 12 for further information regarding the fair value accounting for the interest rate swap agreement.

The fair value of the Credit Facility was $79.8 million (Level 2 inputs) as of September 30, 2022 compared to the carrying value of $78.9 million as of September 30, 2022. The LIBOR rate as of December 31, 2021 was not materially different from the interest rate for the year ended December 31, 2021. Hence the fair value of the Credit Facility approximated the carrying value as of December 31, 2021.

The Credit Facility contains certain financial covenants, including a minimum fixed charge coverage ratio greater than 1.25, a total leverage ratio less than 3.75, and a minimum liquidity balance of at least $20 million in U.S. cash. Annual minimum principal payments over the five year term for the Credit Facility are 5%, 5%, 7.5%, 7.5%, and 10%, respectively, with the remaining balance due at the end of the term.

Pursuant to a Guaranty and Security Agreement, dated July 2, 2021 (the “Guaranty and Security Agreement”), among the Credit Parties and Capital One, National Association, as agent, the obligations under the Credit Facility are guaranteed by certain of the Company’s subsidiaries (the Company and the guarantors, collectively, the “Credit Parties”) and are secured, subject to customary permitted liens and exceptions, by a lien on substantially all assets of the Credit Parties.

The components of interest expense are presented below (in thousands):

For both the three months and nine months ended September 30, 2022, interest expense included interest rate swap expenses of $0.1 million and $0.2 million, respectively.

On July 20, 2021, the Company redeemed the remaining 87,802 shares of its Series A Preferred Stock at an aggregate total redemption price of $88.4 million. The total price consisted of $87.8 million related to the outstanding shares of Series A Preferred Stock with a face value of $1,000 per share and $0.6 million, or $6.86 per share related to the dividends earned for the period from July 1, 2021 to but not including the July 19, 2021 redemption date. The redeemed shares of the Series A Preferred Stock, along with the dividends, were recorded on the redemption date of July 20, 2021.

The Company funded the July 20, 2021 redemption with borrowings under the Credit Facility. See Note 5 for further information regarding the Company's Credit Facility.

On April 16, 2021, the Company redeemed 60,000 shares of its 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, 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 were recorded when the Series A Preferred Stock became mandatorily redeemable on April 16, 2021.

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 10,000 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 $8.95 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 described above, 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 Certificate of Designations for the Series A Preferred Stock.

Presented below is a summary of total and per share dividends declared during fiscal year 2021 (dollars in thousands, except per share amounts):

On May 28, 2022, the Board of Directors authorized an increase to the Company’s previously announced Common Stock repurchase program to increase the value of the shares that could be acquired by the Company from up to $15.0 million over two years to up to $50.0 million over the next four years, subject to compliance with the Company’s Credit Facility, provided that all other applicable conditions and legal requirements are satisfied.

During the three months ended September 30, 2022, the Company acquired 0.2 million shares of Common Stock on the open market at a cost of $1.0 million. For the nine months ended September 30, 2022, the Company acquired an aggregate 0.9 million shares of Common Stock on the open market at a total cost of $4.7 million. Upon completion of all repurchase transactions, the associated shares of Common Stock were retired.

On March 11, 2021, the Company completed the March 2021 Offering of 7.8 million shares of its 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. The Company 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. The Company used the net proceeds from the March 2021 Offering to redeem 60,000 shares of Series A Preferred Stock in April 2021.

On August 6, 2021, the Company reacquired 0.1 million shares of Common Stock for $1.1 million related to restricted stock units (“RSUs”) that vested on that date. These shares are included as Treasury Stock as of September 30, 2022.

The Company’s stock plans consist of the 2007 Stock Plan (the “2007 Plan”) and the 2013 Equity Incentive Plan, as amended and restated in July 2017 (the “2013 Plan”). The 2007 Plan and the 2013 Plan are collectively referred to as the “Stock Plans”. On February 22, 2022, the Board of Directors authorized an increase of approximately 3.5 million shares available for grant under the 2013 Plan. For additional information about the Stock Plans, please refer to Note 8 to the Company’s Consolidated Financial Statements for the year ended December 31, 2021, included in Part II, Item 8 of the 2021 Form 10-K. The information presented below provides an update for activity under the Stock Plans for both the three and nine months ended September 30, 2022.

 

 

For the nine months ended September 30, 2022, the Board of Directors granted RSUs under the 2013 Plan to employees and to non-employee members of the Board of Directors for an aggregate of approximately 0.8 million shares of Common Stock. RSU grants vest over periods generally ranging from 12 to 36 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 $5.10 per share, the aggregate fair value for the shares underlying the RSUs amounted to $4.2 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 $1.8 million and $2.1 million was recognized for the three months ended September 30, 2022 and 2021, respectively. Compensation expense related to RSUs of approximately $6.6 million and $6.2 million was recognized for the nine months ended September 30, 2022 and 2021, respectively. As of September 30, 2022, the unrecognized expense of $9.1 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 1.9 years.

 

 

For the nine months ended September 30, 2022, the Board of Directors granted stock options for the purchase of an aggregate of approximately 1.2 million shares of Common Stock at exercise prices that were equal to the fair market value of the Common Stock on the date of grant. Options granted to employees generally vest as to one-third of the shares subject to the award on each anniversary of the designated vesting commencement date, which may precede the grant date of such award, and expire ten years after the grant date.

 

 

The following table presents activity affecting the total number of shares available for grant under the Stock Plans for the nine months ended September 30, 2022 (in thousands):

The aggregate fair value of approximately 1.2 million stock options granted for the nine months ended September 30, 2022 amounted to $3.3 million, or $2.64 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. For the nine months ended September 30, 2022, 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:

As of September 30, 2022 and December 31, 2021, total unrecognized compensation costs related to unvested stock options, net of estimated forfeitures, was $4.4 million and $3.9 million, respectively. As of September 30, 2022, the unrecognized costs are expected to be charged to expense on a straight-line basis over a weighted-average vesting period of approximately 2.1 years.

 

 

As of September 30, 2022, warrants were outstanding for an aggregate of 18.1 million shares of Common Stock, including 3.4 million shares of Common Stock exercisable at $5.64 per share, and an aggregate of 14.7 million shares of Common Stock exercisable at $11.50 per share. The warrants exercisable at $11.50 per share expired unexercised in October 2022. For additional information about these warrants, please refer to Note 8 to the Company’s Consolidated Financial Statements for the year ended December 31, 2021, included in Part II, Item 8 of the 2021 Form 10-K.

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

 

 

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 elected to defer payroll tax payments which totaled $1.6 million as of September 30, 2022. The Company paid $1.6 million in December 2021 as required under the CARES Act. The remaining amount of $1.6 million is required to be paid in December 2022.

For the three months ended September 30, 2022 and 2021, the Company’s effective tax rate was 12.1% and 47.2%, respectively. For the nine months ended September 30, 2022 and 2021, the Company’s effective tax rate was 65.1% and 45.0%, respectively. The Company’s income tax expense was primarily attributable to earnings in the United States and foreign jurisdictions subject to income taxes and foreign withholding taxes. The Company did not have any material changes to its conclusions regarding valuation allowances for deferred income tax assets or uncertain tax positions for the three and nine months ended September 30, 2022 and 2021.

Given the near-break even results projected results for fiscal year 2022, the Company determined that any changes in pretax income would result in a significant impact on the estimated annual effective tax rate. As a result, the Company utilized the year-to-date effective tax rate as the estimated annual effective tax rate when determining the income taxes recorded during the three and nine months ended September 30, 2022,

The Company has defined contribution plans for both its U.S. and foreign employees. For certain of these plans, employees may contribute up to the statutory maximum, which is set by law each year. The plans also provide for employer contributions. For the three months ended September 30, 2022 and 2021, the Company’s matching contributions to these plans totaled $0.8 million for both years. For the nine months ended September 30, 2022 and 2021, the Company’s matching contributions to these plans totaled $2.7 million and $2.5 million, respectively.

committed acts of copyright infringement and violated other federal and state laws. The litigation involved the Company’s business processes and the manner in which the Company provided services to its clients.

After completion of a jury trial in 2015 and subsequent appeals, the final outcome of Rimini I was that Mr. Ravin was found not liable for any claims and the Company was found liable for only 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 $124.4 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 $89.9 million. A portion of such judgment was paid by the Company’s insurance carriers.

Since November 2018, the Company has been subject to a permanent injunction prohibiting it from using certain support processes that had been found in Rimini I to “innocently” infringe certain Oracle copyrights. 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 was in violation of the injunction, and the Company opposed this motion, disputing Oracle’s claims. On January 12, 2022, the District Court issued its findings and order following an evidentiary hearing held in September 2021 regarding whether the Company (i) violated the injunction for certain accused conduct and (ii) should be held in contempt in those instances where the District Court found a violation of the injunction, and what sanctions, if any, are appropriate.

In the order, the District Court ruled in favor of the Company with respect to five of the items. With respect to the other five items, the District Court found the Company violated the permanent injunction, awarded sanctions to Oracle of $0.6 million and ordered that certain computer files be quarantined from use and notice and proof of such quarantining be provided to Oracle. The District Court also ruled that Oracle may recover its reasonable attorneys’ fees and costs. The Company reserves all rights, including appellate rights, with respect to the District Court rulings and findings.

On February 7, 2022, Rimini filed a notice of appeal in the District Court, commencing an appeal of the District Court’s January 12, 2022 decision to the Ninth Circuit Court of Appeals (“Court of Appeals”). On February 8, 2022, the District Court stayed the briefing on Oracle’s bill of attorneys’ fees and costs until Rimini’s appeal is resolved. Briefing on Rimini’s appeal has been completed, and the parties are currently working with the Court of Appeals to schedule oral argument on the appeal in early 2023. At this time, the Company believes that it is in substantial compliance with the injunction and has complied with the order regarding the quarantining of certain computer files. As of September 30, 2022 and December 31, 2021, the Company had accrued $6.9 million, as an estimate related to reasonable attorneys’ fees and costs. During the nine months ended September 30, 2022, the Company paid $0.6 million to Oracle for the award sanctions. Regarding the Company’s estimate for reasonable attorneys’ fees and costs, significant judgment is required to determine the amount of loss related to this matter as the outcome is inherently unpredictable and subject to uncertainties.

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. On September 3, 2021, the District Court granted Oracle’s motion to realign the parties with Oracle now designated as plaintiff and the Company and Mr. Ravin now designated as the defendants in the case caption and at trial. The District Court also granted Oracle’s motion to bifurcate the trial – originally providing for a jury trial on Oracle’s monetary damages claims against the Company, followed by a separate bench trial on the parties’ equitable claims for unfair competition and Oracle’s claim for an accounting.

On April 14, 2022, the District Court judge who had previously presided over the case entered an order referring the case for reassignment, resulting in the case being reassigned to another District Court judge. During a status conference with the District Court on October 14, 2022, attorneys for Oracle confirmed that Oracle would withdraw all of its monetary damages claims against the Company in Rimini II and proceed with a bench trial instead of a jury trial for its claims for equitable relief. Further, in accordance with a Minute Order issued by the District Court on October 14, 2022, good cause appearing, the start date for the Rimini II trial was changed from November 2, 2022 to November 29, 2022 in Las Vegas.

As ordered by the District Court, on October 21, 2022, the parties filed a joint stipulation (the “Stipulation”) to dismiss with prejudice the Rimini II claims affected by Oracle’s decision, including all of Oracle’s monetary damages claims against the Company and Mr. Ravin. On October 24, 2022, the District Court entered an order granting the Stipulation, dismissing with prejudice Oracle’s claims in Rimini II “for monetary relief of any kind under any legal theory [,] including but not limited to claims for damages, restitution, unjust enrichment, and engorgement [ . . . ].” In addition, Oracle’s claims for breach of contract, inducing breach of contract and an accounting were dismissed with prejudice. Per the Stipulation, the parties have each reserved the right to seek attorneys’ fees and/or costs to the extent permissible by law.

Prior to the date of the District Court’s order granting the Stipulation, no damages of any kind were awarded by the District Court in Rimini II. Whether to award any attorneys’ fees and/or costs will be a decision for the District Court.

At this time, the Company does not have sufficient information regarding the possible recovery by Oracle of its attorneys’ fees and/or costs in the Rimini II litigation. The Company maintains that Oracle should not be permitted to recover its attorneys’ fees and/or costs. Both parties have sought injunctive relief 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, if any, cannot be reasonably determined. The Company also believes that an award of Oracle’s attorneys’ fees and/or costs is not probable, so no accrual has been made as of September 30, 2022. However, the ultimate outcome may be different from the Company’s best estimates and could have a material adverse impact on the Company’s financial results and business. The Company reserves all rights, including appellate rights, with respect to the District Court’s rulings and findings in Rimini II.

 

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 $9.4 million and $8.3 million as of September 30, 2022 and December 31, 2021,

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.

 

Rimini Street, Inc. (“RSI”) was incorporated 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 (“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. Prior to the consummation of the mergers, the ultimate parent entity of GPIA was GP Investments, Ltd. (“GP Investments”), a global private equity firm and a former affiliate of the Company. An affiliate of GP Investments was a member of the Company’s Board of Directors until May 5, 2021.

The following potential Common Stock equivalents were excluded from the computation of diluted net income (loss) per share for the respective periods ending on these dates since the impact of inclusion was anti-dilutive (in thousands): 

For both the three and nine months ended September 30, 2021, all of the Common Stock equivalents were anti-dilutive as the Company had a net loss attributable to common stockholders.

 

 

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, 2021, included in Part II, Item 8 of the 2021 Form 10-K. The Company’s policy is to recognize asset or liability transfers among Level 1, Level 2 and Level 3 as of the actual date of the events or change in circumstances that caused the transfer.

On May 18, 2022, the Company entered into an interest rate swap agreement for a notional value of $40.0 million. The derivative was recognized in the accompanying Unaudited Condensed Consolidated Balance Sheets at its estimated fair value as of September 30, 2022. The Company uses derivatives to manage the risk associated with changes in interest rates. The Company does not enter into derivatives for speculative purposes.

To estimate fair value for the Company's interest rate swap agreement as of September 30, 2022, the Company utilized a present value of future cash flows, leveraging a model-derived valuation that uses Level 2 observable inputs such as interest

rate yield curves. The Company estimated the fair value of the interest rate swap agreement to be $1.5 million as of September 30, 2022.

Changes in the fair value of the derivatives that qualify as cash flow hedges are recorded in Accumulated other comprehensive loss in the accompanying Unaudited Condensed Consolidated Balance Sheets until earnings are affected by the variability of the cash flows.

During the year ended December 31, 2021, the Company determined that its GP Sponsor Private Placement Warrants were subject to treatment as a liability. The GP Sponsor Private Placement Warrants could not be redeemed by the Company so long as these warrants were held by the initial purchasers or such purchasers’ permitted transferees. If these warrants were held by someone other than the initial purchasers or such purchasers’ permitted transferees, they were redeemable by the Company and exercisable on the same basis as certain warrants to purchase approximately 8.6 million shares of the Company’s Common Stock, at $11.50 per share (the “Public Warrants”). As a result, the GP Sponsor Private Placement Warrants were reclassified as a liability. On October 29, 2021, the GP Sponsor sold the warrants for $1.04 per warrant to outside holders. As a result of the sale, the new holders of the Private Placement Warrants had the same rights as that of the Public Warrant holders, which warrants expired in October 2022. Therefore as of October 29, 2021, the Company reclassified the liability for the GP Sponsor Private Placement Warrants to additional paid-in capital for $6.3 million. During the three months and nine months ended September 30, 2021, the key assumptions used to determine the fair value were the term period of the warrants, the risk-free rate and volatility. The Public Warrants and the Private Placement Warrants expired unexercised in October 2022. See Note 7 for further information related to the expired warrants.

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 Company attributes revenues to geographic regions based on the location of its clients’ contracting entities. The following table shows revenues by geographic region (in thousands):

 

No clients represented more than 10% of revenue for both the three and the nine months ended September 30, 2022 and 2021. As of September 30, 2022, no clients accounted for more than 10% of total net accounts receivable. As of December 31, 2021, the Company had one customer greater than 10% of total net accounts receivable. The Company tracks its assets by physical location. As of September 30, 2022 and December 31, 2021, the net carrying value of the Company’s property and equipment located outside of the United States amounted to approximately $1.7 million and $1.5 million, respectively. As of September 30, 2022, the Company had operating lease right-of-use assets of $6.1 million, $3.7 million and $1.0 million in the United States, India and the rest of the world, respectively. As of December 31, 2021, the Company had operating lease right-of-use assets of $7.7 million, $4.7 million and $0.4 million in the United States, India and the rest of the world, respectively.

 

Financial instruments that subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, restricted cash, and accounts receivable. The Company maintains its cash, cash equivalents and restricted cash at high-quality financial institutions, primarily in the United States. Deposits, including those held in foreign branches of global banks, may exceed the amount of insurance provided on such deposits. As of September 30, 2022 and December 31, 2021, the Company had cash, cash equivalents and restricted cash with a single financial institution for an aggregate of $62.5 million and $70.6 million, respectively. As of September 30, 2022 and December 31, 2021, the Company had restricted cash of $0.4 million. The Company has never experienced any losses related to these balances.

 

Generally, credit risk with respect to accounts receivable is diversified due to the number of entities comprising the Company’s client base and their dispersion across different geographies and industries. The Company performs ongoing credit evaluations on certain clients and generally does not require collateral on accounts receivable. The Company maintains reserves for potential bad debts and historically such losses are generally not significant.

The Company uses a discount rate to calculate the right of use (“ROU”) asset and lease liability. When the implicit rate is known or provided in the lease documents, the Company is required to use this rate. In cases in which the implicit rate is not known, the Company uses an estimated incremental borrowing rate.

Some leasing arrangements require variable payments that are dependent on usage or may vary for other reasons, such as payments for insurance and tax payments. The variable portion of lease payments is not included in the Company’s ROU assets or lease liabilities. Rather, variable payments, other than those dependent upon an index or rate, are expensed when the obligation for those payments is incurred and are included in lease expenses recorded in selling and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income.

The Company has lease agreements with both lease and non-lease components that are treated as a single lease component for all underlying asset classes. Accordingly, all expenses associated with a lease contract are accounted for as lease expenses.

The Company has elected to apply the short-term lease exception for all underlying asset classes. That is, leases with a term of 12 months or less are not recognized on the balance sheet, but rather expensed on a straight-line basis over the lease term. The Company’s leases do not include significant restrictions or covenants, and residual value guarantees are generally not included within its operating leases. As of September 30, 2022, the Company did not have any material additional operating leases that have not yet commenced.

The components of lease expense and supplemental balance sheet information were as follows (in thousands):

Other information related to leases was as follows (in thousands):

Maturities of operating lease liabilities as of September 30, 2022 were as follows (in thousands):

For the three months ended September 30, 2022 and 2021, the Company paid $1.4 million and $1.5 million, respectively, for operating lease liabilities. For the nine months ended September 30, 2022 and 2021, the Company paid $4.1 million and $4.6 million, respectively, for operating lease liabilities.

    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:

    We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those referred to under “Risk Factors” in Part II, Item 1A of this Report. Moreover, we operate in very competitive and rapidly changing markets. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

    You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. The forward-looking statements in this Report are made as of the date of the filing, and except as required by law, we disclaim and do not undertake any obligation to update or revise publicly any forward-looking statements in this Report. You should read this Report and the documents that we reference in this Report and have filed with the SEC as exhibits with the understanding that our actual future results, levels of activity and performance, as well as other events and circumstances, may be materially different from what we expect.

 

    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, 2021, included in Part II, Item 8 of our 2021 Form 10-K.

 

    Certain figures, such as interest rates and other percentages included in this section have been rounded for ease of presentation. Percentage figures included in this section have not in all cases been calculated based on such rounded figures but on the basis of such amounts prior to rounding. For this reason, percentage amounts in this section may vary slightly from those obtained by performing the same calculations using the figures in our Unaudited Condensed Consolidated Financial Statements or in the associated text. Certain other amounts that appear in this section may similarly not sum due to rounding.

    We are a global provider of enterprise software management and support products and services, and the leading independent software support provider for Oracle and SAP products, based on both the number of active clients supported and recognition by industry analyst firms. We founded our company to disrupt and redefine the enterprise software support market

by developing and delivering innovative new products and services that fill a then unmet need in the market. We believe we have achieved and sustained our leadership position in independent enterprise software support by delivering on our mission to provide extraordinary technology solutions that achieve each client’s strategic, operational, and financial goals.

 

    Enterprise software support products and services is one of the largest categories of overall global information technology (“IT”) spending. We believe core enterprise resource planning (ERP), client relationship management (CRM), product lifecycle management (PLM) and technology software platforms have become increasingly important in the operation of mission-critical business processes over the last 30 years, and also that the costs associated with failure, downtime, security exposure and maintaining the tax, legal and regulatory compliance of these core software systems have also increased. As a result, we believe that licensees often view software support as a mandatory cost of doing business, resulting in recurring and highly profitable revenue streams for enterprise software vendors. For example, for fiscal year 2021, SAP reported that support revenue represented approximately 41% of its total revenue. For fiscal year 2022, Oracle reported a margin of 83% for cloud services and license support.

    As of September 30, 2022, we employed over 1,870 professionals and supported over 3,000 active clients globally, including 75 Fortune 500 companies and 16 Fortune Global 100 companies across a broad range of industries. We define an active client as a distinct entity, such as a company, an educational or government institution, or a business unit of a company that purchases our services to support a specific product. For example, we count as two separate active client instances in circumstances where we provide support for two different products to the same entity.

 

    Our subscription-based revenue provides a strong foundation for, and visibility into, future period results. For the three months ended September 30, 2022 and 2021, we generated revenue of $101.9 million and $95.6 million, respectively, representing an increase of 7%. During the three months ended September 30, 2022, we had a net loss of $0.4 million, and as of September 30, 2022, we had an accumulated deficit of $223.0 million. Approximately 52% and 53% of our revenue was generated in the United States for the three months ended September 30, 2022 and 2021, respectively. Approximately 48% and 47% of our revenue was generated in foreign jurisdictions for the three months ended September 30, 2022 and 2021, respectively.

 

    Since our inception, we have financed our operations through cash collected from clients and net proceeds from equity financings and borrowings.

 

the cost reductions relating to travel and in-person marketing event fees and expenses described above. 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.

 

 

    Since we founded our company, we have made the expansion of our client base a priority. We believe that our ability to expand our client base is an indicator of the growth of our business, the success of our sales and marketing activities, and the value that our services bring to our clients. We define an active client as a distinct entity, such as a company, an educational or government institution, or a business unit of a company that purchases our services to support a specific product. For example, we count as two separate active clients when support for two different products is being provided to the same entity. As of September 30, 2022 and 2021, we had over 3,000 and 2,790 active clients, respectively.

    We define a unique client as a distinct entity, such as a company, an educational or government institution or a subsidiary, division or business unit of a company that purchases one or more of our products or services. We count as two separate unique clients when two separate subsidiaries, divisions or business units of an entity purchase our products or services. As of September 30, 2022 and 2021, we had over 1,510 and 1,450 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.

 

    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 $400 million and $377 million as of September 30, 2022 and 2021, respectively. We believe the sequential increase in annualized recurring revenue demonstrates a growing client base, which is an indicator of stability in future subscription revenue.

 

    A key part of our business model is the recurring nature of our revenue. As a result, it is important that we retain clients after the completion of the non-cancellable portion of the support period. We believe that our revenue retention rate provides insight into the quality of our products and services and the value that our products and services provide our clients.

 

    We define revenue retention rate as the actual subscription revenue (dollar-based) recognized in a 12-month period from clients that existed on the day prior to the start of the 12-month period divided by our annualized recurring revenue as of the day prior to the start of the 12-month period. Our revenue retention rate was 94% and 93% for the 12 months ended September 30, 2022 and 2021, respectively.

 

    We derive revenue through the provision of our enterprise software products and services. All the costs incurred in providing these products and services are recognized as part of the cost of revenue. The cost of revenue includes all direct product line expenses, as well as the expenses incurred by our shared services organization which supports all product lines.

 

    We define gross profit as the difference between revenue and the costs incurred in providing the software products and services. Gross profit margin is the ratio of gross profit divided by revenue. Our gross profit margin was approximately 61.5% and 65.1% for the three months ended September 30, 2022 and 2021, respectively. We believe the gross profit margin provides an indication of how efficiently and effectively we are operating our business and serving our clients.